Operational Questions & Answers - Part 1

What is a Selection Universe? Nope, not a buy list, it is the result of applying a time tested set of selection rules, concepts, and experiences, to a pre-selected group of securities that are of a known level of quality i. e., Investment Grade only. It's just one of the things you need to know...

Here's a fairly comprehensive Question and Answer [more accurately, a Question & Discussion] list that should help you to use the investment process defined and explained in "The Brainwashing of the American Investor". ( Yes, the new Edition is bigger, better, bolder, and includes more information that you need.) The more times you read it, the better your performance will be. Here are my responses to some questions I've received lately from people who are using my methods... If you have additional questions, please send them to: steves at sancoservices dot com.

Within the Investment Grade Value Stock (IGVS) Quality Rating, Additional Factors & Numbers:

The Specimen Stock Worksheet included in the Brainwashing Book lists only two non-price items: S & P Rating and Current Yield. Why aren't such fundamental standards as P/E Ratio included there?

• The IGVSI (Investment Grade Value Stock Index), and related Market Stats were recently developed for users of the Working Capital Model.
• The Selection Methodology presented in Brainwashing is a management technique employed to simplify, organize, and control the decision making process so that a consistent approach to stock selection, and trading, evolves... the KISS Principle. A basic assumption, and the rationale for using the S & P letter rating system in the first place, is that their thousands of analysts consider the important fundamentals in determining the Quality rating.
• A key problem that most users of investment letters, newspapers, chart selection techniques, and computer models have in common is the inability to make decisions... simply because they have much too much information and opinion in front of them. The Selection Universe removes the analysis paralysis and provides an efficient tool for identifying buying opportunities.
• As you become more experienced as a user of the methodology, you will find that the vast majority of the stocks you purchase will fall within the Lower P/E category. Generally speaking, stocks that are ready to buy will have reasonable P/E ratios, but there can be exceptions.
• When making the final selection from the candidates for purchase (and before you have the experience referred to in the Brainwashing Book) it may be wise to use P/E and/or other Stock Guide data (profitability, current ratio, institutional holdings) to select your daily Best Buys.

When you refer to profitability, are you referring to more than the fact that the company is paying a dividend?

• Yes, absolutely. I focus on the right hand columns of the Stock Guide ( Earnings per Share) to make certain that there are no recent negative numbers (a recent operating deficit). It's not uncommon for companies to pay a dividend for a while after they begin leaking oil. A dividend cut or omission won't be far behind. We want both, profits and dividends.
• Always keep in mind that a bad quarter, in a generally profitable long term picture, sets the stage for those good quarter to quarter comparisons that Wall Street gets all excited about down the road. Such earnings surprises always make the news, and often cause a severe decline in market price.

I stay away from companies with a current ratio [Current Assets vs. Current Liabilities] less than 1. Does that seem like a reasonable threshold to you?

• For the most part, but there are certain industries where the current ratio can't be calculated [financial companies]. Also, if there is a lot of inventory [retailers], I like a higher ratio. If everything else looks good, see if there is a simple explanation for a negative number. If not, find something else.

Could you refresh my memory about the significance of the Guide's Institutional Holdings columns?

• The more institutional interest there is in a stock, the more likely it is that there will be the kind of volatility we need for successful trading, and the amount of trading volume we need for instant liquidity. Also, analysts follow the larger holdings, creating more news and more volatility. These are the guys who buy on good news and sell on bad.
• Although I've never tried to come up with a level of institutional popularity that is the best, I'd tend to avoid issues where there seems to be very little interest.