This appeared on another thread, and demonstrated the opinion that *Fundamentals* is really another way of saying *Buy & Hold* & further that the selection of undervalued stocks are few and far between.
This really isn't the case.It would be suicide for a newsletter to do true Buffet/Graham type investing. People want lots of buy and sell suggestions, while I would be surprised that there would be more than one or two new "value" stocks coming up every year according to Graham's value rules.
Lets take an actual example, SGTL, one of tech/a personal hate stocks, and also currently a particularly horrible performer on the current list.
An undervalued business, some can have speculative elements, but you must recognise them as such (for example a leveraged Balance Sheet) This is important, the business must really be a good business, you cannot utilize speculative, no earnings, newly listed IPO's, etc, and you must understand the fundamentals, and how to analyze them.
A calculated *fair value* at a minimum of 50% above current price. This is your starting point, if it is further below it's fair value, so much the better.
Take the *all time high* or *52week high* as the starting point, calculate the drop from this to the current price.
SGTL .......52week high = $24.00
Fair value (coincidently) = $24.00 - $30.00
Initial entry price $10.29 (which is approximately 50% of 52week high)
Therefore, initial position 50% equity, 50% cash
A $10K initial allocation of capital = $5K equity, $5K cash
If price falls, as it has in this case, you use the cash component to pyramid into the full position at lower prices.
I took entries at; $8.49, $6.90, $5.50, & $4.88
Equity = 90%
Cash = 10%
The final 10% would be purchased @ $4.50 or below.
On *Exits* the reverse procedure is implemented, with a gradual selling out of the position, so assuming todays price was the lowest, I would start selling 10% of the position @ $7.48, $8.30 etc
Therefore my *return* would look a little like this;
Shares purchased @ $4.88 and sold at $7.48 = 53.3% return
@ $5.50 and sold @ $9.23 = 67.8% return
@ $6.90 & sold @ $10.24 = 48.4%
@ $7.48 & sold @ 11.37 = 52.0%
@ 10.29 & sold @ 12.63 = 22.7%
This exits 100% of the position for a 37.2% return on aggregate if a total exit is taken at $12.63............if you hold the 50% to *fair value* the returns are higher. Obviously the price doesn't go straight down, and then straight back up either, so you can continue to trade the position until *fair value* is reached, where a 100% exit is taken.
Therefore, it isn't actually required to find *undervalued* stocks on a daily basis, probably 5/10 year is all you require. Your *trading* thus requires far less trading than a technically based methodology, which cuts down dramatically the danger of overtrading.
A good example of a selection that is working well, are SAFM & GKIS both which traded lower than the initial entry price, and additional positions taken, and gradually sold as the share price has gone from the low of $19.93 to $30+
SAFM .......Entry @ $26.45
Initial position size 50% equity 50% cash ........52week high $49.00+
Purchase @ $21.54
Total = 70% equity 30% cash
Sell @ $29.27 (both positions) = 37.4% return
Holding 50% equity 50% cash
Next sell price = $33.67
Anyway, you should get the idea.