Tom Armistead's investment strategy

My investment philosophy has been shaped by reading Ben Graham, David Dreman, Phil Fisher, Ken Fisher, and John Neff, among others. I think that the small investor can outperform the major indices on a regular basis, provided he is willing to do the work and use some common sense and emotional control.

I make my selections by a combination of screening and listening to the recommendations of investors I respect. I complete a systematic review of 10 years of financial figures, using an Excel spreadsheet to ensure that I have looked at the required minimum amount of information. I rely primarily on 5 Year Average EPS and a 5 year history of Price/Sales Ratios. For candidates that look attractive on that basis, I read their financial statements and press releases at the SEC website. I compare them to their competitors and develop some familiarity with their industry and any company specific issues.

I look for Debt/Equity less than .35 and a strong cash flow. I spend some time on what management is doing with the cash flow. Some value candidates are simply underappreciated: however, many will have issues about slowing growth, shrinking margins, or difficult business conditions. My concern is to verify that management has an awareness of what the problems/opportunities are and a plan to resolve or capitalize on them, with sufficient resources to complete the task.

If I develop a favorable opinion, I initiate a position, usually 40% of my intended maximum, adding 2 more increments of 30% depending on price movements and the development of additional information. I start to exit when the stock goes over the midpoint of its price range as I compute it, or when I conclude that my original performance expectations will not be met.

The past ten years have been challenging. In early March 2009 I had the memorable experience of watching an account that had been worth more than my house dwindle to where it was worth maybe two cars. It has since recovered. In today’s market, I think many large, strong (and safe) companies are underappreciated – investors have been chasing more glamorous and risky fare.

My strategy: Selective Contrarian, along the lines suggested by David Dreman, meaning I make my selections from among stocks that are relatively low compared to their historical range or their sector averages on one or more the basic valuation metrics.