Ask Colin

Do you look at rate of return and projected rate of return in choosing stocks?

I do not routinely look at rate of return in choosing stocks to invest in. My primary concern is value rather than profitability. In Appendix A of my book, I take you through the Benjamin Graham inspired margin of safety checks that are my prime focus. This puts me into stocks that are selling at a good price and have a good track record. Stocks with an outstanding rate of return tend to come under the growth stock model, which for me is primarily technical - breakouts from consolidation and trending strongly.

With the value stocks, I am often looking at stocks that are improving their rate of return. This will be reflected indirectly in increasing earnings per share, which is one of the checks in the margin of safety.

I do not believe that forecast rates of return are worth the paper they are printed on. Like Graham, I am highly sceptical of attempts to forecast the future. It is better to buy sound companies in the right part of the value model cycle or as described for growth model stocks.