A recent article by The New York Times showed that investors in mutual funds returned 4.25% annualised over the last 20 years. The S&P 500 returned 8.21% over the same timespan. This means that the average investor underperformed the market as a whole by 4 percentage points over 20 years.
The main reason: investors buy into the market at highs because they are euphoric and sell out at lows because they feel wretched.
To guard against such negative behaviours I placed developing a positive psychology at the top of last weeks’ list of 3 actions you can take to become an awesome value investor. The emphasis was on ensuring that a large margin of safety exists before purchasing a stock.
Today’s post has 3 more actions you can take to become an awesome value investor.
#1 Commit To Appraising The Daily List Of 52 Week Lows
The daily list of 52 week lows is where you are more than likely going to find bargains. Here are 3 reasons why daily reviews of the list of 52 week lows will help you become an awesome value investor:
- You will limit the likelihood of missing an investment opportunity – crucial if you want to adopt a business like approach to your investments. Is there any other way to approach it?
- You will appraise hundreds of multi cap stocks from different sectors in a short space of time – this is the most efficient way of learning the craft of valuing companies. The modern version for busy people of Buffett’s approach of appraising the Moody’s manual.
- You will be following a way of finding undervalued stocks that professional money managers use – if its good enough for them, its good enough for you.
There really is no excuse not to do it. Besides you will become efficient at eliminating stocks that are overvalued quickly, especially as your experience grows. You will also become brilliant at identifying potential bargains very quickly. What’s not to lose?
#2 Maintain A Watchlist
On the same websites that you can run screeners or look for 52 week lows there will likely be an option for you to maintain a watchlist.
My own watchlist follows a simple format:
- Stocks I’d love to own at the right price
- Stocks that I need to do further research on.
The advantage of a watchlist is that it will help you to focus on stocks that exhibit the value-orientated characteristics of your investment strategy out if a universe of thousands.
I combine the use of a watchlist with price alerts: I receive an email when a stock hits a share price I specify. This is useful for when you come across a great company but the share price is too high for a margin of safety. You can set a price alert at a lower price that you determine has a margin of safety all things being equal.
Serious investors make scanning the 52 week low list a daily habit. They then eliminate stocks that do not conform to their investment criteria. Those that do simply get added to a watchlist.
The advantage of a watchlist is that you do not have to remember which stocks to conduct further research since you can go through them one by one from a watchlist. Do ensure not to make your watchlist too unwieldy by selecting only the very best stocks.
#3 Design An Investment Check-List
Check-lists are great. When Warren Buffett joined Graham Newman, his first job whilst sharing an office with Walter Schloss was to complete an investment check-list. Buffett and Schloss were calculating the liquidation value of companies and would then pass the check-list to Ben Graham upon which Graham would base his investment decisions.
Check-lists will will keep you focussed on the the most important questions to ask no matter what your investment philosophy is, or what industry, market cap or financial structure each company has.
Here are 5 examples of the types of questions you can include just for the PE ratio alone:
- What Is The Current P/E Ratio?
- What Has Been The Average P/E Ratio Over Last 5 Years?
- Is The Current P/E Ratio Higher Or Lower Than The Past 5 Year Average? By How Much?
- How Reliable are current earnings? (Are there a lot of tax credit and debits or other financial shenanigans recognised as earnings?)
- How reliable are the previous years’ earnings?
This list is not exhaustive but it should give you some idea as to what types of questions you need to be answering when reviewing a stock for your check list. I have over 40 such questions on my check-list as an initial screen, some of which then lead onto 3 or 4 more questions that I’ll need to answer as part of my due diligence process.
If you enjoyed this, you might also enjoy these posts inspired by taking action:
- How To Find Undervalued Stocks
- 3 Basic Things You Need To Know About Value Investing
- How To Use ADVFN To Invest Like Ben Graham And Walter Schloss
Also check out the free Shares and Stock Markets Newsletter for more value investing content for investors who want to take action.
Image: Mountain In Snow