The UK Value Investor model portfolio follows an investment strategy known as defensive value investing.
This strategy was originally developed in 2011 and is based on Benjamin Graham’s investment principles for defensive investors (Ben was Warren Buffett’s professor, employer and mentor), which he first wrote about in the 1930s.
What are the goals of defensive value investing?
The strategy is designed to produce a portfolio which is:
- HIGH YIELD – Higher than than the market’s yield
- HIGH GROWTH – Higher dividend and capital growth than the market
- LOW RISK – Less volatile than the market
- LOW EFFORT – Requiring only one trade per month
To achieve these goals the strategy follows a simple four-step process:
- FIND QUALITY COMPANIES – Look for companies with long track records of consistent profits, dividends and growth
- BUY THEM AT ATTRACTIVE PRICES – Invest when earnings and dividend yields are above average
- DIVERSIFY WIDELY – To reduce risk, diversify across many companies, industries and geographies
- CONSTANTLY IMPROVE – Be willing to sell in order to take profits on winners and weed out losers
If you want even more detail you should read a copy of my book, The Defensive Value Investor.
This strategy is built upon the foundations of Ben Graham’s work, so here’s a extremely relevant quote from his book, The Intelligent Investor, which sums up the defensive value approach perfectly:
The selection of common stocks for the portfolio of the defensive investor is a relatively simple matter. Here we would suggest four rules to be followed:
(1 )There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.
(2) Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.
(3) Each company should have a long record of continuous dividend payments. […] we would suggest the requirement of continuous dividend payments [of at least ten years].
(4) The price paid for each should be reasonable in relation to its average earnings for the last five years or longer. We would recommend a price not to exceed twenty times such earnings.
The stock of a growing company, if purchasable at a suitable price, is obviously preferable to others. No matter how enthusiastic the investor may feel about the prospects of a particular company, however, he should set a limit upon the price that he is willing to pay for such prospects.
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