Step-by-Step Guide to Investing with Cabot Benjamin Graham Value Letter
By
J. Royden Ward, Editor of
Cabot Benjamin Graham Value LetterThe goal of the Cabot Benjamin Graham Value Letter is to provide you with exceptional stock recommendations using the techniques pioneered by Benjamin Graham. Our second goal, just as important, is to give you the confidence to buy the stocks and the patience to hold them to fruition. If we can achieve these goals, we’re confident that you’ll achieve yours, and together we’ll have a long and prosperous relationship.
Here’s a step-by-step guide to investing with the Cabot Benjamin Graham Value Letter:
Organize your portfolioCommit a percentage or dollar amount of your portfolio to value stocks. You should commit at least enough of your portfolio to accommodate investments in 10 or more of the stocks recommended in the Cabot Benjamin Graham Value Letter. (Randomly picking a few stocks from our recommended lists often produces unsatisfactory results.)
Determine how many value stocks to buyAfter determining how much money you will invest in value stocks, you need to determine how many stocks to buy. We recommend 10 to 12 stocks for commitments under $100,000, and 30 to 40 stocks for commitments over $500,000. If your portfolio commitment is between $100,000 and $500,000, you can interpolate to get the approximate number of stocks you should own. Divide your cash investment evenly by the number of stocks, leaving 2% to 5% in cash.
Buy stocksWe recommend waiting for your chosen stock to dip below the suggested Maximum Buy Price before buying. Investors may miss out on a stock or two, but it is better to move on to another stock than to buy a stock with limited potential.
If a stock is selling above its Maximum Buy Price, you should consider placing a limit order with your broker to buy the stock at a limit equal to our Maximum Buy Price. After purchasing a stock, if the stock falls 10% or more, don’t be alarmed. We recommend that you consider buying additional shares at the lower price.
Buy equal amounts from each of the modelsPick an even number of stocks from the Classic Value Model and the Wise Owl Model. Choose stocks to diversify your portfolio as much as possible, limiting your investment in one industry sector to no more than 20%. Purchase your selected stocks as soon as they drop below our Maximum Buy Prices.
Commit your fund slowlyWe highly recommend dollar-cost averaging into the models. Use a three-month time frame and invest equal amounts each month. For example, if you want to invest in a total of 15 stocks, invest equal dollar amounts in five different stocks in each of the next three months. If there are less than five undervalued stocks available in any month, stretch out the timeframe to four months or even longer. Don’t overweight stocks—it rarely works out well.
Monitor your stocksOur Minimum Sell Prices are three-year objectives, so be ready to hold your stocks for one to three years. In the interim, expect the stocks to go up and down—ride them out. Each stock should be held until it reaches its Minimum Sell Price. Occasionally, a stock should be sold before it reaches its Minimum Sell Price; in that case, the Value Letter will clearly indicate a sell.
Sell your stocksThe target holding period for stock in the Cabot Benjamin Graham Value Letter is from one to three years. All stocks recommended are assigned a Minimum Sell Price. When the price is reached, we will alert you with a special email Sell Bulletin and then in your monthly issue. Special Bulletins are also posted on the Cabot website.
We recommend two sets of rules for selling stocks—one for each model.
For Classic Benjamin Graham Model stocks, you should continue to hold the stock until it reaches its Minimum Sell Price. We publish the current Minimum Sell Price of all previously recommended stocks on page 8 of the Value Letter.
Wise Owl Model sell rules are different because we use the Wise Owl rating system to help determine when to sell. On page 8 of the Value Letter and in our email Sell Bulletins, we will inform you that a Wise Owl stock should be sold because it reached one of three thresholds:
• The stock reached its Minimum Sell Price
• The stock’s Total Owl Rating fell below 6
• The stock fell from our list of Highest Ranked Wise Owl Stocks
If you are ever unsure if you should sell a stock, don’t hesitate to email roy@cabot.net and we’ll get right back to you.
Restock your portfolioAfter you have sold a stock, simply replace it with another stock from the current models. If your sale creates excess funds, you can add part of the sale proceeds to one of your smaller holdings to keep your portfolio in balance.
About Benjamin Graham, the Father of Value Investing
How Cabot Applies the Benjamin Graham Value Strategy
Guide to Value Investing with the Cabot Benjamin Graham Value Letter
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