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I am often asked why I follow the rules of the Heatseekers portfolio as closely as I do.
I have learned over the years that breaking the rules usually ends in financial tears, so I try to be as disciplined as possible about the process.
It's not always easy, as I am as susceptible to a good story as the next guy.
To make it even worse, I hang around with a bunch of super smart guys who have been investing in the markets for years, and they always seem to have great stock stories.
It can become challenging, even for me, to resist the siren song of biotech, cybersecurity, the aging of America, the global love affair with conflict, and all the other fantastic themes, trends, and stories I hear pretty much every day.
But these two examples, in particular, prove why you should…
Patience Paid Off for Me – It Can for You Too
Our Heatseekers investing process is to follow the numbers, not the stories.
Adhering to this process makes me money. Overriding the process usually does just the opposite.
Two examples of resisting the stories and being patient with the numbers come to mind.
First, take Unisys Corp. (NYSE: UIS).
This is actually a great story of an old tech turnaround that is working. I loved the idea of an old tech company like Unisys reforming to take the lead in a cutting-edge field like cybersecurity.
They have a cybersecurity platform called Stealth that is selling very well. They finally taught their salespeople how to cross-sell, instead of just taking the order and going home. They have great new products to sell to a very well-established customer base and will be a significant beneficiary of the ever-growing need for cybersecurity.
The problem was the numbers.
When I first heard the story back in 2015, I dug deep. The WAR was a paltry 4 – remember, we don't even consider anything under 6 – and the shares were not cheap based on the Cost of WAR.
When I looked at the stock again in 2016, the shares were cheap based on the Cost of WAR with a score less than .6 – again, we don't even consider a stock unless the Cost of WAR is less than 1. However, the WAR calculation showed that conditions had actually worsened to about 3.5. Had I just jumped in and bought the shares because they were cheap, I would have taken a loss of about 50% over the next year.
Jump forward to early 2018, and the company now had a WAR of 7 and a Cost of WAR of just .80. Unisys was now a true Heatseeker. I jumped in and rode the stock to gains of more than 100% in less than a year.
Second, consider small banks. It's no great secret that I love small banks.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.