Hi friends. I hope you enjoyed a wonderful Thanksgiving season. Christmas is just around the corner. The weather has been warm and very dry in the deep south until just this past week but today is cool and very rainy, feeling more like winter and Christmas time.

Today, I’ll share a portion of a question and answer conversation I recently had with a reader of my book, “Choose Stocks Wisely.” Thor asked me:

“When I use the screen parameters described in the book, I come up with 1 company as of today (11/24/16). If I relax the “Insider Transactions +5%”, I get 16 companies in total. I don’t recall you requiring this last parameter in the book so I wonder how important it really is? Thoughts?”

I responded:

“Each of the criterion are there for a reason. The insider one is indeed one of the seven listed in my book and it helps to beset a notion that the value turned up by the other screen filters is too good to be true. If insiders are adding, it helps support the legitimacy of the other parameters that collectively say you are likely looking at overly discounted equity by the stock market.

As to whether you can exclude it, you can obviously manage the filters as you see fit. I’ve played around with doing this very thing (leaving off the insider transaction variable) just to see what shows up. However, I’m a very patient investor these days and cautiously proceed if I do ever stray from the strictness of the parameters. As to what, if anything can be relaxed,  I’d rather relax the P/E, the P/S, and conceivably the insider transaction before I ever tamper with the balance sheet criteria or enable non-U.S. stock investing by relaxing the country criterion.

I believe we will again see some deep value opportunities crop up as this long-in-the-tooth bull market driven by heavy govt. intervention since 2008 grows weary.  I don’t know whether it will be very near, during 2017 or later than that, but my thoughts have always been to wait on opportunities to come to me and remain disciplined.

If the value is deep enough and the company seems to have a positive catalyst for growing in its future, then overlooking the insider transaction criterion becomes more acceptable. That’s my thinking.

Hope this helps.”

I appreciate Thor for the question and his willingness for me to share our conversation in a blog post. From my background as a teacher, I observed time and time again that where one person has a thought or question, that thought or question is often on the minds of others too. So, again, I appreciate Thor for raising the question.

My screening approach is surely not for everyone nor was it shared in my book as one that anyone should employ. Rather, it reveals my personal practice and illustrates how I emphasize the balance sheet to avoid risk while trying to select potential stock candidates for purchase. It does not turn up many large companies well-known by the investing community but tends to reveal smaller companies that sometimes are entirely absent investors’ radar screens.

Finviz has over sixty filters and there are numerous options within those filters. So, obviously, there are innumerable screening approaches with so many potential filters. Whatever approach one chooses, the strength of the statement of financial position, namely the balance sheet, should be observed before investing because it distinctly exists to enable potential investors to observe a company’s financial strength and flexibility. The importance of the balance sheet standing relative to risk assessment is what I’m most passionate about emphasizing.

See you next time.