Today I will talk about my investment strategy.
This is a topic that I’ve explored before and most notably you can read about it here and here.
I’ve tried to do a graphic representation of the strategy and here it is:
As you probably already know I try to focus on small-cap stocks with high stable earnings and a good dividend yield.
Let’s go through the chart one point at a time:
- Yield of 7 per cent or more. These prices are obviously only possible in highly depressed markets like the one we had during the financial crisis in early 2009. But if you find them congratulations as you will likely be earning splendidly from the stock in the future.
- Dividend history. Here we are looking at the company’s history of paying out dividends. Is it good or bad? Has the company a history of increasing its dividend over time or has it been the same for the past fifteen years? Obviously we prefer a high that is also increasing over time.
- P/E ratio of maximum seven. Because our goal is to maximize our gains we are constantly looking out for companies that are trading at low earning multiples. The lower the P/E ratio, the more value we will get. Now, obviously this is only true if the company has been making solid earnings over time and not making exceptional earnings one year only. According to famous investor John Lee, a “double seven” is a company with a P/E ratio lower than seven and a dividend yield of at least seven per cent.
- Patience. This term comes from the fact that every investor should be able to wait for the value to come sufficiently to suit his or her book. The easiest task is in fact identifying the shares that are interesting. The most difficult is to wait for prices to come down.
- Leverage. This term signifies financial leverage which should not be used excessively. One example where it can be used is if there is an interest rate spread between the money you borrow and the money you get in return from your investment. In that case it makes financial sense to borrow, but otherwise we would advice against it.
- Integrity. This is where we are looking at the integrity of the business model when we are investing in a company. Many factors, such as trust between the founders and our clients, come into play when we are managing other people’s money.
- Reinvest dividends. This is the ultimate investment trick. It allows you to compound your return for each dividend check and finally earn a higher return than if you had only counted on the price increase of, let’s say, a commodity.
Today I have been talking about my investment strategy and how it translates into double digit earnings.