How to buy stock - a system based on fundamentals

So now lets look at how to buy stock using a system based on fundamentals.
And as we have said - we want a system that uses simple rules that can be tested.
And a system that at beats the index.

Clearly such a system will not make you warren buffet!
No mechanical system can ever be substitute for the intuition of a master reader of markets.

On the other hand we have already said so: most investment managers never manage to beat the index over any period of time

And another statistic is that most day traders and spreadbetters, not only fail to win - they lose.

So if we have a system of how to buy stocks that set modest goals of just beating the index then we have already done better than almost everyone in the market.

Just be patient, we will show you how to do even better than that.

How to buy stock based on fundamentals

If you have ever tried to study fundamentals?
That is liquidity, profit, assets and yields - products and markets and managements.

You will know that it is not easy to know how to buy stock using fundamentals alone.

It really is a minefield.

Here are some obvious facts about fundamentals.
Lets explain first of all- what is any investment there to do? And the answer is to earn money that goes back to the investor! Never forget this!

• You will see that share prices all well outstrip the assets of the companies - in most cases massively so - so you are not getting value for money in terms of the assets underlying your shares!

• The next obvious fact is that if you try to base the value of a company on such things as price earnings. Then with the exception of a handful of utility companies you dont seem to get much of a return on your investment at all.

• The final obvious fact is that massive income jumps and massive share price increase is always the preserve of small companies -so rewards are concentrated at the riskier end!- which are equally prone to nose dive!

And when you look at all this you realise the magical touch that Warren Buffet has - he is not investing on present worth, present income or three year projections. He looks at long term value. Now there are ways such as the harvard model to analyse business merit. Which can sort some of the wheat from the chaff. But picking winners is a little like going to the races...

So is all lost? Can we find a method of how to buy stocks to prove that it can be done.
The answer is a resounding YES! and the resounding yes comes from an odd conclusion.

It comes from the fact that the stock market, which should be an efficient market - is not efficient at all.

What is an efficient market you ask?

The idea is that in an efficient market everything that is known about a stock is reflected in the value. because if there was information that should affect the share price, the price would move to absorb the information. So that the idea of a share being over or under valued in terms of present price should NOT in an efficient market exist.

The reality is Efficient markets do not exist.

The reality is that few if any have the foresight of Warren Buffet, and more importantly stocks go in and out of favour so that immediate price certainly does not always reflect a fair price.

And we will prove that with a set of simple rules.

So what is the question that is vital in how to buy stocks - what is the essential fact that gives any stock value?

The answer is not just profit - it is profit distributed to shareholders - and that means dividends. For as long as a company is paying dividends its stock has value in an absolute sense -

• Sowe cannot go far wrong if we take the dow index and select the ten highest yield shares - that is dividend as a proportion of price. And that is the first part of the system!

Then from these pick the stocks that are out of favour. The way to judge this is from the share price. Share prices go from cents to a few dollars, and after sustained growth to hundreds or thousands .

If the price ever gets to be too high to make trading easy, there is generally a share split that ensures share prices tend to be a few dollars a share.

So what happens in a bad year when a stock goes out of favour? the stock falls dramatically and can go below a dollar. So the outward sign of a poor performing share, is one whose price is low!

• So the second part of the system says pick the five lowest price of the ten highest yielding shares.

And it is as simple as this. Buy those shares. Hold them for a year. Then repeat the calculation.

And has worked ! Boy has it worked!

Over a period of 20 years and depending upon exact details - this scheme has returned approaching 20% over the long term which is massively more than the index

And massively more than most managed funds. Now this is not my idea it is well established and can be found in Higgins celebrated book which can be found HERE And it contains many other observations and refinements.

Jim Slater has also published books in the UK that test a similar process on the FTSE and that has worked over long periods too!

So what does this tell us about how to buy stocks?
It tells us you can beat the index
It tells us you can use a system to do it.
And if you do that you are beating most of the professional fund investors.

But most of all it tells you

Rule 3 of how to buy stocks - the market is not efficient - there are value differences And they can be exploited.

SO is that all we have to say?

Absolutely not - we havent even started yet - there are systems that dwarf these results. Be patient - we will explain - keep reading , and please? subscribe to my feed! I would like to know whether my readers are finding this interesting and whether to keep it up!