Briefly:
The SSG is the form used by the NAIC (National Association of Investor Clubs). For info go to better-investing.com
The NAIC principles are based on long-term investing, with a target of 15% annual growth (a stock to double in five years). For a few recent years this looked like a silly and downright anemic target; suddenly it doesn't look so stupid any more. And historically, the market has grown about 13%, so a successful NAIC investor will beat the market.
The SSG is a two page stock analysis form, the front page of which is charting the stock's price, earnings, profits, and sales over the past 10 years and projecting over the future five years. The back page is data analysis. In a nutshell, the principle is a combination of growth and value. First, you have to be confident that a stock is going to act in basic accord with its past history -- that is, if sales have been going up and average of 8% for 10 years, they will continue to rise at some percentage in the future. If the stock PE has ranged between, say, 8 and 20 over the past 10 years, it will stay within that same range in future. (Obviously this is not a good tool for start-ups or no-history internet stocks. But the recent crash of the bubble has shown the long-term wisdom of the NAIC principles.)
You look at high and low PEs over the years, project what you expect growth to average over the next five years, and then project the high price the stock should reach within the next five years by multiplying the average high PE by the expected earnings five years out. You then project what you think the lowest price the stock will hit will be. There are several methods for doing this; you choose which seems best -- calculated low (current earnings times average low PE), lowest stock price of past two years, average low of past five years, or the price the dividend should support. Then you "zone" the stock between the low and high prices. You can use three equal zones, or be more conservative (as I am) and use a 25%, 50%, 25% zoning. If the stock is in the bottom zone, it's in the buy zone. If in the middle zone, it's in the hold or consider zone, if in the top zone it's in the sell zone. For example, suppose you get a price range for a stock of 20-60. You buy it from 20-30, hold or consider from 30-50, and sell if it gets over 50.
But that's just ONE measure -- whether it's in the buy zone. You also look at upside-downside. That's looking at the low, the high, and the present price and calculating what the odds are of the stock dropping to its low vs. the odds of it reaching its high. In the above stock, if it's at 20, your downside is 10 (from 30 to 20) and its upside is 30 (from 30-60). The upside-downside ratio is thus 30-10, or 3-1. In addition to a buy zone stock, you're looking for a 3-1 or better upside-downside. (It sounds like this is a duplicative measure, but it isn't. Some stocks in the buy zone have upside-downside measures of under 2. Those are not recommended buys.)
Of course these are only tools, you have to apply judgment to see whether there are other reasons to buy or not to buy, but they force disciplined thinking and a structured approach to stock analysis.
This is just a cursory overview. NAIC has a book which discusses the SSG in detail which is well worth reading, if only for the discipline of a time tested conservative but successful approach. There's a stock thread on SI, fairly inactive but there, on NAIC investing. Look for "Disciplined Investing, especially the NAIC way." Also, there are two computer programs to do SSGs, and several sets of data files, so it's possible now to produce SSGs much more quickly and easily than it was 20 years ago, when they had to be done by hand.
The AIM method is based on a book with a hokey title something like "How to make a million dollars in the stock market automatically." Something like that. It's a much more trading based system (the NAIC is clearly an investor based system, with limited trading). It's based on an extensive market study fairly well presented. The principle is to take a certain number of dollars to commit to a single volatile stock and start out investing half the fund in the stock. Then, according to a detailed formula, as the stock goes up you sell certain percentages of your holding as it hits certain price points; as it goes down, you buy more. So you're always buying at lower points and selling at higher points. As long as the stock is sufficiently volitile, and doesn't just go down and stay down, the formula seems to work. (It works best when you buy in at a highish price just before a drop so you average down, then sell as it goes up.) The formula is complex, but there is a computer program for it. AIM has a formula, and as the stock reaches certain points you buy or sell a portion of your holding. There's an active thread on this at A.I.M. Users Group Bulletin Board.
I don't specifically endorse these methods (though I use the NAIC method myself and belong to an NAIC stock club--I've looked at the AIM method but haven't jumped in yet, not having the willingness to track stocks as actively as it requires), but they are both structured approaches that, if carefully followed, have a greater potential for assuring that you buy low and sell high than any other methods I've come across.
If you want more info on either, I suggest going to the stock threads and asking questions. |
