Newcomb Briefing

The Four Investment Approaches

The Four Strategies
The four personal approaches that lead to decisive investment focus are growth, quality, sentiment, and value:

Growth is investing in accelerating earnings-per-share growth (EPS), relative growth, growth momentum, rising expectations and enterprise sales growth.

Quality is investing in turnover speed, industry leadership, return on investment (ROI), and strong operating margins.

Sentiment is investing in consensus, high price-earnings multiples (PE), insider buying data, institutional ownership and lesser-known stocks.

Value is investing in contrarian opportunities, favorable values, EPS to growth (PEG), income stocks, and relative value.

Before deciding on an investment approach, know that one approach must predominate. The reasons are legion. Using all four at once may diffuse and dilute earnings. The separate strategies have different holding patterns, time horizons, and fit differing investment objectives. Finally, profitable investment requires a focus. Focus on the approach that fits with goals, style, and level of risk comfort.

It is possible to combine elements in a central strategy from the other three strategies. For instance, a value investor should consider sentiment because analyst's expectations can change equity values. Likewise, a growth investor concentrating on momentum and ignoring quality may run into trouble by not considering return-on-investment. Find, Analyze, Buy, and Sell
The strategies assume a more than a passing knowledge of the financial markets, financial ratios, and accounting. Once an approach is adopted, there is more work to do.

All equity investors need to;
- Find stocks
- Analyze Stocks
- Buy Stocks
- Sell Stocks

First, when finding stocks, it is a mistake to fall in love. Stocks and love do not mix. Find stocks that are performers. If they top-out or have stopped performing, then sell them. When choosing stock candidates, base choices on good data and good business reasons not hearsay, broker advice, or emotion. One way to do this is to use a good stock screen. The primary function of screening is to boil down stock choices to a select few based on preferences. Many screens filter the market based on pre-set parameters. Some screening tools are better than others. For instance, a value-oriented screen may filter 9,000 stocks down to only 23 stocks that fit certain criteria. Search the Internet for stock screens, there are several to select from.

The following are some places to get started with stock screening;
- Bloomberg, http://www.bloomberg.com/analysis/monitor/,
- Morningstar, http://screen.morningstar.com/StockSelector.html?tsection=toolsssel,
- Reuters, http://www.investor.reuters.com/ArticleEntry.aspx?target=%2fopinion, Yahoo, http://screen.yahoo.com/stocks.html,
- MSN, http://moneycentral.msn.com/investor/finder/predefstocks.aspx,
- Marketwatch, http://www.marketwatch.com/tools/stockresearch/screener/default.asp?siteid=mktw&dist=10rt&.

Many on-line brokers provide relevant information, analysis, and screening. Suggested on-line brokers are;
- ScotTrade, http://www.scottrade.com/index.asp?supbid=27452
- AmeriTrade, http://www.tdameritrade.com/welcome1.html
- ChoiceTrade, http://www.choicetrade.com/
- TradeKing, https://www.tradeking.com/
- TD Waterhouse, http://www.tdameritrade.com/welcome1.html
- ThinkOrSwim, http://www.thinkorswim.com/tos/client/index.jsp

Secondly, properly analyze stocks. Determine values, earnings, and discover the market expectations for stocks. Compare the stocks to other stocks; resolve financial positions for safety, margin, and cash flow.

Consider earnings estimates reports, valuation tables and ratio comparison reports, earnings estimates reports, performance reports and trends in financial statements. Throughout the preliminary investigation, maintain the major investment strategy. Thirdly, purchase the stocks that meet analysis criteria. The relevant questions to ask are; - does it fit a strategy of growth, quality, sentiment, or value? Does it meet long-term and short-term goals? Are principles of diversification used? Are there any negatives to consider?

Lastly, sell the stock. Sell it when it meets the criteria for being sold. Avoid riding out winners and dumping losers. Develop a set of parameters under which a stock must be traded. Has the stock met return objectives? How much does it have to lose to cut losses? This analysis is similar to the analysis for buying stocks.

For example, an investor may sell all stocks that have appreciated by 20%, sell all stocks that have depreciated by 8%, and hold all stocks that meet criteria for future growth or quality. If such a strategy is exercised, the investor never loses more than 8%, gains are 20%, and holds are to be determined. No love lost, trade it and start over again at step one. Buy a new one, do the homework, and score a winner.

posted by Ed Newcomb @ Wednesday, December 07, 2005