Stock purchases must meet these criteria:

• No bulletin board or pink sheet stocks will be purchased.
• Price-to-book-value ratio must be less than 0.80. (This figure will change gradually with changes in overall market values.)
• Market capitalization must be between $17 million and $200 million. (This figure will change gradually with changes in overall market values.)
• The firm’s last quarter and last 12 months’ earnings from continuing operations must be positive.
• No financial stocks or limited partnerships will be purchased.
• No foreign stocks will be purchased because of different accounting and/or withholding tax on dividends.
• The share price must be greater than $4.
• In order to reduce trading by avoiding stocks that are forever marginal, any stock that was sold within two years will not be rebought.
• Note first item under stock order rules concerning spreads when buying shares.
• Price-to-sales ratio must be less than 1.2. (This figure may change gradually with changes in overall market values.)

Stocks are sold if any of the following occur:

• If last 12 months’ earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings from continuing operations becoming positive, the stock is sold.
• The stock’s price-to-book-value ratio goes above three times the initial criterion.
• Market capitalization goes above three times the initial maximum criterion.
• After two years, sell if not qualifying as a buy currently. (But do not sell until there is a qualified stock to buy.)

Stock Order Rules

• If the quoted bid-ask spread is more than 4% (ask price minus bid price, divided by ask price), the stock is eliminated from consideration. Better to stretch other criteria, if necessary, than pay high spreads.
• Stocks are eliminated if the average daily number of shares traded is not four times the amount needed for the position—the spread will be too high and not negotiable either now or when sold.
• Market orders are not used. Instead, orders are placed between the bid and ask prices unless the difference between the two is 2% or less, in which case purchases are placed at the ask price and sales are placed at the bid price.
• For NASDAQ stocks, it appears to be better to use day orders. If the order is not filled, it is placed again with a slight adjustment. For NYSE and Amex stocks, good-till-canceled (GTC) orders are used to keep a place in line in the specialists’ books. If the market isn’t close to the desired price, the price is adjusted in a few days with a new GTC order.
• If price changes cause a stock to become ineligible (due to changes in price-to-book-value ratio or market capitalization) when only part of the order has been filled, stocks already purchased are kept but the balance of the order is canceled.
• All order rules can be adjusted based on your own judgment and experience.

Management Rules

• Equal dollar amounts are invested in each stock initially.
• Decisions are made only at the end of each quarter. In order to react to the majority of earnings reports as soon as possible, quarterly reviews are made early in February, May, August, and November.
• Best judgment is used for tenders or mergers, but all criteria must be obeyed.
• At the end of a quarter, if receipts from stocks sold exceed requirements for new purchases, the excess receipts—up to 5% of the portfolio’s value—are kept in cash until the next quarter. If the excess receipts are greater than 5% of the total portfolio value, the amount above 5% is distributed to smaller holdings that still qualify as buys. Efficient quantities are purchased: If over 10% of the portfolio is in cash, the price-to-book-value ratio can be moved up, but never over 0.90.
• At the end of a quarter, if receipts from stock sales are insufficient to buy all newly qualifying stocks, purchases are made in order of lowest bid/ask spreads.
• Note that if you are managing your own portfolio, it should consist of at least 10 stocks. More than 20 stocks is not needed until the portfolio exceeds $1 million.