An investing strategy you can use

I outline all the steps to select stocks and manage an effective portfolio

By Jim Van Meerten Nov 13, 2009 2:38PM
I'd like to go through the processes I use to select the stocks I add to my portfolio and to manage the portfolio.

First let me say I run my portfolio like a mutual fund. Every fund should have a philosophy, mission statement, a type of stock that they look for and a disciplined method to manage portfolio.

My investing philosophy follows the theme as my newsletter Financial Tides: Observe the tide and swim with it not against it. The mission statement of the fund is to beat the market and have a positive rate of return by owning individual stocks that are appreciating faster than the market and protecting against losses by culling stocks immediately that fail to maintain positive price appreciation.
  • First analyze the economy and see how the leading, coincident and lagging economic indicators are trending -- Conference Board
  • Second use the Value Line Index (1700 stocks) to see if the overall stock market is trending with the leading economic indicators -- BarChart
  • Third decide if this is a time I'd like to be buying into the market -- My weekly market momentum analysis each Saturday -- you'll find it here on Top Stocks

Suppose that I now determine this is a time to be buying into the market; the stocks I'd like to consider are the stocks that appear to be having positive price appreciation in today's current market conditions. I don't care what happened 6 months ago or in the last bull or bear market I want what's working today. I want stocks that will continue to hit new highs -- the whole is equal to the sum of the parts. My portfolio will continue to hit new highs if I add stocks hitting new highs and cull those that fail to continue to hit new highs.

  • Look for the top ten stocks trading more than 100K shares a day that are hitting new highs on the BarChart's stock screener and eliminate all stocks that have not hit new highs at least 50% of the time in the last 20 days
  • Filter the remaining stocks using BarChart's 13 technical analysis indicators and eliminate from the list those that do not have at least a 80% buy rating
  • Eliminate from the list those that have not had positive price appreciation for the last 5, 20 and 50 day periods
  • Graph each stock left using its daily price against its 20, 50 & 100 day moving average and BarChart's Trend Spotter. I'm a visual person and this helps me determine how this stock is performing in today's current environment and the daily moving averages help smooth out that visualization.

This little 4 step analysis doesn't take that long and has whittled down 12,000 stocks to the 2 or 3 I'd consider buying that day. If no stock has passed this 4 step filtering then I won't buy anything that day.

 

The last step before I hit the buy button is to research the news, analysts recommendations and the Internet to see if there is any negative buzz that is not reflected in its current technical price movement. 


I don't think analysts are good at what they do. They are not very good at predicting a company's future but if they turn out a negative report all their brokers and everyone who reads that report just might be putting in sell orders. 


I'm not smart but I'm also not dumb enough to think that if all these brokerage houses are encouraging their customers to sell that the stock it will continue to climb -- remember to swim with the tide not against it.

 

When I buy I like to buy 5% of my portfolio in each position and I try not to have more than 2 stocks in the same sector. If gold and oil are both going up I would want 5 oil and 5 gold mining positions, the downside risk is too great with that kind of concentration.

 

My portfolio management is to always have a protective stop loss either actually or mentally and eliminate any stock the is trading below its 50 day moving average or has lost 10% off its previous high. 


Each Saturday I make a list of all the stocks in my portfolios that don't meet those 2 criteria and put in a sell order on each one that has not had a positive price appreciation the previous week.

 

I hope that this method isn't too mechanical or cookie cutter for you. I have to have a discipline to follow. Making money in the stock market is like losing weight -- it's easy, we all know what is needed: take in fewer calories and/or expend more calories by increasing your exercises. 


In investing buy stocks going up and sell stocks going down. Sounds easy but most people aren't disciplined enough to do it.

 

Jim Van Meerten is an investor who writes on financial matters here and on Financial Tides. Please leave a comment below at email FinancialTides@gmail.com

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