Since the publishing of my book, The Confident Investor, many people have asked for an explanation of the high-level strategy. It is difficult to summarize an entire book in one short article but I will try to give the essence of the system.
First, it is important to understand some of my observed truths. If you disagree with these truths than the book is likely not for you.
- Buy and hold is not a great investment strategy as it ties up your capital and subjects you to periods of bullish behavior by the stock.
- It is okay to hold on to truly great companies that are very well run if it doesn't affect your original capital.
- Most stocks of great companies go up and down within a range that slowly grows over time
- If you only own the stock during the good times and sell it during the bad times your profit will increase and your capital will be preserved
The basic strategy is to find truly great companies and grow your investment in these companies with free stock. It is easy to decipher the metrics that I think make up a great company - I regularly show how companies do on my grading system. I publish the best of these companies on my Watch List. The metrics are:
- The growth of the company’s sales.
- The growth of the company’s earnings per share of stock outstanding.
- The growth of the company’s market value compared to its earnings.
- The growth of the company’s earnings before taking into account interest and taxes.
- The value of the company compared to its earnings as compared to other similar companies.
- The productivity of the company employees relative to industry averages.
Once you identify a great company, the strategy is to acquire shares in that company for free. This is a strategy that I call GOPM (Grow on Other People's Money). It isn't a leveraged model where you are taking a loan out to buy stock. Rather, it is using technical analysis to know when to buy a stock and when to sell it. The investor should buy stock when it is bullish and then sell the principal when the stock enters bearish territory but keep the profit from the original purchase invested in shares of the company. These profit-owned shares were purchased with Other People's Money. They are free for you since you conserved your original capital. This capital is now available to invest in another great company that is experiencing bullish conditions.
Over time, this strategy allows you to build up a substantial amount of shares in great companies. These shares are essentially free (or have cost very little per share).
There are many details to executing this strategy. Reading the book, The Confident Investor, is essential to understanding how to calculate the metrics and how to understand the technical analysis. The book is available wherever books and ebooks are sold such as Amazon, Kindle, Barnes and Noble, Nook, and iPad. Once you have purchased the book, you will be able to access private information on this site that is reserved for book owners.