Four and Twenty Rules For Buying and Selling Shares

I Just finished reading Four and Twenty Rules For Buying and Selling Shares by Nigel McCarter, a New Zealand investor who has managed to capture returns of over 20% a year since 1997 using a strategy based on rules for selecting and selling shares on the Australian and New Zealand share market.

At just over 100 pages, the book isn’t long, but it doesnt need to be. It simply details the 20 rules that McCarter uses to select shares and the 4 that he uses to sell and does so in a way that most people would understand. It’s fair to say that I gained a great deal from this book and will look to incorporate some of it’s findings into my own investments.

One thing I like about the book is that it’s completely genuine, which sets it apart from most other stock market books straight away. The other thing I like is that Four and Twenty Rules For Buying and Selling Shares deals with investing in an objective way, using a quantitative approach that can be easily understood and tested.

Indeed, one of the things that puts me off investing in general is the thought of the unknown. At the end of the day, you can do as much analysis on a stock as you like, but if you haven’t backtested your valuation methods of past data – or future data for that matter – you can never be completely sure that your method will result in a profit.

McCarter’s rules (some of which are included below), seek to remove that subjectivity and in the process they make investing both accessible and rewarding.

Some of McCarter’s rules taken from the Four and Twenty Rules For Buying and Selling Shares book:

Rule 1 – You should understand how a company makes a profit

Rule 6 – EPS has been growing 10% or more for the last 3 years

Rule 12 – PE is > 5 and < 25

Rule 20 – Directors and managers hold shares in the company

The other good thing about these rules is that they dont just work for the Australian share market, they can work on any free market stock exchange. By running a stock screener on over 4000 US stocks I was able to identify 3 stocks with incredible fundamentals that fit the criteria.