Procedures:
- Compare the merits of one stock over another, 5 yr estimate of stock's future
price range to include the boom and bust cycles.
- Rule of Five, one exceeds expectations, one underperforms and 3 as expected.
Use challenge tree to weed the underperforming stock and upgrade your portfolio.
- Challenge tree uses 5yr upside-downside ratio and quality considerations to enhance
the defensive strength of the portfolio
- Two major indicators for purchase:
- A stock selling in the lowest third of its estimated 5 yr price range and showing 100% appreciation at that time.
- A stock offering sound reasons to expect substantial price appreciation in the next 6 to 18 months.
Making Decisions:
- suppose you purchase a stock based on the estimate that it would double in 5yrs and it is now in the middle
of the range having posted a 33-66% gain. This stock appears to have realized 50% of its potential gain and
its upside/downside has dropped from 3-1 to 1-1. If a replacement stock of greater quality with a
greater upside/downside is available and 100% price appreciation potential is found, buy it.
Avoid Two Common errors:
- Do not hold lesser quality stocks as a bull market winds down or results can be erratic.
Only stronger companies survive downturns.
- Do not assume that simply because a company has doubled in value, it cannot continue to
appreciate, superior growth companies do.
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