Five Rules To Follow When Picking Stocks

Johnny HopkinsPatrick O’ShaughnessyLeave a Comment

One of my favorite podcasts is Masters in Business hosted by Barry Ritholz, and one of my favorite investors is Patrick O’Shaughnessy. So, it was awesome to listen to a podcast where Ritholz interviewed O’Shaughnessy on his investing strategy.

O’Shaughnessy, is a principal at O’Shaughnessy Asset Management and author of “Millennial Money: How Young Investors Can Build a Fortune.”

O’Shaughnessy takes a contrarian position about young people. Rather than lament the state of the economy or the cost of student loans, he is focused on the singular advantage that people in their 20s and 30s have: time.

Despite the difficulties of the recent economy, the prime benefit of being young is having a very long investment horizon, he says. That 40-to-50-year window allows the miracle of compounding to take place over many decades. This leads to results that significantly outpace those of folks who begin their portfolio building in their 40s or 50s.

What I really took from this podcast was the five criteria that O’Shaughnessy uses to pick stocks at his firm. It’s very similar to the criteria that we use here at The Acquirer’s Multiple. O’Shaughnessy also highlights the importance of sticking to your strategy.

Here’s the criteria that he uses to pick stocks:

  1. Shareholder Oriented – Shareholder yield greater than 5%, shareholder yield is defined as buyback yield plus dividend yield
  2. High ROIC compared to its competitors, greater than 30%
  3. Real Earnings – Operating cash flow greater than bottom line profits – helps to avoid the Enron’s of the world
  4. Cheap – Enterprise Value/Free Cash Flow less than 10%
  5. Momentum – Six month momentum in the top three quarters of the market

Here’s the podcast:

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