My investing strategy involves the following steps:
- Examine structural trends for opportunities and threats. Structural trends are expected to last several decades and offer high probability outcomes.
- Study market cycles that are likely to have a major impact on medium-term investment performance. Here we react to market signals rather than make predictions because of higher levels of uncertainty.
- Focus on sector opportunities from the first two steps and identify stocks that display:
- Strong earnings growth (or strong cash flows distributed as dividends or stock buybacks); and
- Ability to defend their market position against competitors.
- Monitor targeted stocks for buying opportunities when:
- Earnings multiples are low relative to dividend flows plus expected growth; and
- Technical indicators reflect favorable market sentiment.
- Sell stocks in the investment portfolio if the enterprise loses its ability to defend market share or expected long-term earnings growth declines.
- At times we may buy cyclical stocks — including gold miners, fund managers, media companies, and building supplies — when technical indicators suggest opportunities. These are sold when market sentiment turns bearish.
- At times we may reduce overall exposure to equities and increase holdings of cash and interest-bearing securities when measures of market risk measures are high.
Next: Structural Trends