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Stock Selection For The Defensive Investor
The author provides some criteria which an investor might want to follow when selecting a stock:
- Adequate size of the enterprise- At least $100 million in annual sales (needs to be adjusted with inflation for today’s values).
- Strong financial condition- A current ratio of at least 2:1 and not a significant amount of debt in the balance sheet.
- Earnings Stability- Similar earnings in the past 10 years.
- Dividend Record- Uninterrupted dividend payments in the last 20 years
- Earnings Growth- a minimum increase of at least 1/3rd in per-share earnings in the past 10 years).
- Moderate Price/earnings ratio- (shouldn't be more than 15 times than the average earnings of the last 3 years)
- The moderate ratio of price to assets- not to be more than 1.5 times
One’s view of whether a stock is better from others also comes down to an investor’s taste and preference as well as their personal expectations from a stock.
A stock is not valued entirely on its today’s earnings, it is also based on the future earning capacity of the company.
If the stock's price has a sustainable margin above the stock's present value, it helps an investor not lose too much money in case the company develops any unfavourable situations in the future.
Diversification of stocks and industries is an important factor in a portfolio. It is totally not advisable to put all our money on 1 stock or industry. If any adverse situation occurs within that sector, we will lose all our money, but by diversifying, our risks are mitigated.
