In an article from 2014, AAII Journal offers a list of five stock selection rules for value stocks which it derived from some of Wall Street’s most celebrated and successful investors. “If you look at the approaches of these gurus and stock market experts,” the article says, citing Benjamin Graham, Warren Buffett, David Dreman, John Neff and others, “you will quickly notice that successful approaches within a given investment style tend to have similar elements.”
The article provides the following list of attributes, providing details regarding the metrics used by the various gurus as well as the methodology behind them:
- Reasonable value—According to the article, legendary value investors like Buffett and Graham believe that investors tend to react too negatively to companies with weak prospects, adding that such a behavioral bias is best overcome by using a quantitative approach. “The mispricing of securities,” it says, “tends to be a self-correcting process that contrarian investors can use to their advantage.”
- Growth and consistency—”Successful value screens,” it argues, “require minimum levels of growth in factors such as earnings, sales, dividends or cash flow, but also levels that are not too high.” It cites preferences of gurus such as Peter Lynch, John Neff and Martin Zweig.
- Financial Strength—”A strong financial position enables a company to work through a period of operating difficulty often experienced by out-of-favor stocks.”
- Unique niche—Referencing Buffett’s methodology, the article explains that he “seeks out consumer monopolies selling products in which there is no effective competitor, either due to a patent or brand name or similar intangible that makes the product unique.”
- History of paying dividends—The article notes that there are many ways to screen for dividend payment history. “You can simply establish a minimum level or perform a relative screen that compares the current yield to the market level or to the company’s historical norm.”
The article concludes, “Much can be learned by studying the strategies of investors with successful long-term records. Investors must learn to separate the company from the stock.”