I think every investor should read it (see my post on here, “I thought I was an OK investor, now I know I'm not”, 17th May 2012).
Now that I’ve had a little time to think about it, I think a way forward might be this:
- Choose an amount you wish to put into the market (say £1m over 10 years), and then how much you will invest every month to achieve this (in this case, £8,340 per month).
- From the world’s stock markets find companies that match the following screener:
Zero debt.
At or near a 52 week price low.
Yield 3.5% or greater - consistently (i.e. over, say, 10 years or more).
Consistently generates free cash flow, every year (i.e. the company has money left over after meeting all its obligations - its defined here: http://www.moneyweek.com/investment-advice/glossary/f/free-cash-flow). (See video here: http://www.moneyweek.com/freecashflow).
Isn’t a “small cap” (i.e. with a market capitalisation of less than $1bn US or around £700 million).
- Then do a randomised pick of the resultant list of the above.
I suppose one would use the stock exchanges of London, Japan, US, Europe (Berlin, Paris, etc.), and far east (Singapore). Choose a broker with a good global spread.
As long as you don’t breach the 3% rule, you can invest in an individual stock as often and as regularly as the randomised picking system instructs you to.
- Benefits:
Pound cost averaging - i.e., smooths out the highs and lows in the markets.
Market top or bottom agnostic (ignore the news!).
Takes little time, probably just an evening a month, after you’ve set up your screening and spreadsheets.
Entirely “mechanical”. Your emotions won’t get in the way of making stock picks, and emotions are a big problem for stock pickers.
Simplicity.
- Rules:
Don’t trade (i.e. buy or sell on news).
Keep holdings for the long term (more than 3 years).
Be disciplined, and don’t fall to temptation.
Ignore “gurus” and tipsters.
No stock holding to exceed 3% of your overall initial pot (in this case £30k, or 3% of £1m).
If the screen of the above brings up nothing, or just ones you are fully invested in, then don’t invest this month, and hold your cash pot over till something comes along. In other words, be patient!
Stick to the rules!
I have not tested this method, it is just a theory, and I have no results to show for it. However, I have read extensively elsewhere regarding making stock picks, and this one seems to me to be as good as any.
