My Personal Criteria for Security Recommendations.
Suitability:- At all times I am careful to ensure any recommendation is in keeping with my client's risk tolerance and overall financial circumstance. I am aware there is a strong element of trust in our relationship which I cherish and never want to betray. There are times when individuals themselves are unaware of the risk they may encounter with suggestions they sometimes make to me. I feel a very real requirement to ensure they are fully aware of this; and indeed, will not hesitate to use my gentle powers of caring dissuasion on such occasions.
Common Stocks:-
When choosing a common stock for recommendation to purchase I want to ensure that a credible upside potential total return of at least 20% is identifiable within a period of 12 months, maximum. This must be present in the analyst's opinion and I must see it as reasonable from the structure of the stock's price chart. In simple terms this is one manner of determining that the stock is currently undervalued and it's risk level is relatively low.
In respect to the stock's chart pattern, I will stand aside from any analyst's recommendation of a stock that has had a strong 'uncorrected' run to the upside.
I much prefer to see the stock's price having encountered an orderly sell down after a show of strength and the fundamental argument being valid. Similarly, I am attracted to the favourable analysis of equities that have encountered a prolonged period of 'consolidation' or, 'bottom building' having successfully emerged from a downtrend. Of course, the ideal entry point is after a pull back within a young up trend with the backing of supportive fundamental analysis.
Fundamental research analysis is always more reliable when based on clearly identifiable criteria especially that of financial strength and a favourable industry or product outlook. If a favourable outlook can be rationally justified despite current weak conditions, very often such represents a good investment.
I believe the technical condition of the market itself to be very important. I hesitate strongly in suggesting purchase while the market is in a declining mode, and similarly when it is clearly overextended in the short to intermediate term (two to six months).
When a stock has reached its fundamental target previously established by research and has become clearly overextended I will draw this to my client's attention and recommend profits be taken. This does not infer I will have an immediate replacement purchase as most often the market in general will have become overextended itself; and, prudence would suggest waiting for a corrective phase to emerge prior to effecting a new purchase.
Fixed Income Securities:- There are two dangers to succumbing to low current yields by accepting and positioning an inadequate return for any period in excess of two years. The first is the low return itself, and the second is the certainty of experiencing a loss in value when the interest cycle inevitably turns adversely. My criteria for fixed income purchases is that the return in absolute amount be acceptable and that the fixed income market be overextended on the down side in price terms. With the exception of coupon trading, the most important of these two criteria is the absolute return level. I do not subscribe to the 'siren song' that inflation is no longer.
The successful trading in 'Strip Coupons' requires positioning when the return is acceptable on an absolute basis and the bond market is overextended on the down side for the short to intermediate term. When such conditions are present I will recommend coupon positioning in long term maturities to maximize the profit when the market recovers. My success with coupon trading is directly attributable to my grasp of the precepts of technical analysis and this timing discipline commands my strict adherence. Fundamental persuasions which are dependant on so many unpredictable variables are quite unreliable in this intermediate term trading exercise.
