1. Make sure the company behind your stock is large
Stocks are like women.
Different sizes, different temperaments.
They are both whimsical and irrational in their behaviour.
One minute they can be shooting to the moon, the next they can be crashing to the floor.
The investor who invites such volatility can be guaranteed an emotional roller coaster ride without much to show for it.
It is far better to find a stock that behaves in a far more predictable and much less barbarous manner and you will find these from the large cap stocks.
I’m talking about the really big dividend payers; upwards of $10 billion for US stocks and FTSE 100 stocks for UK investors.
Load up on the fatties – your capital will thank you for it.
2. Make sure your company is going through a period of unpopularity
Jettison any thoughts of finding your BBW stock in a state of perfect harmony.
Your mission is to find emotional wrecks.
For with disorder comes cheaper prices but be warned: ensure to the best of your ability that any turmoil your stock is going through is temporary.
You are not a White Knight.
You are a cold blooded investor on the look out for prices below their intrinsic value in the expectation that their share prices will rise to their intrinsic value or beyond.
Whilst waiting for the mean reversion process to play out occupy yourself by counting dividends.
Learn to love bedlam and to take advantage of it when it arises.
3. You shall ensure that your stocks’ share price has declined
What sets you apart from others who call themselves investors is your contrarian mindset: buying when others are selling.
Those who do call themselves investors will follow and exacerbate the whimsical and irrational behaviour of stocks.
They are fuel that powers the mad swings in prices from one extreme to the other.
You do not follow.
You set your own path because you know that a large cap dividend paying fatty is not going to go bust and has more than likely recorded an above average financial performance over many years.
Any temporary unpopularity is simply that – temporary.
Buying stocks when their prices have declined is the hardest thing to do but you must in order to avoid overpaying for stocks in the first place.
4. Always ensure your stock is at or below its past long-term average P/E ratio
No matter how much the mainstream financial media like to vilify the PE ratio you can use it to your advantage and get into stocks below their long term average.
An average PE of five years is good, 10 years is better.
Financial websites as well as financial statements and your phone’s calculator app will help you to find a stocks’ long term average PE ratio.
By using a long term average you are smoothing out the historical wild swings in market value that even large cap stocks succumb to.
This is a smart and rational way to use the PE ratio despite the kicking it gets.
5. Your company’s current P/E ratio should be 20 or below
In your quest to find emotional wrecks you will come across what at first glace is a stable and steady stock that reports increased earnings and dividends every year.
It is very easy to gravitate towards such powerhouses – their lure snares the unsuspecting investor into a false hope that earnings and dividends will rise forever.
They will not.
The sorts of companies that exhibit skyrocketing financials typically trade well above a PE ratio of 20 therefore they must be avoided because you are a value investor not a stock market sucker.
This post is the basis of the Shares and Stock Markets value investing strategy.
To obtain a complete breakdown of the strategy down load the free ebook ‘How To Start Value Investing In 30 Days‘