"An investment in knowledge pays the best interest." - Benjamin Franklin




Investment Process

The primary objective of my investment strategy is to create a portfolio that provides me (and my subscribers) with a growing stream of income.

This strategy accomplishes two very important objectives:

  1. It provides  an increasing level of income each year that can be used to pay for retirement, college, travel or the normal inflation impacted prices of goods
  2. When prices go down, I  don’t have to sell shares in order to live. In other words,  I  know that the dividend income is going up despite the near term market action.

So how do I go about executing the strategy?

  • 1.

    The first step I take is to screen U.S. publicly traded companies for those that fit the following criteria: 

    • They must provide a yield [1.5% minimum for the Dividend Growth Portfolio, 75% of the yield of the 30 year Treasury for the High Yield Portfolio and any yield for the Aggressive Growth Portfolio and a mixture of these for the ETF Portfolio
    • Their dividends have been raised in at least 7 of the last 10 years. This step gives me the first cut.

  • 2.

    The second step is to take the companies selected in step one and screen their financial statements using a set of criteria, focused on balance sheet strength, total capitalization, return on equity, sales growth, earnings growth rate and dividend payout ratios. This process (1) screens out all but those companies with superior financial strength, that is, the ability to sustain their dividend paying capability even in times of economic duress and (2) sets a quality rating [think S&P or Value Line] for each company. Surprisingly enough, just these two steps (which I perform on a continuous process) distill all of the U.S. publicly traded stocks down to only 150-200 companies. These 150-200 companies then serve as my investment Universe.  These are the premier investment grade companies in the United States. Then it is simply a matter of deciding when to buy and when to sell the shares of those companies.

  • 3.

    The third step in the strategy is to set the buy/sell discipline for each of the stocks in my investment universe. I  begin by establishing a long term valuation channel for each company (much like Bollinger Bands).  Without getting into the math of this process, it incorporates a combination of technical and fundamental valuation factors adjusted for the volatility (beta) of the common stock.  Once that valuation channel is established, my Model then determines three prices:

    •  a Buy Price---which is equal to or less than 10% above the lower band the valuation channel
    • a Stop Loss Price---which is 15% below the Buy Price
    • a Sell Price---which is 5% or less than the upper boundary of the valuation channel. 
    • Like the screening process, the Buy/Sell discipline is a continuous process, the natural result of which is that all the prices move up over time.

    The point of this third step is to insure that when I set a Buy price it not only properly reflects the undervaluation of the company but also reflects the volatility of its stock. The higher the volatility, the bigger the discount  placed on the Buy price and the higher the premium placed on the Sell price. A simple example would be two companies each earning a dollar of earnings.  Assuming all other technical and fundamental factors are equal, if Company A’s stock is more volatile than Company B’s, then our Buy Price guideline for Company A will be less than the Buy Price guideline for Company B. The reason is simple: virtually 100% of purchases are made when the shares are at historically low valuation levels. So if Company A’s stock is more volatile than Company B’s, then it makes sense that, all other things being equal, the bottom in price for Company A is likely to be lower than that for Company B.

  • 4.

    The final step is to sub divide the stocks in the Universe into three Portfolios of differing objectives: the Dividend Growth Portfolio [what you might call quality growth], the High Yield Portfolio and the Aggressive Growth Portfolio.  This is done using minimum stock yield, minimum quality ratings and minimum projected dividend and earnings growth rates. 

    In the ETF Portfolio, I have constructed a global multi asset portfolio which is also focused on quality (I use ETF.com as reference) and rising income.  This portfolio would be especially useful for investors with savings of less than $1 million because it involves fewer holdings (though greater diversification) which in turn reduces trading costs.