I started my toe dipping exercise into value investing this month. The plan is to start out light and only buy once a month or when I sell something. I want to hold up to 20 stocks and also use the sliding cash system I thought about last time where the cash % is twice the average PE of the market.
The general idea is to buy stocks from the FTSE All Share index which fall in the lowest 20% market cap of the bottom 10% price/book. So if there are 500 companies in the index then I pick the 50 with the lowest PB and then the smallest 10 of those by market cap.
Many previous studies have shown that these stocks can outperform the market over the next few years after purchase. The gist is that markets are not 100% efficient and that they over do the gloom on certain stocks or just don’t value them fairly.
My sell signal will either be when the company reaches a price/book ratio of 1, or when I’ve held the stock for 5 years, whichever comes first.
This month I bought:
Pendragon at 8p, market cap 62M, PB 0.15. This is a car dealership network and it’s been pretty beat up in this recession.
Ennstone at 16.47p, market cap 81M, PB 0.4. This is a construction and materials company and has not surprisingly lost a lot of value recently.