I am always looking for good high quality companies that are trading at a discount. Finding these companies is both challenging and time consuming. Finding cheap companies isn’t hard- finding cheap good ones is. A professional investor will spend the entire day researching company after company trying to find something the market has overlooked. As an amateur investor I don’t have that kind of time so I needed a method to reduce the number of companies I examine every week to a small handful that merit my further investigations.
One of the means I use to get this short list is what I call my value investing four filters. While I will describe each of these filters in more detail in further articles I wanted to give a brief overview that we can refer back to.
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The filters can be split into two distinct sets. The first two filters’ sole purposes are to weed out companies so I can avoid waisting time. The second set of filters helps the cream in those remaining rise to the top.
- Filter 1 Insider Trading:
Not just any insider trading though. I have a refined set of job titles that I look for insider trading against. These job titles have shown special knowledge of the runnings of companies in general. Think about it this way, if you had a question about the financial health of a company who would know better a CTO, or a CFO? The roles I focus in on have proven to have low losses, high consistency and high returns. I use the axiom “people sell stock for all sorts of reasons but only buy for one reason.” To read more about this filter have a look at this post.
- Filter 2 Graham Fundamentals:
Once a company has cleared filter 1 we apply filter 2. Filter two’s role is to get past the optimism insiders have shown in filter one and ask if the company has a healthy future and is priced inexpensively. To anyone familiar with Benjamin Graham the rules used in this filter are old hat, for a sample have a look at my previous posts.
- Filter 3 Sustainable Competitive Advantage:
After applying the first two filters we have now focused in and found companies where employees are confident in the company, the company is cheap, and the company appears to have a safe financial future. The purpose of this third filter then is to focus in on companies that have good products or services that should guarantee ongoing income.
- Filter 4 Managers:
Last but not least we need a company with good solid leadership at the helm. Ultimately without a good captain even the best boat will go round and round in circles. To read a bit more about these last two filters have a look at this article.
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Applying these filters weeds out the low quality expensive companies. It allows me to focus my attention on high quality companies that are trading at a discount, and that have excellent people running them that have a strong belief in the health and prosperity of their company’s future.
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