Retirement Ready Income Programs

Investment Grade Value Stocks - Quality Is Job One

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A More Refined Equity Selection Universe Breeds Superior Performance 

How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve our very own greed, fear, and unrealistic expectations?

Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic investment methodology - an ongoing selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines.

If you are thinking of trying a strategy for a year or so to see if it works, you're due for a smack up alongside the head. Viable strategies transcend cycles, not years, and viable equity strategies consider three or four disciplined activities, the first of which is selection.

How should you determine what stocks to buy, and when to buy them? Will Rogers summed it up: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have misread this tongue-in-cheek observation and joined the "buy anything that is rising" club. I've found that the "buy investment grade value stocks lower" approach works better.

A Google search produces a variety of criteria that help to identify value stocks, the standards being low price to book value, low P/E ratios, and other fundamentals. But you would be surprised how the (self serving) definitions can vary, and how few include the word quality.

In the late 90's, it was rumored that a well-known value fund manager was asked why he wasn't buying dot-coms, IPOs, etc. When he said that they didn't qualify as value stocks, he was told to change his definition --- or else.

How do we create a confidence building stock selection universe? Operating on blind faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies. Also, some of the figures may be difficult to obtain quickly, and it is essential not to get bogged down in endless research.

Here are five filters you can use to come up with a selection universe of high quality companies, and you can obtain all of the data inexpensively:

1. An S & P rating of B+ or better. S & P is a major financial data provider and its "Earnings and Dividend Rankings" combine fundamental and qualitative factors into a letter ranking that speaks to the financial viability of a company.

Potential market performance (a guessing game anyway) is not a consideration. B+ and above ratings are considered investment grade. Anything rated lower adds an extra element of speculation to the portfolio. A staff of thousands does your research for you.

2. A history of profitability. Obviously, a company with a history of profits is a less risky investment than an unproven, start-up, or losing enterprise. Profitable operations adapt more readily to changes in markets, economies, and business opportunities, and are more likely to produce profit-taking opportunities for you.

3. A history of regular dividend payments. The payment of dividends, and periodic increases in the rate paid, are signs of economic viability. Companies will go to great lengths, and endure great hardships, before either cutting or omitting a dividend. 

There is no need to focus on the size of the dividend itself; equities should not be purchased as income producers. On the other hand, companies who enrich officers and don't reward investors should be avoided.

 Additionally, dividend cuts are a clear indication of financial stress within the company.

4. A reasonable price range. Most IGVSI stocks trade between $10 and $100 per share. If you have a seven-figure portfolio, price may not matter from a diversification standpoint, but in smaller portfolios, a round lot of a $40 stock may be too much to risk in one position.

An unusually high price may be caused by high sector or company speculation while a single digit price may be a warning signal. With no real structural size limitations, I feel most comfortable with a range between $12 and $80 per share.

5. A NYSE Listed Security. I'm not sure that the listing requirements for the NYSE are still more restrictive than elsewhere, but it is helpful to be able to focus on just one set of statistics. Market Stats, Issue Breadth, and New Highs vs. New Lows are reported separately by exchange. 

Your IGVSI selection universe will become the conscience of your equity investment program - allowing no room for creative adjustments to the rules and guidelines you've established. You will be able to focus on diversifying properly and on identifying stocks that are ready for purchase.

Always keep in mind that you want to sell each equity at your target profit ASAP. What, you say, what are targets? Well, security selection is just one part of the process.

You'll want to establish appropriate diversification, buying, and selling rules as well. For example, I never consider buying a stock until it has fallen at least 20% from its 52-week high. Your actual "buy list" should change every day in symbol, # of issues, and day-limit price.

You will need to apply consistent and disciplined judgment to your buying activity so you don't violate a formalized set of diversification rules as to sector, individual issue, global interest, etc. And then the absolute most important function of all - profit targeting.

Never, ever, say "no thank you" to a net/net profit of 10% (or less under certain circumstances) and you'll be able to do it again, and again, and again.

One other observation, as IGVSI stocks gyrate above and below your purchase price (as they absolutely will), you can be confident that it is merely the nature of the stock market and not an imminent financial disaster --- and that should help you sleep nights.

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Retirement Ready Income Programs
2971 Maritime Forest Drive
Johns Island, SC 29455
Phone (800) 245-0494 • Fax (843) 243-8509
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Please read this disclaimer:
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.

Please join the private article mailing list or Call 800-245-0494 for additional information

Risk Management: Income, 401k, and IRA Programs

Take a free tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:


In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.

At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.

The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.

Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,

Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.

Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side...  while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.

To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.

Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.

Total income is 6.5% of capital and more than covers the RMD.

Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds. 

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Please read this disclaimer:
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.