Wednesday, May 04, 2005


One reader suggest that she likes my blog but that buying individual stocks sounds too complicated. I say, phooey!

There are many simple ways to find good stocks. One of the methods I use is to run a screen on one of the many online screening tools that are available for free. I usually use Morningstar.

The screen can be as simple as finding the stocks with the lowest price to sales ratio. If you choose a .9 ratio and get too many stocks then try .8. When your list is down to 100 or fewer, choose a stock you have never heard of that has increased in price at a better than average pace in the past year. Invest about 8% of your stock money in this stock through a discount broker. Repeat the process each month for the next year. As soon as one of the stocks drops 30% in value, sell it, run the screen again and invest the proceeds into an new selection.

You will soon find that you are holding winning stocks, you have an income tax savings and you have zero carrying costs! The key to winning big is to hold on to the stocks that do better than you expected. If you hold your winners, you will sooner or later own a company that is worth 50 times what you paid for it. Your portfolio will be 90% of the professional managers in the business.

Mutual funds typically charge .75 to 1.5% of assets. If your stocks go up by 11%, 1.5% is a 14% over-head that you do not need to pay. It is this over-head that hurts returns as much as anything.

By the way, James O'Shaughnessy has written a number of books that demonstrate that simple screens can help you select winners. As I recall, his screens show that low PE, low price to book and strong cash flow are all good measures. However, price to sales is his favorite measure of value.