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The TLA Strategy is built upon steps – both quantitative and qualitative.
The steps are as follows:
1. Build the list of stocks to put into the portfolio when the price is right.
2. Buy stocks off the list after they have been unfairly punished by the market on the day.
3. Evaluate if it is time to add to a position, develop the portfolio by adding a stock from the list, or reduce a position (ideally up and able to play with house money).
First, I build a list of stocks to consider adding to a TLA Portfolio. To make that list I use the following three pillars:
1. Business Fundamentals
So how do I measure, evaluate, analyze these three pillars? Let’s take a look at some of the basics…
1. Business Fundamentals:
In a blog from April 4th, 2020 I outlined the details on how to do this. Find that post here.
This is your traditional evaluation of stocks. This is the Benjamin Graham-teaches-Warren Buffet approach to reviewing a company’s income statement, balance sheet, and statement of cash flows, then using a discounted cash flow model to conclude what the total company is worth both now and in the future. But as I wrote on April 4th, “[w]e would not want to treat $1 five years from now like it is worth as much as $1 today because it will not be. ” In turn, I compare that total worth to how many shares are available – and from there I can see if a single share is over-, under-, or fairly valued.
Analyzing business fundamentals is the primary method I use to build a list of stocks worthy of a TLA Portfolio. As each trading day goes by, I see which stock from the TLA list was most unfairly punished on the day, then I buy it. It has then become part of The TLA Portfolio as it is now owned.
Note: Fundamentals of tech companies is different from how Graham and Buffett measure them because rarely does a tech company’s Book Value accurately reflect the company’s value well enough.
Perhaps I will blog about Technicals in the future, but a lot of people are familiar with them already. Analyzing Technicals is analyzing a stock’s charts, 52-week high and low, its market cap, its beta, its volume, dividend, et cetera.
I definitely analyze the Technicals, but it is fair to say I give the least weight to this pillar – although I consider it significant and very important to understand. (A big reason why is because it often drives, whether rationally or irrationally, Sentiment.)
In a blog post from September 30th, 2020 found here, I outlined the sentiment of an emotional market that The TLA Strategy is designed to capitalize on:
“Each and every day the market overreacts to news. A report comes out and a stock drops 5%. Another report comes out and a different stock drops 8%. But is that company reported on now a different company than it was before the report?
That’s the question I ask when I consider buying the day’s hardest hit stocks. If the answer is no, then likely the market has overreacted and the stock is now offered at a discount. One of my strategies is to buy stocks in this manner.
I don’t look at any and all stocks though. I pre-screen stocks, get to know and understand them well, then add them to a portfolio if I like them. From there I watch and see which companies in the portfolio are unjustly punished with news. Over time this builds a quality portfolio of stocks purchased at a discount each trading day.”
Second, once the pillars are measured, and the list is built, the buying begins and the portfolio continuously develops until each of the pre-screened stocks are owned.
The overall effect is that I’m buying growth stocks at value prices in a developing portfolio. Frankly, it’s proven to be a powerful combination over time, and grows more powerful the longer the strategy is used as the growth stocks grow, the value priced buys average and add up, and the portfolio div.
A look at how growth stocks can be averaged to value prices:
If you had $250 to invest and bought a share of stock at $40, $45, $50, $55, and $60 then you have spent $250, bought 5 shares, and your shares are $50 on average. A month later, if you had another $250 to invest and bought the same stock at $50, $55, $60, and $85, you bought 4 shares, and these shares are $62.50 on average. Yet another month later you have $250 to invest and buy the same stock at $50, $40, $35, $35, $30, $25, and $35. You bought 7 more shares, and your average shares are $35.71.
You now own 16 shares of the stock and have spent $750. This means your average share cost is $46.88. If you are buying the stock in a rising market then you are continuing to participate in its upside without having to take the risk of putting your full $750 into a stock – that is a win. Now if you are buying the stock in a falling market then you guarantee yourself a lower average cost than if you had risked your full $750 up front – that is a win too. So averaging into a stock creates a win-win scenario and reduces risk!
Note: Averaging is especially powerful in a falling market! With The TLA Strategy we are profiting in a rising market, and we are most powerfully employing our money in a falling market! It is critical to stay critical in a rising market and Steady in a falling market!
Third, I evaluate if it is time to add to a position, develop the portfolio by adding a stock from the list, or reduce a position (ideally up and able to play with house money). There is a lot of art and feel to this. Each day I find the stock off my list that was down the most, confirm it was unfairly punished by the market, then buy it. This process often includes different stocks after each trading day, so the portfolio naturally develops. But early in the development of a portfolio I am more likely to favor bringing a new stock off the list into the portfolio than building a deep position on a couple stocks, as this develops the portfolio. In this way, I build the portfolio.
But what about reducing positions?
To be fair, if I am going to reduce a position I start with a scientific approach and evaluate how much I have gone up. From there I may sell enough stock to cover my investment plus an addition percentage which is based on my overall assessment of the stock and the market. If the stock and/or sector is overheating, I am more likely to take more off the table. You can see it becomes an art too.
Note: If I am down I am unlikely to reduce a position because I like the company and can now buy it at a discount! To do this, one must be Steady.
All good investors objectively and emotionlessly evaluate both the art and the science of investing. For me I have been investing since a teenager and have become very objective about it, which helps. The word I use is Steady. I don’t want to report the above as simple and all inclusive to The TLA Strategy, but I do hope it gives you a good overview and perspective as to why it has been successful.
This idea of Steady, plus my favorite aspects of other investing methods I have studied, have led me to The Target List Averaging (TLA). It is fundamentally Steady.
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