5 steps to building a stock portfolio for the conservative long term investor

The success of a portfolio of stocks depends on the underling principles and approach used to build the portfolio. While there is a lot of buy and sell rating noise available on individual stocks, there are very few voices who tell us how to go about building a portfolio of stocks which will deliver to us our investment goals. The blog post talks about how to build a screening criteria which will filter the right stocks into your portfolio. I will share with you a simple 5 step screening criteria which will generate stable low risk returns over the long term.


The screening criteria is focused on finding stocks whose businesses are run by able managements who can deliver results irrespective of the external economic environment. The screening criteria focuses on the ability of the business underlying the stock to succeed irrespective of the external economic environment. The screening criteria dose not focus too much on the price movement of the share.

The 5 criterion on which stocks need to assessed for them to be a part of this portfolio are:

1. Dividend = The company should have paid out dividends to its shareholders in all the preceding 10 years. The amount of dividend adjusted for stock splits should have increased. If the company has been able to pay and increase its dividends for 10 continuous years is an indicator of a solid business which can manage the ups and downs within the industry.
2. Profit = The company should have been profitable in all the preceding 10 years. A company which maintain profitability irrespective of economic cycles is a good company to invest in. 
3. Sales Growth = The compounded annual growth rate for sales for the last 10 years should be at least 1.5 times the current GDP growth rate (one could consider a 8% GDP growth rate for India)
4. Market Leader = The company should be a leader in terms of market share, brand, customer service, technology etc. It would be good to select a company among the top 3 players of the industry.
5. Management = There should have been no negative news about the ethics and capability of the management in the last year. This is very important in the Indian environment for doing business.

The five criterion will give you a list of stocks which could potentially be a part of your portfolio. For one to actually buy the stock and make it part of the portfolio its current market price becomes important. One should buy the stock only if it available at less than 10 times its trailing 12 months earnings per share. If one has identified the companies meeting the five criterion, but selling at more than times 10 times its earnings per share, then one must do nothing and wait patiently. One may need to wait patiently for weeks, months and years for the company to be available at that price. This typically happens when the market sells of a for a reason not related to company. This is the time to buy the company and make it a part of the portfolio. There is a possibility that for long periods the company may not be available at price of 10 times trailing 12 months earnings. In this scenario keep tracking the company, keep waiting, be disciplined and still keep on waiting.

While we have the rule for selecting a stock and making it a part of our portfolio, then next question is when to sell a stock. The time to sell the stock of business which is doing well is never unless one requires cash for some other purpose. The only other reason to sell a stock is when it fails to meet even one of the five criteria.


This is my approach which has worked well for me over the last 5 years. Any one can build a screening criteria customized for individual investment goals.