Investment Common Sense



Here's the dates and results when I made 32.4% profit in one year in the stock market using a system that I will fully disclose on this page - no registration and no BS - read on:

·         June 19, 2012: I placed $100,000 in a segregated account with my broker (discount broker – trades cost $8.95).

·         June 20, 2012: invested in common stocks of 25 companies listed on major exchanges.

·         April 5, 2013:  Withdrew $5,000 cash (from accumulated dividends) for personal use.

·         Various dates: Sold shares that declined more than 15% from their highs since purchase (15% trailing stop) and reinvested the proceeds in shares that met the system criteria on that date.

·         June 4, 2013: Rebalanced the portfolio – total value $127,428.58.

·         Total Return: $127,428.58 + $5,000.00 I spent = $132,428.58 or 32.4% profit.

While it’s true that the stock market was strong during this time period – the S&P 500 index was up 17.2% (1362.16 to 1597.57) - my reference portfolio was up almost double the average, beating the index by 15.2%

Do you remember what bond yields were during this period and what the yields were on bank CDs?  Just in case you don’t, they were generally less than 1%.  Even long term US Government bonds had a yield of less than 2%.

It sounds too good to be true, doesn’t it?

As I said, I am not a professional investor, and I am not a licensed security dealer.  I am a successful computer programmer, and I had the privilege for several years of working on a trust investment committee with a college professor who taught finance and was a very successful investor. I managed a bank’s bond portfolio, I spent about a year developing software for an investment advisory firm, I manage my own investments and I live in Omaha.  You have probably heard of a famous investor who also lives here and why he chooses to live here.  Omaha is a long way from Wall Street, and it seems like it is easier to see the big picture and ignore the big hype when you live here.

I was in the market in 2007 - 08 and lost about 20% using my – then current philosophy of “investing in value stocks with a good story” – not too bad since the market went down about 56%, but certainly not good enough to retire on.  In fact, I went back to work because I did not have enough to retire comfortably.

When that market crash happened, many of my friends decided to use professional money managers or mutual funds, but being a computer geek and avid reader, I decided to do some research to see if I could find a better way to manage my own money without paying somebody 2 to 3% off the top.  I thought about switching to gold or real estate, but I tried real estate a couple of times in the past, and it takes a lot of work even if you have a manager and it's hard to sell if/when you need the money.  I bought a little gold and learned that there is a big spread between bid and ask and the small investor pays the freight both ways - don’t forget storage cost and no cash flow.

So, I decided to see if I could find a way in the stock market.  First I set my conditions:

·         Invest in high value companies; strong enough that I could sleep well at night.

·         Play golf on good days and not sit in front of a computer managing my portfolio.

·         Get the odds in my favor.

I read lots of books; books about legendary investors like George Soros, Warren Buffet, Charlie Munger and Jim Rogers. By the way, I don’t care about their politics, just their results.  I also read books about statistics and famous traders, and re-read "The Intellegent Investor" by Benjamin Graham. I spent a couple of months reading every investment book I could finish in that time.  What I found out is this:

·         70% of mutual funds perform worse than the S&P 500 over any five year period.

·         The markets always revert to the mean.

·         You will lose if you don’t follow a consistent plan.

·         If you want to be a billionaire investor, you better figure on working very hard.

·         You can win and keep your day job if you follow a strategy that puts the odds in your favor – maybe not a billion but a winner

One more fact I know from experience:

·         It is impossible to find out the truth about individual or corporate investment manager's results but I am pretty sure that the odds are in their favor, not yours.

If, by now, you’re still reading, you probably want to know what system I used to achieve those spectacular results and my personal goals.  The system that I use picks 25 of the top 10% of stocks based on financial strength, and price to value; stocks that I can own with confidence. I split my portfolio into six parts and invest 1/6 every two months   I check them maybe two or three times a week to see if I need to sell any losers, and once a year, I rebalance each portfolio. I got this system from a book that makes sense and supports its recommendations with cold hard facts:  That book is, "What Works On Wall Street” by James P O’Shaughnessy.  I use the strategy entitled “The Trending Value Portfolio” found on page 583.

That’s my secret.  If you want to match my results, you can do one of three things:

1.       Buy the Book “What Works On Wall Street”, pick the strategy you like and do what it says.

2.       Let O’Shaughnessy Asset Management manage your portfolio.

3.       Click for information on how to contact me and get on my mail list. You may want to get on my mail list so you can argue with me or correct mistakes you see. For now I will continue to freely publish weekly lists of the stocks ranked in order of momentum that meet the criteria of the "Trending Value Portfolio". Take a look by clicking on a link at the top of the page.

By the way, I strongly recommend that you buy the book and read at least the first few chapters. I think you will be convinced - like me - that O'Shaughnessy has done a thorough analysis and is right.

Why would you want to use this web site when this is a system that you can apply for yourself?  Because getting the data and doing the calculations is devilishly difficult and will cost you more time and money than using this web site.  I could not do it without subscribing to several data services and using my computer programs.

This is how I apply O'Shaughnessy's "Trending Value" system to my portfolio:

The six value factors that O'Shaughnessy has identified as most important are 1) Yield, 2) Price/Earnings ratio, 3) EBITDA/Enterprise Value ratio, 4) Price/Sales ratio, 5) Price/BookValue ratio 6) Price/Cash Flow (not necessarily in that order).

I download this data for as many listed companys as I can. I then sort the stocks by the each factor and assign a number from 1 to n on each factor (where n is how many I am able to download). I then calculate how many stocks are in each percentile (if there are 4000 stocks then there are 40 in each percentile), and assign 100 points to the stocks in the top 1 percentile, 99 points for the next and so forth. I do this for each value factor then add them up for a total score. I drop all but the the top 10% then sort what's left by their momentum in the marketplace. Momentum in the marketplace means how much the price of the stock has changed in the past 6 months. The results of those calculations are the tables I publish on this web site.

If you're still not convinced, we also furnish a watch list of the stocks that I own that shows the highest price since I have owned it and flags any that have declined more than 10%. This feature alone may save you hours of worry and missed time on the golf course. Click here for a sample

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