The FALCON Method

The FALCON Method Plot Summary

Introduction

Have you ever felt overwhelmed by the countless investment strategies promising extraordinary returns while delivering disappointing results? The path to financial freedom through stock investing doesn't have to be complicated or mysterious. With a disciplined approach grounded in proven principles, anyone can build substantial wealth and generate reliable passive income streams through the stock market. What separates successful investors from the crowd isn't access to privileged information or exceptional intelligence—it's the application of a systematic process that tilts the odds in their favor. By focusing on quality companies available at attractive prices and having the psychological strength to stay the course through market fluctuations, you can achieve outstanding investment results regardless of your starting point or previous experience level. The principles outlined in these pages represent a culmination of decades of investment wisdom distilled into actionable strategies you can implement immediately.

Chapter 1: Identify Quality Companies With Proven Dividend Records

The foundation of successful long-term investing begins with identifying high-quality companies that have demonstrated consistent performance over extended periods. Rather than chasing the next hot stock or speculating on unproven businesses, focusing on companies with established dividend histories provides a reliable indicator of corporate health and shareholder-friendly management. As Professor Jeremy Siegel discovered in his extensive research, companies that have paid uninterrupted dividends for extended periods tend to significantly outperform the broader market. His analysis showed that investing in businesses with at least 15 years of consistent dividend payments delivered superior returns because these companies demonstrated the ability to maintain earnings power through various economic cycles. This isn't coincidental—a long dividend history serves as evidence of a robust business model generating consistent free cash flow beyond what's needed for operations. Take V.F. Corporation as an example, the parent company behind popular brands like Timberland, Vans, and The North Face. Unlike more volatile businesses such as Chevron, V.F. Corporation has maintained steady earnings growth and consistent dividend increases for decades. This predictability makes it psychologically easier to hold during market downturns while providing growing income regardless of short-term price fluctuations. Dividends aren't merely payments—they represent corporate accountability. Unlike reported earnings which can be manipulated through accounting practices, dividends require actual cash transfer to shareholders. This reality creates a natural filtering mechanism that eliminates financially unsound businesses from consideration. The S&P 500 Dividend Aristocrats index, which tracks companies with at least 25 consecutive years of dividend increases, has outperformed the broader market by a significant margin precisely because of this quality factor. When building your investment portfolio, look beyond arbitrary time frames like the often-cited 25-year requirement for Dividend Aristocrats. Instead, focus on companies with at least 20 years of uncut dividends showing a generally rising trend. This approach allows you to include excellent businesses like Boeing that may occasionally maintain rather than increase dividends during challenging periods, demonstrating prudent capital allocation rather than pursuing artificial consistency. Remember that a company's dividend history is a symptom of excellence, not the cause. The ability to pay growing dividends over decades indicates consistent earnings power, strong cash generation, and shareholder-friendly management—exactly the qualities you want in your long-term investments. By starting with this select group of top-quality dividend payers, you dramatically improve your odds of investment success before applying any additional criteria.

Chapter 2: Find Undervalued Stocks For Double-Dip Benefits

Understanding the components of total investment return is crucial for maximizing your results. While many investors focus exclusively on dividend yield or growth potential, truly exceptional returns come from combining quality companies with attractive valuations—creating what Warren Buffett calls the "double-dip benefit." Your total return from stocks comes from three primary sources: dividends received, business growth (reflected in earnings increases), and changes in valuation multiples. When you purchase shares in outstanding companies at depressed valuations, you position yourself for exceptional performance as both the business grows and the market eventually recognizes its true worth through multiple expansion. This powerful combination creates returns far exceeding what either factor could deliver independently. Consider the real example of CVS Health as illustrated in the book. In one scenario, an investor purchased CVS shares at an extremely overvalued multiple of 55 times earnings in 1998. Despite the company's impressive subsequent growth, the return through 2008 was a mere 2.5% annually because the valuation multiple contracted toward more reasonable levels. In contrast, another investor who purchased CVS at a bargain multiple of 10.1 times earnings and held until the valuation normalized at 14.1 delivered an exceptional 20.6% annual return—the double-dip benefit in action. This principle works because stock prices fluctuate far more than underlying business values. During market panics or when specific industries fall out of favor, even excellent companies can become temporarily undervalued. By comparing current valuation metrics to historical averages for specific companies, you can identify situations where quality businesses are available at discount prices, setting the stage for extraordinary returns. Implementing this approach requires patience and discipline. Rather than focusing solely on absolute valuation metrics like P/E ratios, examine whether a company's current valuation is low relative to its own historical average. This comparative perspective helps identify truly attractive opportunities while avoiding value traps that may appear cheap but lack fundamental quality. The most powerful investment opportunities emerge when all three return components align—quality companies with growing dividends, increasing earnings, and temporarily depressed valuations. As Warren Buffett noted about Coca-Cola and Gillette investments in his 1991 letter to shareholders: "We got a double-dip benefit, delivered partly by the excellent earnings growth and even more so by the market's reappraisal of these stocks." By systematically seeking these situations, you position yourself for outstanding long-term results.

Chapter 3: Apply Threshold Criteria To Protect Your Capital

Before committing capital to any investment, establishing minimum acceptable standards ensures you avoid dangerous situations regardless of how attractive relative comparisons might appear. These absolute threshold criteria serve as guardrails protecting you from common pitfalls that destroy wealth, particularly during market extremes when traditional valuation metrics can become distorted. Consider a scenario where even the highest-yielding dividend stocks offer less than 1% yields during periods of market euphoria. Should you invest simply because these represent the "best" relative opportunities? Absolutely not. Your investment process must include non-negotiable minimum standards that prevent capital deployment when conditions become unreasonable, allowing you to preserve cash for better opportunities. The book demonstrates this principle through three essential threshold criteria: dividend yield, free cash flow yield, and shareholder yield. When examining Teva Pharmaceuticals in early 2017, the numbers initially looked attractive with a 4.1% dividend yield and impressive 14.9% free cash flow yield. However, the negative shareholder yield of -5.4% revealed significant share dilution that was destroying shareholder value despite the seemingly attractive dividend. This simple metric exposed problems that many dividend-focused investors completely missed. Comparing Teva with Target Corporation further illustrates this point. While both offered similar dividend yields around 3.7%, Target's exceptional 15.2% shareholder yield indicated substantial share repurchases that increased remaining shareholders' ownership stakes. Additionally, Target's 8.7% free cash flow yield showed considerable room for future dividend growth compared to competitors paying out nearly all available cash. These threshold metrics quickly separated genuinely attractive opportunities from misleading ones. Implementing these criteria requires understanding the prevailing market environment. The same dividend yield that appears attractive when 10-year Treasury bonds yield 2% might seem inadequate when risk-free rates approach 10%. Rather than setting permanent absolute values, adjust your minimum thresholds based on current conditions while maintaining disciplined standards relative to alternatives. By requiring investments to clear these absolute hurdles before considering relative rankings, you ensure baseline quality and value regardless of general market sentiment. This approach prevents deploying capital during extreme market conditions when maintaining cash reserves would better serve your long-term interests. Remember that threshold criteria should focus on factors with empirical evidence supporting their importance. Free cash flow represents truly "no-strings-attached" money available for shareholder returns, making it far more reliable than reported earnings that can be manipulated. As Warren Buffett noted, "Our acquisition preferences run toward businesses that generate cash, not those that consume it. However attractive the earnings numbers, we remain leery of businesses that never seem able to convert such pretty numbers into no-strings-attached cash."

Chapter 4: Rank Investment Opportunities Systematically

Once you've identified quality companies that meet your minimum threshold criteria, implementing a systematic ranking process helps identify the most attractive current opportunities while removing emotional biases from decision-making. This disciplined approach ensures consistency through changing market conditions and prevents psychological factors from derailing your investment success. Traditional quantitative models often fail because they produce recommendations that investors find psychologically difficult to follow—typically obscure companies or frequent portfolio turnover that generates substantial taxes and transaction costs. An effective ranking system must balance mathematical rigor with psychological sustainability, focusing on factors you genuinely understand and can maintain through market cycles. The book presents a weighted multifactor ranking approach that combines current dividend yield with dividend growth rates across multiple timeframes. This methodology recognizes the mathematical reality that lower-yielding stocks require higher growth rates to deliver comparable total returns. For example, comparing CVS Health with AT&T reveals dramatically different yield-growth profiles—CVS offered lower current income but substantially higher growth potential, while AT&T provided higher immediate yield with more modest growth expectations. This approach improves upon simplistic methods like the "Chowder Rule" (which adds current yield and five-year dividend growth) by incorporating growth data from multiple periods rather than arbitrarily selecting a single timeframe. When examining Target Corporation in early 2017, the five-year dividend growth rate of 16% masked a recent slowdown to 7-8%, which more accurately reflected future expectations. By weighting multiple growth periods, the ranking system better captures these changing dynamics. The ranking process works by assigning weights to each factor (such as different dividend growth timeframes), calculating normalized scores for each stock, and determining a weighted average final score. For example, if Stock A scores 23.3%, 34.5%, and 24.6% across three equally-weighted factors, its final score would be 27.47, compared to Stock B's 26.63 from scores of 27.3%, 27.0%, and 25.6%. This mathematical approach removes subjective biases while maintaining flexibility to emphasize factors you consider most important. Implementing this system doesn't require complex calculations—modern spreadsheet programs can easily handle the formulas once properly set up. The critical element is maintaining consistency in your approach rather than constantly adjusting criteria based on recent performance or market narratives. By focusing on process quality rather than short-term outcomes, you position yourself for superior long-term results regardless of market fluctuations.

Chapter 5: Execute With Conviction Through Market Fluctuations

The greatest investment process becomes worthless without the psychological fortitude to execute it consistently, particularly during market downturns when emotions threaten rational decision-making. Building this conviction requires understanding both your investment approach and your own psychological tendencies to weather inevitable market volatility. Studies reveal that most investment newsletter subscribers significantly underperform the very recommendations they follow because they implement strategies inconsistently. Fidelity conducted an internal performance review that discovered their best-performing accounts belonged to investors who were either deceased or had completely forgotten they had accounts—demonstrating how detrimental excessive activity can be to investment results. As Warren Buffett noted in his 1996 letter, "Our portfolio shows little change: We continue to make more money when snoring than when active. Inactivity strikes us as intelligent behavior." Consider how market participants reacted during the significant stock market corrections described in the book. While many investors panic-sold their holdings at precisely the wrong moment, those with conviction in quality companies continued collecting growing dividend payments regardless of temporary price declines. This psychological comfort stems from understanding that market prices fluctuate far more than underlying business values, particularly for established companies with consistent earnings power. Implementing this conviction-based approach begins with proper position sizing. Rather than concentrating in just a few positions like professional investors who analyze companies deeply, most individuals should maintain approximately 20-30 equally-weighted positions across different sectors. This diversification provides psychological stability during market turbulence while still allowing meaningful wealth accumulation from successful investments. For those starting with a lump sum, consider dividing capital into 24 equal portions and investing gradually over two years, always purchasing the most attractive opportunities available each month. This disciplined approach eliminates the impossible task of market timing while steadily building positions in quality companies at various price points. As Peter Lynch observed, "I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world." Remember that consistency matters more than brilliance. The S&P 500 index outperforms most professional investors precisely because it methodically executes a simple strategy without overthinking or changing course. By establishing clear buying and selling rules—such as only selling when a company cuts its dividend or becomes extremely overvalued—you remove destructive emotional reactions from your investment process.

Chapter 6: Construct A Balanced Portfolio For Sustainable Growth

Building wealth through stock investing isn't about finding a single perfect investment but rather constructing a portfolio that balances income, growth, and capital preservation according to your specific situation. This balanced approach ensures sustainable progress toward financial goals regardless of which particular investments perform best in any given period. Professional portfolio construction falls on a spectrum between two extremes. At one end, the theoretical "know-everything" investor who can perfectly predict which single stock will deliver the highest return should logically concentrate 100% in that opportunity. At the opposite end, the "know-nothing" investor recognizing their limited predictive ability should maximize diversification. Most individuals fall somewhere between these extremes, benefiting from moderate diversification while still concentrating in their best ideas. Warren Buffett, when speaking to Columbia Business School students, revealed that reading 500 pages of financial reports daily was his key to success, noting "All of you can do it, but I guarantee not many of you will do it." Since most investors won't dedicate this level of effort, a portfolio of 20-30 quality positions represents a sensible compromise between concentration and diversification, providing sufficient opportunities for outperformance while limiting individual position risk. When implementing portfolio construction, consider your regular investing schedule. If saving monthly, identify which top-ranked stocks you have the lowest dollar amount invested in and purchase more of those positions. For those with lump sums, gradual deployment prevents the psychological distress of investing immediately before a market decline. These mechanical rules remove emotional biases from capital allocation decisions. Remember that a well-constructed portfolio addresses all three components of total return. Dividend payments provide immediate feedback and growing income regardless of market prices. Business growth compounds value over time as companies expand operations and increase earnings. Valuation changes offer opportunities to purchase quality at discounted prices while providing potential multiple expansion benefits. By balancing these elements, you create sustainable wealth-building potential. The portfolio construction process becomes self-reinforcing over time. As dividends accumulate, they provide additional capital for reinvestment, accelerating wealth accumulation through compounding. During market declines, these growing dividend payments provide psychological comfort that makes maintaining your investment discipline easier. This virtuous cycle explains why dividend-focused investors often demonstrate superior long-term results compared to those seeking price appreciation alone. A balanced portfolio also prevents overexposure to specific economic scenarios. Companies across different sectors react differently to inflation, interest rate changes, and economic growth variations. By maintaining positions in various industries, you increase the likelihood that some holdings will thrive regardless of macroeconomic conditions, providing stability through changing environments.

Summary

The path to building wealth through stock investing requires neither extraordinary intelligence nor complex strategies—just disciplined application of proven principles. By identifying quality companies with consistent dividend histories, purchasing them at attractive valuations, applying strict threshold criteria, systematically ranking opportunities, and executing with conviction, you position yourself for exceptional long-term results regardless of market fluctuations. As Warren Buffett wisely observed, "The main point is to have the right general principles and the character to stick to them." This psychological discipline ultimately determines your investment success more than any specific stock selection technique. Begin today by establishing your investment process, focusing on quality and value rather than excitement or predictions, and commit to consistent execution through market cycles. The wealth-building journey may not provide daily thrills, but the financial freedom waiting at the destination will prove worth every step along the path.

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David Solyomi

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