The Golden Rules

Your intellectual investment framework –
the Golden Rules.

Stock Doctor’s Golden Rules simplify the complex task of selecting great businesses and, just as importantly, rejecting potential portfolio disasters.

Following our Golden Rules will give you an intellectual framework to use while selecting ASX stocks. Ultimately it will help you achieve long-term share market success.

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Golden Rules

The Golden Rules

1 Financial Health

Golden Rules

Financial Health is our first and most important Golden Rule. Knowing the true Financial Health of a company is critical to long-term investing success. Without knowing the risk your businesses are exposed to, you are gambling and seriously risking loss.

Developed in 1982 by Lincoln founder, academic and former Olympian Dr Merv Lincoln, Lincoln’s unique Financial Health model assesses key accounting ratios relating to each company’s profitability, cash flow, liabilities and assets. It then determines a Financial Health rating commensurate with the business risk of the company. Using Lincoln’s Methodology, investors can quickly identify stocks that warrant further consideration and eliminate those that don’t.

To meet this criteria a stock must exhibit Strong or Satisfactory Financial Health ratings. A company must be healthy for at least two consecutive periods or more. It is not sufficient for a stock to be healthy for a single period.

2 Management Assessment

Golden Rules

Management quality and leadership capabilities are important factors when assessing the ability of a company to fulfil its financial and strategic objectives.

Star Growth Stock criteria
For investors seeking capital appreciation/growth Lincoln uses four measurements to determine this: Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS) growth and revenue growth. We measure this criterion based on the company’s market capitalisation and industry sector.

Star Income Stock criteria
For investors seeking income, Lincoln determines whether management has achieved consistent and stable earnings in the past allowing them to pay an above-market yield. Consistent earnings should support a strong history of paying dividends.

3 Outlook/Forecast

Golden Rules

To determine whether a company’s fundamental qualities are sustainable, we need to gauge whether a company is likely to remain as a either a Growth or Income Star Stock in the future.

Our team of research analysts will perform an in-depth analysis into a company’s operations and future opportunities. Our due diligence process is so much more than dissecting data and executing algorithms. It includes discussions with management and industry peers to asses and validate our findings.

The outcome is a judicious opinion as to whether the company’s underlying performance will be sustainable in the coming year, to remain a Star Growth or Borderline Star Growth Stock. Star Income Stocks are viewed as being able to sustain stable earnings and provide an above-market yield into the future with the likelihood of dividend rises.

Other Considerations

Golden Rules

Company valuations provide investors with a guide as to whether a company’s share price is trading at a premium or a discount to its valuation. Lincoln’s team of analyst’s apply sophisticated and appropriate valuation models to Star Stocks. Lincoln provides two forward-looking valuation methods.

Star Growth, Borderline Star Growth and Star Income Stocks: These stocks are undervalued if its current price is below its Lincoln Valuation. At times the market attributes a premium to a company, particularly Star Growth Stocks, due to its strong corporate history, stability of earnings and/or its future growth prospects with the market supporting management’s ability to keep the earnings momentum going. A track record of quality results may provide comfort that the company will surprise on the upside once more.

Non-Star Stocks: To value non Star Stocks, Lincoln uses consensus price targets, where available, traditional price earnings (PE) and price earnings growth (PEG) ratios.

Golden Rules

Stocks with a positive price trend are preferred. Some may be wary of stocks that are historically volatile, under-performing its peers, sector or indices, or trending downwards. As a rule of thumb, compare a shares 12 month share price performance versus the All Ordinaries index. However the market will sometimes fail to acknowledge a companies fundamental qualities, and so creates a disconnect between the value of the company and the price investors are currently willing to pay. This may represent an opportunity for a value investor seeking deep value and looking to prosper from this disconnect. If the company retains its fundamental quality, investors may consider the stock or even acquire more if they currently hold it.

Golden Rules

Before purchasing a stock, Lincoln recommends you consider that there may come a time when you wish to sell. To ensure an investor can at any time buy or sell a stock at a fair price, we suggest that the average daily volume traded figure is at least five times their exposure level. When assessing for Star Stock eligibility, a different set criteria is imposed for companies with a market capitalisation of less than $200 million to companies larger than $200 million.

Golden Rules

Before investing in a company and becoming a part owner, an investor should have a basic understanding of that companies principal activities, as well as the potential opportunities and threats that may impact future earnings of the company or its industry.

Golden Rules

Company news and announcements, in particular price sensitive announcements, can immediately impact stock prices positively and negatively. Our Analysts will provide commentary on any Star Growth Stock, Star Income Stock or Borderline Star Growth Stock. Investors should be wary about investing in companies that have had recent negative news or announcements.

Proven long-term performance


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#Please consult your tax adviser regarding the extent to which Stock Doctor is tax deductible given your circumstances.

All figures, information and illustrations are as at 30 June 2018 unless stated otherwise.

^Disclosure - Star Stock Past performance: Star Stock (encompassing Star Growth, Star Income and Borderline Star Growth) returns were calculated by Lincoln as a measure of the historical performance of the strategy, reflecting the changes in recommendation and the performance of them over time and do not represent an actual investment. Investments go up and down. Past performance is not a reliable indicator of future performance and should not be relied upon.

The performance over the stated time period/s reflects the capital return and dividend income paid on a notional portfolio that is equally invested in each Star Stock at the commencement of the relevant performance period quoted. The portfolio is rebalanced to equal weight exposure when the composition of the Star Stocks changes. Dividend distributions are reinvested in the specific investments which generate the distribution on the appropriate ex-entitlement dates.

Transactions are calculated at the closing prices for the next trading day and it is assumed there is sufficient market liquidity to make the required trades at this price. Transaction costs of 0.5% on each purchase and sale have been incorporated into the performance figure. The calculation makes no allowance for other distributions, government charges or tax, or annual subscription fees payable to Lincoln.

Performance varies positively and negatively month to month reflecting the volatility of the equities asset class. Therefore, no performance figure should be taken as a reliable indicator of future performance.

The Star Stock criterion has not remained constant but has been revised and updated over time. The quoted performance reflects actual Star Stock recommendations as they have been published to the public over time and have not been retrospectively implemented.