A look at the headlines of the past week is a glaring example of just how imperfect markets can be at times. Janet Yellen told us things were good, except of course for the things like full-time, high-paying jobs that aren’t very good. The situations in the Ukraine and the Middle East continue to flare up on a regular basis.
Trying to predict what will happen — and more importantly, how markets might react to various pieces of political and economic news — is frustrating at best, and usually just impossible. In such an imperfect world, all we can do is keep our heads down and look for cheap stocks that have an adequate margin of safety.
One way to find such stocks is using a screen I developed years ago that searches for what I call “perfect stocks.” Perfect stocks are profitable companies that pay a dividend, trade below book value and have a margin of safety in the balance sheet. We want solid companies with low debt levels and high current ratios available at bargain prices. I cannot predict the future of market movements, but owning companies that are cheap and strong enough to survive until they come back into favor is a solid plan for achieving strong returns.