I follow a simple step-by-step investment strategy known as defensive value investing, which I use to manage both my personal investments and the UK Value Investor model portfolio.
The strategy is designed to produce portfolios which are:
- HIGH YIELD compared to the FTSE All-Share
- HIGH GROWTH compared to the FTSE All-Share
- LOW RISK compared to the FTSE All-Share
- LOW EFFORT with approximately one buy or sell trade required each month
To achieve these goals the strategy follows a simple four-step process:
- FIND above average companies
- BUY a diverse group of them at below average prices
- HOLD them for at least several years
- SELL when a company or its price are no longer attractive
This approach builds upon the work of Benjamin Graham, a legendary stock market investor who effectively invented the investment profession in the 1930’s.
Here’s a quote from his best-selling book, The Intelligent Investor, which sums up the principles of defensive value investing 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.
If you’d like to know more about how defensive value investing works, take a look at this blog post on how to build a high yield, low risk portfolio, or these investment strategy articles.