Advanced Portfolio Concepts
Viewing investing from a value point of view opens up some interesting investing strategies.1 Value investing is a long-term strategy. The movement of a stock price to intrinsic value is a three- to five-year phenomenon. The strategy needs to be long term. Value investing also is a contrarian strategy. You are buying stocks that are beaten up and selling stocks that have had price success. Psychologically, this is hard for most people to do! You need confidence that you know more than the crowd knows.
An advantage of ValuFocus is that it allows you to create a set of rules to help you become a disciplined investor. Value investing requires discipline.
Before going into specific strategies, let's cover how to select stocks using ValuFocus and diversification.
Four considerations are key in selecting stocks as a longer-term investor: value, tracking error, diversification, and inflection points. Each is equally important.
You want to select a stock that is undervalued—the more undervalued, the better. Undervaluation is relative, influenced by economic and market conditions. In highly valued markets, 15 percent undervalued may be as good as you can get. In low-valued markets, companies can be 50 percent undervalued. Your own portfolio market value often lines up with entire market value.
I like to buy stocks that are at least 35 percent undervalued, with a signed tracking error of less than +/− 15 percent ...