A Newbie's strategy to have some money when I'm old and grey

24th Aug '17 by AnonymousUser353071

15 comments 6854 reads

Hello everybody,
I am a small investor from Germany. Since we will not have sufficient money in Germany as a retiree from the state, in order to lead an appropriate lifestyle, one has to provide for itself. I am in the fortunate position, in addition to the “usual” pension from the state, that I'll receive a pension form the Company I work for. But this will probably not close the gap completely. Therefore, everyone should also make private provision for the future pension. At the beginning of my Fourties, I still have 25 years as an investment horizon.

Stocks are the means of choice in such a timeframe to achieve a good return. There are people who recommend passive investing, for example in ETFs. I also own an ETF - an ETF on fixed-interest corporate bonds. I guess it's called asset allocation. ;-) For me, however, I have discovered that it is fun for me to take the issue myself and to make a conscious decision to invest. If I choose an ETF, I have no influence on which companies are in or are exchanged. So I decided to stockpicking stocks.
This, of course, involves following a particular strategy. Which strategy did I choose?

***drum-roll***

It is an adapted strategy of the Martin Zweig Growth Screen, which I will use here with the help of Stockopedia's screening tool.

What are the reasons? At first, I am firmly convinced that growth and rising sales are essential to the success of a company. On the other hand, of course, it should not be overrated, which is why a limitation of the P / E ratio makes sense. I also believe that good developing companies will also be successful in the medium term. In this respect, the observation of the relative strength in relation to one year makes sense. Martin Zweig, however, was not a pure growth investor. He has also always paid attention to the fact that a company is financially sound. This is in my opinion a bit too short for the original Martin-Zweig Stockopedia-Screen. I have therefore added or modified a number of key figures that are helpful for my way of investing and which I consider important:

- Limitation of P / E ratio to max. 40. I think Martin Zweig had set the limit…

Unlock with Email

Unlock with Google

Already have an account?
Login here

doug2500

24th Aug '17

Welcome Ben, I don't think your namesake would approve of buying companies with a PE of 40!

You don't sound like somone who would be interested in a bond ETF, are you planning to keep it?

AnonymousUser353071

Hey doug, thanx for the welcome. Actually I thought the same about my nickname when writing the article. But I come from the value investing approach - now somehow changing to the dark side of investing. ;-) For example I like the dividend investing strategy a lot. But since I would have to pay too much taxes for dividends in Germany compared to the US, all the DGI blogs and recommendations don't work for me. Nevertheless I am thinking about switching my stocks towards reliable dividends stocks when I am a retiree later on.
As for the PE - 40 is the max and I would probably sell a stock when it goes above this limit. When I look at the stock list with "my" screen, it is facebook with a rolling PE of about 36 on top. Most of the other companies are around 20, Taylor Wimpey is just below 10. The main rule is less than 1.5 of the industry median which is absolutely okay for those growth stocks. The whole thing is more like a growth at reasonable price approach of which I am convinced.
The bond ETF I am going to keep. It is some kind of admixture to my portfolio and represents only a small part. I feel fine with it.

Rusty2

Hello Ben, I do own a few German shares which have performed quite well for me this year, I don't know much about Martin Zweig so don't know if they fit in with his strategy. The ones hold/have held are CE2 (sold), BSL, WAF, WSY.
I would have bought some more but many German companies are not available through my UK stockbroker.

poughtibridge

Hi Ben, welcome... I'm really interested to hear how it goes - I'm doing a similar thing but with O'Neil's CAN-SLIM.
I haven't come across the VLG index before (forgive my ignorance) I've just a had read up on and will start following it.

25th Aug '17

Thanks for all your Feedback! That's great to see.

@herbie: I know the problem of not getting all the foreign stocks you like, especially those small micro caps. The ones you own seem to be some typical growth stocks. Especially Basler is quite successful at the moment and doing very well. They have found their niche with those high tech cameras for industry, medicine etc.
For the Martin Zweig screen the EPS and sales growth period of your shares would not be long enough. They had some critical years in the past. Nevertheless they are doing fine right now, so maybe they will occur on the Martin Zweig screen later on. ;-)

@poughtibridge:To be honest I did not know the VLG index either unless I dealt with Martin Zweig and his approach. ;-) Still not sure if I would really sell everything when the red lights are appearing… CANSLIM is very interesting, too. But very hard for me to put in quantitative facts since there are some soft factors to be accounted. Yet CANSLIM has some intersections with the approach of Martin Zweig, e.g. the RS. Hope you are doing well with CANSLIM. What are your experiences?

underscored

Why a PE of 40 but not of 50? Is there empirical data to support 40 (or 42) as a cut off?

@underscored: No, there is not. It is just, that Martin Zweig searched for companies with a PE of at least 5 and a maximum of 1.5x the industry median, but never more than 42. That was his range to find reliable growth stocks without paying too much for them. If you take a look at different investing blogs and sites a lot of people look for stocks with a max PE of 20 and will sell if they reach 40. At least if they have a more conservative approach. Of course you can also hunt for high flying growth stocks with PEs from 50 or above. But that is not my comfort zone.

"investing blogs and sites a lot of people look for stocks with a max PE of 20 and will sell if they reach 40."

How are they performing against a realistic benchmark?

timarr

To put another way, a PE of 40 implies that at constant earnings it will take the company 40 years to earn equivalent to the market capitalisation. The long-term historical PE in most markets is around 15. To justify a PE ratio much ahead of that you have to have strong conviction about future earnings growth.

Zweig's approach was to look for growth, essentially it's a Growth at a Reasonable Price (GARP) strategy. However, he's very clear that the target PE ratio is not a fixed value and stated, all things being equal, that a low PE is better than a high one and that stocks with very high PE ratios are to be avoided because they fail to deliver on growth then the share price is likely to collapse. He didn't really set a PE target but generally aimed to invest at around or slightly ahead of the current market average.

However, Zweig was a perma-worrier and basically sat out the market when the average PE hit 20 - so the absolute maximum PE he would have ever paid was 30, and I can't actually imagine that he'd have done that. Oh, and Zweig's is definitely not a buy and hold strategy - it's an activist strategy, suitable for people who track stocks regularly, use stop losses religiously and who are happy to sit on the sidelines for relatively long periods.

His book, "Winning on Wall Street", is essential reading for anyone wanting to use this strategy or anything based on it. I certainly wouldn't recommend it to someone new to investing.

timarr

I think a lot of people come to individual investing via Buffet and Graham. It is so intuitively believable, buy something at discount and sell when the sale ends. Base decisions on tangibles like past earning.

There is another - possibly more powerful force at action too. Investor sentiment - see Keynes' castle-in-the-air theory for a simple summary.

For a newbie investor I would suggest that you take some time to watch the guides on this website regarding StockRanks, and look at William O'neil's CAN-SLIM for an alternative perspective to "buy one get one free value".

Well, you cannot say across board how different investors are doing with their strategies. One I like a lot is e.g. the blog from the Dividend Growth Investor (www.dividendgrowthivestor.com). He has – who is wondering – a dividend growth approach. And he actually does not care a lot about share prices, so some of his stocks may not develop as good as the market. But he gets a permanent dividend payed. Also you can look at seeking alpha where you can find a lot of financial versed guys with different strategies. You seem to be someone who has an idea of investing so you’ll probably know all of those sources.

Yes, Zweigs strategy is definitely not a buy and hold strategy. Even though I have added some more “value” key ratios to the Stockopedia original screen you have to check your stocks regularly. As I’ve written, I also added a stop loss which is something Zweig worked with as well. Limit your losses. The PE ratio should of course - as every other ratio - not be seen detached from other aspects. In the Stockopedia Martin Zweig screen it is limited to 1.5 of the median. And I also use this rule. The PE 40/42 should be seen as the absolute maximum and so did Zweig, too. It is just to avoid investing in a stock with a PE of let’s say 50, when it is in the range of 1.5 of the median even with this high PE ratio. As I mentioned above: None of the stocks on the list reaches such a high PE ratio, most of them are around 20 which in my opinion seems to be fine. And I will not invest in all of the stocks blindly. The screening results are the first step for further investigations in a company. And we agree: In the end it is a growth at reasonable price approach.

I will definitely do so, underscored. I have allready watched some of the videos. I am not totaly new to stock-investing. I've read Peter Lynch, Joel Greenblatt and James O'Shaughnessy and read a lot in the Internet. Maybe too much, so I am still trying to find my own way. ;-)

Mark Simpson

Using dividend yield as a value indicator is not particularly useful - in most studies (like Dremen's Contrarian Investment Strategies) it has half the out-performance of other value based strategies like P/E, P/B EV/EBIT. I posted the figures here: http://www.dangercapital.co.uk/2015/08/the-dividend-fallacy.html

And like you say it has some significant tax disadvantages for many investors.

If a value strategy fits your personality best then I wouldn't give up on it too soon. There is a distinct advantage of following a strategy that you believe strongly in because you will stick with it during the inevitable years of under-performance. There is nothing stopping you following a value strategy where you buy say low EV/EBIT companies that are financially sound but don't pay a dividend. This would give you a tax efficient portfolio that should outperform over the long term. Since the whole of Europe is your area there should be enough companies to get diversification.

Value and momentum strategies are historically inversely correlated so there is also an advantage to allocating some of your capital to both.

Logic

29th Aug '17

There are arguments for and against dividends, and all that I would like to add is that a regular dividend can be beneficial to those who rely on income from investment for their daily expenditures (retired or full time investors), and it can be psychologically important (especially when there is a market down-turn).

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - J.D. Rockefeller (allegedly. To be fair, with his dividends, I would also be happy to see them..)

But that does not mean dividend investment is the only way. There are other methods which may give a higher yield and there are ways which may be more tax efficient in certain settings. I obviously cannot give much tax advice, other than to suggest that you investigate what is the most tax efficient way to invest. All fees and taxes eat in to your return.

For the purpose of disclosure, I view myself as a value/dividend investor, and would list Dremen and Graham as the investors who have had the most influence on me. That does not mean I do not read Rogers and Greenblatt. Personally I am not keen on companies with high PE unless there is a very good reason (say a megacap that has had a fall in profit for a specific reason and you expect profits to return soon).

If you find yourself having spare time, I would recommend reading a book or two by David Dremen.

A Newbie's strategy to have some money when I'm old and grey

Unlock the rest of this article with a 14 day trial

About the Author

AnonymousUser353071

15 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...