I’m something of an oddity in the investing world when it comes to finding the best buy and hold investments: I do not limit myself to a one individual method of stock analysis.
In other words, I’m not 100% reliant upon fundamental analysis where I only review the financial statements and read the 10-Ks, nor am I only using technical analysis where I’m annotating charts, looking for bull flags and only buying at technical support levels.
So instead of being confined by the parameters of an individual methodology, and the specific weaknesses each method possesses, I prefer to take a gauntlet like approach where a collection of stocks will face a series of 4 uniquely different challenges, and only the best companies who get top marks in each challenge will be considered as a potential long term investment.
This way, I can be relatively certain I’m getting reasonably good value for my money, buying at a price with a more upside potential than downside risk, while also investing in a company with a solid business plan poised to improve their bottom line and grow their company.
The crux of my technique is fairly simple: you whittle down thousands of companies and only select from those companies that get top marks (think “A” students above the 90th percentile) in each category.
In this sense, it’s much like that of selecting the best possible candidates to attend professional schools (medical school, law school, etc.) or top 25 business schools where you only take those students that managed to make themselves the cream of the crop by getting the highest grades as possible, doing very well on their entrance exams, so on and so forth.
Hence the use of a Venn Diagram (although overlapping circles are normally used) with four similarly sized boxes with a small overlapping diamond in the center to illustrate the difficulty in finding a few stocks that get top marks for each investment category.
In the graphic, you will first notice that there are two very different schools of analysis, a bargain hunting “buy on the dips” strategy that mimics value investing, followed by a “gut feeling” strategy that relies mainly on instincts and reviewing the ways a company makes money.
Without going into much detail, this is how I use the individual methodologies to quickly screen a potential stock as a solid buy and hold investment:
Remember, this isn’t a catch all technique that you should run out and try yourself without any practice or training. If you’re a novice investor, you should begin by learning one strategy as well as you possibly can, then master the others as time allows.
If you’re an inexperienced investor or simply don’t want to put in the time to do the research yourself, you should highly consider sticking to the Plain Jane index funds or test out your investor skills by starting a stock market simulation game.
If you’re a stock picker, mind sharing any of your selection criteria or stock screening techniques that you use when picking buy and hold investments?