The FALCON Method

Your financial future isn't a game of chance but a matter of careful, decisive actions. The FALCON Method shows you how to take control with clarity and discipline.

1. Why Stocks Triumph Over Other Investments

Stocks have an edge over other investment types, such as bonds, commodities, and mutual funds, because they offer unmatched growth potential and long-term stability. These investments not only provide a chance to earn as a company's value grows but also deliver payouts through dividends, creating a dual-income stream.

Unlike currency-based investments like bonds, which are vulnerable to inflation eroding their value, stocks represent ownership in a productive enterprise. This ownership aspect means they generate value over time, regardless of a nation's currency fluctuations. For example, when you own a share in Coca-Cola, you're entitled to a piece of the company's profits, paid annually through dividends, alongside the underlying value of that share.

Moreover, stocks surpass commodities like gold or oil, as the latter often don't generate ongoing income. Instead, their value depends on market demand. A share in a company, on the other hand, keeps on delivering through its business activities, as it grows and produces income.

Examples

• Warren Buffett advocates stocks as the best long-term asset for wealth growth due to their ability to survive inflation and generate steady income.
• Currency-based bonds often lose out when inflation strikes, unlike company shares.
• Commodities like gold lack dividends, making them less attractive compared to top-tier stocks.

2. A Company is a Black Box of Cash Management

Visualizing a company as a "black box" with inputs and outputs helps investors focus on what matters: how a company generates and spends cash. This simplification lets investors analyze financial health without being distracted by complex insider details.

Inputs like revenue and equity sales flow into the company, while outputs include expenses, debt payments, acquisitions, and taxes. A company that skillfully manages these elements and produces consistent profits becomes a stronger investment candidate. For instance, retained earnings, which are reinvested back into the business, signal potential for organic growth.

The most revealing output is what a company does with its profits. Investors should seek companies that distribute earnings to shareholders as dividends, buy back their own shares to increase their value, and reinvest in growth initiatives. These strategies showcase sound financial management and a commitment to shareholder returns.

Examples

• Apple frequently reinvests its profits in product innovation and regularly pays attractive dividends.
• Coca-Cola uses share buybacks to concentrate ownership and improve shareholder returns.
• Observing a company's output reveals the efficiency of its financial structure without requiring insider knowledge.

3. Buy and Hold for Lasting Success

The FALCON Method pushes back against the image of an opportunistic stock trader making quick profits. Instead, it emphasizes the classic approach of “buy and hold,” where stocks are purchased with a focus on long-term growth and income through dividends.

The difference between this method and other strategies, like quantum investing, lies in its consistency and trust in well-known companies. Quantum investing may involve frequent buying and selling, which can create instability and increase the likelihood of losses during market downturns. The FALCON Method removes this pressure and concentrates on shares of financially stable firms.

This buy-and-hold approach not only generates recurring income through dividends but also benefits from the eventual appreciation in stock value. By avoiding short-term market fluctuations and hasty decisions, investors align themselves with long-term success.

Examples

• Holding shares in companies like Johnson & Johnson has allowed investors years of uninterrupted dividend payments.
• Quantitative trading often leads to emotional decisions, while buy-and-hold methods remain steady.
• Well-known brands like Microsoft fit the FALCON blueprint, offering reliability and growth.

4. Identifying Companies With Dividends as Key Indicators

The FALCON Method focuses on companies with at least 20 years of uninterrupted dividend payments. While other financial metrics can be manipulated, dividends reflect a company's genuine cash flow and profitability.

Dividends have historical significance. For example, even during the 2008 financial crisis, some firms continued paying dividends, showcasing their resilience. This long-term track record indicates stable management practices and sustainable income.

The strategy avoids exclusively seeking increasing dividends, allowing room for flexibility. Companies may allocate resources to growth temporarily instead of raising dividends, and the FALCON Method accounts for such decisions. Its flexibility expands investment opportunities beyond the S&P 500 index, which lists Dividend Aristocrats with 25+ years of increases.

Examples

• Enron manipulated revenue figures but couldn’t falsify actual dividend payouts.
• Companies like 3M have thrived by steadily distributing dividends for decades.
• Avoiding restrictive dividend rules opens doors to opportunities across various markets.

5. The Art of Buying Stocks at a Discount

Stocks fluctuate in price due to market emotions, but their underlying value remains tied to assets, financial strength, and future potential. The FALCON Method capitalizes on this by encouraging purchases of high-value stocks during periods of pessimism.

For instance, during the 2008 market downturn, investors like Warren Buffett seized discounted shares of blue-chip companies. This approach requires calm and bravery, particularly when market sentiment is at its lowest. On the flip side, it warns against buying into the hype of soaring stocks during periods of irrational exuberance.

Understanding historical pricing and a company's underlying value enables smart investors to pounce on these opportunities, securing quality company stocks at below-average prices.

Examples

• Buffett bought shares in Goldman Sachs during the financial crisis at a discount.
• During widespread euphoria, overpaying for companies like Tesla brings risks.
• Examining past financial data helps investors identify underpriced shares.

6. Using Key Filters to Narrow Stock Choices

The FALCON Method applies three financial filters to evaluate shortlisted stocks: dividend yield, free cash flow yield, and shareholder yield. These filters challenge companies to meet strict financial benchmarks.

Dividend yield ensures the stock offers a reasonable annual payout. Free cash flow yield examines the company's operational spending habits and remaining cash for shareholders. Shareholder yield includes dividends and stock buybacks, providing a full view of how the company distributes money to investors.

By setting minimum values for these criteria, investors ensure their list includes stocks capable of generating stable income and long-term growth. This screening process guarantees that only well-performing businesses survive.

Examples

• Apple’s free cash flow ensures it continuously innovates and pays dividends.
• Microsoft’s dividend yield shows healthy returns for shareholders.
• Google’s shareholder yield reflects commitment to investor rewards.

7. Weighted Rankings to Find the Best Companies

The FALCON Method uses weighted multifactor ranking to rank high-potential stocks by assigning importance to key financial indicators. This ensures balanced and justified scores for each company.

Investors can assign weights to factors like dividend yield or cash flow based on their priorities. Calculations combine these weights with the company’s performance to create final rankings. The method also includes variations like the Chowder Rule, which examines a firm’s current dividends against their growth over specific periods.

This technique ensures the final selection is data-driven and unbiased, leading to dependable investment choices.

Examples

• Applying equal weights to financial indicators gives a fair assessment.
• Firms with both high dividends and growth potential stand out in rankings.
• Chowder Rule comparisons highlight companies maintaining dividend consistency.

8. Avoiding Cyclical Stocks and Risky Ventures

The FALCON Method recommends steering clear of stocks prone to volatile rises and falls, called cyclical stocks. These swings can be unpredictable and undermine long-term success.

Volatile markets like oil or cryptocurrency may promise quick profits, but they also bring significant risks. For example, Chevron’s stock price history shows dramatic peaks and troughs, a pattern dangerous for steady investors. By contrast, stable stocks in diverse industries present a safer avenue for wealth building.

The buy-and-hold philosophy thrives when investors avoid risky speculative ventures and instead focus on predictable growth.

Examples

• Chevron shareholders experienced volatile returns, highlighting uncertainty.
• Stable funds like Procter & Gamble remained reliable despite market downturns.
• Avoiding fads, like speculative cryptocurrencies, aligns with FALCON values.

9. Combining Data With Your Own Judgment

While the FALCON Method emphasizes quantitative analysis, it also incorporates human judgment as the final filter. This balances data with qualitative insights for well-rounded decisions.

Indicators like ROIC (return on invested capital) help measure how efficiently a company uses its resources. Additionally, investors must review the company's business patterns to identify red flags.

By blending personal discretion with structured data and disciplined rules, investors find the perfect combination of reliable and profitable stocks.

Examples

• ROIC helped investors identify Alphabet as highly resource-efficient.
• Personal evaluation flagged potential weaknesses in rapidly rising but volatile firms.
• Combining filters and human discretion enhances successful long-term investments.

Takeaways

1. Begin your investing journey by identifying well-known companies with a 20-year history of consistent dividend payouts.
2. Use the FALCON Method's financial filters—dividend yield, free cash flow, and shareholder yield—to refine your stock list.
3. When the market panics and stock prices drop, apply the method to pick discounted shares and hold them for long-term gains.