When you have a service like VectorVest, there is an infinite number of ways to make money in the stock market. Less appreciated, perhaps, is the priority VectorVest has always given to the principles of managing risk and protecting your wealth.
From the beginning, VectorVest Founder Dr. Bart DiLiddo designed the program around sound risk management principles. Front and centre would be exclusive tools, features and indicators to help retail investors make smart decisions designed to help them avoid losing money. In times like these, it is worth reviewing a few of the most important ones.
First, Dr. DiLiddo determined that conservative and prudent investors should favour safe, undervalued stocks that are rising in Price. Every stock is measured by these three metrics every day and reported in the VectorVest Summary at the top of the Full Stock Analysis Report.
1) IS IT SAFE?
Safety, or risk, is measured by Relative Safety (RS). Safe stocks have RS scores greater than 1.0 on a 0.00 to 2.00 scale: the higher, the better. These companies have consistent and predictable earnings and other desirable financial metrics.
2) IS IT UNDERVALUED?
To determine if a stock is undervalued, VectorVest examines Price, Value and Relative Value. Value, as computed by VectorVest, tells you what a stock is currently worth based upon its earnings, earnings growth rate, profitability, inflation, and interest rates. If Price is less than Value, a stock is undervalued. Think of it as getting a great deal on an antique car or some other commodity, knowing that you can turn it around and sell it for a lot more right away and that its value will increase over time.
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When Price is more than Value, you may choose to pay a premium for a “hot commodity,” betting on its future. Relative Value (RV) looks at the future. It compares Price and Value, takes a stock’s risk and earnings growth into account, and indicates the investment potential of a stock compared to a high grade, ‘safe’ Corporate Bond. Stock investment is favourable when RV is greater than 1.00.
3) IS IT RISING IN PRICE?
You are on solid ground when Price is less than Value and RV is greater than 1.00. Dr. DiLiddo believes most stocks you buy should have those attributes, and even then, purchase them only when they are rising in Price. You can study a graph, of course; however, the quickest and surest way to find stocks that are rising in Price is to look for stocks that have a ‘B’ or BUY rating. Purchase them early in the trend, soon after they get a new BUY. To help you find them, Dr. DiLiddo even created a search in the Trends – New Stuff folder. The search is called New Buy Rated Stocks.
To get a Buy rating, a stock’s Price must be greater than its Stop-Price, its Relative Timing (RT) indicator must be above 1.0, Value, Safety and Timing (VST) must be greater than 1.0, and Price must be ‘pulling away’ from its Stop-Price, something you can only see on a graph.
The Stop-Price is another risk management indicator built right into the program. It lets you know when you absolutely must consider selling a position. Dr. DiLiddo told me more than once he put the Stop-Price in the program to protect investors from their own emotions. A stock’s STOP is computed from a 13-week moving average of its closing price and fine-tuned according to the stock’s fundamentals. A stock with weak fundamentals will reach its Stop-Price earlier than a stock with good fundamentals. When a stock falls below its Stop-Price, it gets a SELL rating, and a big red ‘S’ appears, something you should never ignore.
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Dr. DiLiddo also knew from his analysis and his own experience that the safest time to buy is when the overall market is also rising, and the riskiest time to hold stocks is when the market is falling. So, he designed the Color Guard as your traffic light on the market. Then, he and his team created market timing signals ranging from the fast Primary Wave and Green Light Buyer to the slow, more conservative DEW and Confirmed Calls.
The above features, indicators and tools are far from everything VectorVest offers to help you pick winners and manage risk, but they show that for Dr. DiLiddo and VectorVest, it has always been about SAFETY FIRST.
Exceptional and very timely article