Our goal for each stock recommended in IAS is a doubling in value in five years, from a combination of:
- Capital appreciation (the increase in the stock’s price)
- Dividends (though not all companies pay them)
- Price/Earnings ratio expansion (that comes from the somewhat contrarian practice of buying stocks that are undervalued compared with their historical trends).
In selecting stocks with these guidelines, a portfolio of IAS picks may be able to reach our goal of an annualized 15% total return.
Not all individual stock recommendations will achieve that goal, of course. Experience shows that some will do much better and some will do worse.
Although we are proud the IAS has generated results that have consistently been better than that of the Dow Jones Industrial Average and other market averages, there is no assurance the future will be as favorable.
Diversify Your Portfolio
A portfolio of ten to twelve stocks selected from our recommendations has a better chance of doing well than just a few selections. Of course, since no one is perfect, price declines will occur in some of the selected stocks. Adequate diversification is always prudent.
Choose Your Own Stocks
The Investor Advisory Service is an unmanaged letter advisory service. In other words, subscribers must choose on their own which stocks to buy, as well as when to hold and when to sell. We try to help the decision-making process with the assistance of our Stock Studies and the Ranking Spreadsheets.
Don’t Fear Selling
It is important to recognize that we do not advocate a “trading strategy.”
We have found that holding carefully selected stocks over the long term produces the best results. No stock follows a time schedule, though, and there are always ups and downs in stock prices. If the fundamental assumptions made at the time of recommendation deteriorate, a sale may be recommended and follow-up on that stock may be discontinued. Remember, a torpedo can come out of the dark at any time.
If you buy ten stocks, chances are two will do much better than expected, two will be disappointments and the other six will follow the expected course. When a mistake has been made, it is best to acknowledge the error and sell the stock. Waiting to get even is usually a self-defeating strategy. If you would not buy a stock that is down 25% in price, knowing that the decline is well-justified, then why continue to hold it in hopes of recovering your investment?