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Buy Discipline
The combination of
value/price (V/P) and
relative strength leads us to buy industries that are underpriced by our
calculations and that are positioned to outperform (see Relative Strength)
the overall market. As shown in the hypothetical illustration below, industries
with V/P and relative strength readings above 1.0, indicating good bargains and
market leadership, would be candidates for purchase in this example:
|
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| Industry |
V/P Ratio |
Relative Strength |
Signal |
| Automotive |
1.20 |
1.04 |
Buy |
| Biotechnology |
1.19 |
0.95 |
Do Not Buy |
| Homebuilding |
0.97 |
1.02 |
Do Not Buy |
| Personal Products |
0.98 |
0.97 |
Do Not Buy |
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These examples are hypothetical, do not reflect actual performance, and should not be construed as a recommendation of any sector, industry or security.
While Automotive meets our V/P and relative strength criteria, industries with
V/P and relative strength readings below 1.00 would not be suitable purchases.
Biotechnology, for example, is a bargain based on its V/P, but its relative
strength suggests it is too early to buy. Homebuilding is not a bargain, even
though it is showing strength against the market. Personal Products is neither
a bargain nor a market leader.
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Sell Discipline
Our sell discipline is typically on an industry basis rather than by individual
stock, although we evaluate whether individual securities continue to be
attractive investments according to our model. An industry can be sold for two
reasons:
- It is overpriced relative to our calculation of intrinsic value.
- Its performance has been poor relative to the market.
We generally sell when an industry drops into the bottom 10% of our V/P
rankings, meaning that it has become extremely overpriced relative to other
industries. We may also sell when an industry falls into the bottom 20% of a
relative strength scale, indicating poor performance.
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Stock Selection
Individual stocks are screened for quality. We favor companies that are high in
cash, low in debt and well managed. Income statements, balance sheets and
ratios are used to assess management quality seeking evidence of control,
planning and efficiency. Overall, we look to increase the potential that price
will move toward value while reducing the potential for value to deteriorate.
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The figures shown are past results. Past performance does not guarantee future results.
An investment concentrated in sectors and industries may involve greater risk and
volatility than a more diversified investment, and the Technology sector has been among
the most volatile sectors in the market.
There are risks involved with mutual fund investing, including the risk of loss of principal.
Investments in international securities may entail unique risks, including political, market, regulatory and currency risks. Financial statements of foreign companies are governed by different accounting, auditing, and financial standards than U.S. companies and may be less transparent and uniform than in the United States. Many corporate governance standards, which help ensure the integrity of public information in the United States, do not exist in foreign countries. In general, there is less governmental supervision of foreign stock exchanges and securities brokers and issuers.
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