Explaining Our Methodology

I wanted to make a few comments about our Buy List’s methodology. As I’ve found out, if you have a publicly-available free Buy List that’s done very well, some unpleasant people will call you a fraud or a liar. They’ll question your math or a bunch of other things.

There’s not much you can do about cranks, but I’ve always gone out of my way to make our Buy List as transparent as possible. The set-and-forget rules are about as simple as you can get. I even take the extra step of making my new buys public two weeks before the changes take effect. You’d think that would mollify some people. Not so.

Long story short, it’s a good time to restate what my goal is with the Buy List. I want to show regular investors that a disciplined approach can prosper and even beat the market. That’s why I do a few other things with my Buy List that I don’t often highlight. For example, I try to make sure that the Buy List is easy to replicate. This characteristic doesn’t get as much attention as it should. We don’t select any oddball foreign stocks or trade in unusual commodities or currencies. We don’t use margin, options or ETFs. There’s no shorting. Nor do we speculate on the North Bulgarian exchange in New Zealand pesos or anything like that. Around here, we keep it straightforward.

Also, nearly all our companies are at least mid-caps, and many are large-cap blue-chip names. We don’t dabble in IPOs or thinly traded pink sheets. I always have the average investor in mind. The companies on our Buy List also have pretty standard operations. And of course, we keep our trading to a minimum.

At the beginning of each year, I assume the Buy List is equally weighted among the 20 stocks. I also treat each year’s Buy List as a separate entity. In other words, we start over again at 0% at the start of each year. Here I can understand how some people might disagree with this decision.

My rationale is this: if I treated the Buy List as one never-ending unit, I could show that we’ve made huge long-term gains in a stock like Fiserv, but very few blog readers have been following us the entire time. It’s a question of making things as comprehensible as possible for as many folks as possible. (Honestly, I can see tracking the Buy List either way, but I think the separate year-by-year approach is the easiest and fairest.)

Occasionally I list our full nine-year total returns, but that means an investor rebalanced the portfolio at the end of each calendar year. I don’t think it’s wrong to do this, but I want to make it clear what it means.

Every so often, we’ve had spin-offs or buyouts. I try to deal with these as best I can. Years ago, we got cash for our Biomet shares. I distributed that cash into the 19 remaining Buy List stocks. When Golden West Financial was bought out, we got shares of Wachovia, and that became a new member of the Buy List.

I’ve always been careful to detail on the blog how all the calculations are made. Later this year, eBay will hopefully spin off PayPal. If all goes well, we’ll get the shares, and I’ll decide what to do with them in December. As always, the decisions I make are designed to make investing as easy as possible for average investors.

Posted by on January 5th, 2015 at 9:24 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.