I analyzed my stock picking record for a ten-year period from 1987-97. It was very good, but would have been even better if I had never looked for the “home run” shots. I decided to stick to solid companies in good business lines – great companies.
As part of my market education I read thousands of analyst reports from “sell side” brokerage firms. I could tell that most were not very good, just repeating information from the company and using a standard method. Sometimes someone would have real insight about important changes. I developed an understanding of what analysts were looking for in different companies and what it would take for them to upgrade or downgrade a stock.
We look for stocks that we expect to double in three years. That is an annualized gain of about 24%. Trying for more than this is too aggressive and too risky. Since we do not hit the target on every stock, our expected performance is a bit lower. We have beaten the market by an average of about 8% a year for over ten years. The long-term gain in stocks is over 8% per year, so we are trying to maintain a 16% return. We expect the market to resume the traditional pattern, and we expect to continue to outperform. Having a target is very helpful. It helps us to focus on stocks with plenty of upside, but without the speculative risk. While we are not swinging for the fences, we get our share of home runs anyway.