“Take a simple idea and take it seriously.”

I wish I’d said that, but it was Charlie Munger of Berkshire Hathaway Inc. (NYSE: BRK.A).

Charlie is the Oscar Wilde of finance; there seems to be a “Mungerism” for every occasion, but this is probably the most important of them all.

In any case, it’s certainly my personal favorite – and not just because of the way it trips off the tongue.

I love it because, when you apply my favorite Mungerism to one of my favorite investments, you can enjoy the kinds of returns that make Wall Street eggheads green with envy; you’ll make your friends green with envy, too.

In a nutshell, this approach can set you up for life if you execute it repeatedly, the way I’m going to show you. And don’t worry: It’s really easy to execute. It’s not rocket science by any stretch.

I’m going to show you how to do that now – and give you some great examples of the strategy you can (and definitely should) own today.

My 5-Step Recipe for a 3,962% Edge

Just this one strategy, rigidly applied, would have outperformed all mutual funds and most hedge funds over the previous 20 years… by a factor of 12.

It would have turned a $10,000 investment into $431,500 today. Those who followed the Street’s popular eggheads with that same stake and bought an index fund would have just $35,300 in theirs.

In fact, this approach, rigidly applied, would’ve outperformed all mutual funds and most hedge funds over that same 20-year period.

It’s the best thing you could’ve done with your money in that time – a 20.7% annualized return. That’s the kind of return that made Warren Buffett one of the three richest people in the world.

I think he’d approve, too; this approach isn’t flashy at all, and it hinges on some seriously boring stocks.

Here’s how you do it:

  1. Go to any financial search engine where you can look up stocks. I like MoneyMorning.com, of course, but even Yahoo! Finance will do.
  2. Put together a list of bank stocks, regardless of size, that trade with a price/earnings (P/E) ratio of 12 or less
  3. Now, filter for those stocks with a dividend yield of 3% or more.
  4. Then buy the 25 with the highest dividend yield. If you can’t find 25, then spread your money across the ones that do have a P/E of 12 or less and a dividend of at least 3%.
  5. Repeat: Every month, do the same thing. If something’s not performing the way it used to, kick it out and replace it with a stock that does. No time to be sentimental. Most months that will mean selling (on average) one stock and buying a replacement.

Now, some people will try it and abandon ship the first time they have a down month and go looking for the next foolproof, “goes up every single day and outperforms every single month” idea. Best of luck to ’em.

We’re in it for the long haul, to build the kind of wealth you need to really enjoy your old age.

That brings me to my next point.

You might be worried about how your portfolio would do during the rough times it seems like are perpetually just ahead of us. You’re concerned about how a group of core holdings like this would’ve come through the credit crisis and market meltdown, or the perception that bank stocks are particularly risky these past 10 years.

It just isn’t so.

Yes, you would have seen a significant decline in your account – but nowhere near much as the indexers and other mutual fund owners would have experienced.

Even better, less than two years after the dust settled and the market bottomed, your account would have been back to all-time highs.

If we use portfolio beta (β), which is volatility, or how much the strategy moved up or down based just on stock market movements, we find that this simple yet effective bank stock portfolio is less than half as risky as owning the S&P 500.

Owning high-yielding, undervalued bank stocks allows you to have your Wall Street cake and eat it, too.

So now that you know the secret, let me give you two stocks that fit the bill perfectly right now to get you started on your way to a life of ease (and ridiculously high returns). It’ll give you a great idea of how naturally diversified this portfolio is, too.

This West Coast Bank Hits All the Marks

PacWest Bancorp (NASDAQ: PACW) is located in Beverly Hills, Calif. It has 80 branches with about $26 billion in total assets.

PacWest caters to small and mid-sized businesses across the United States. It focuses on what its whip-smart management calls “relationship-based business banking” to small, middle-market, and venture-backed companies nationwide. It also provides banking services for venture capital and private equity firms across the country, as well.

PacWest currently trades with a P/E ratio of just 9.75, and the stock yields a market-crushing 6.19% at the current price of just under $34.

Over the past five years, it has increased the dividend by 17% a year, on average.

If you’ve been reading me for a while, you know I hold insider ownership in high regard. It says a lot about a company if its own officers are happy to own huge chunks of it.

Insiders own over 1.4 million PACW shares, so they have more than enough skin in the game to stay laser-focused on growing the bank and moving the stock price higher.

I’ve got one more for you…

Five Stars for This Bank’s Management

All the way across the country, we find Financial Institutions Inc. (NASDAQ: FISI), the holding company for Five Star Bank in Warsaw, New York.

It has 53 branches in Western and Central New York, with about $4.2 billion in assets. Five Star serves pretty much everybody in its communities, including individuals, governments, and businesses.

It also provides indirect auto loans through a network of franchised auto dealers across its region. This is a very profitable business, and the company is excellent on the credit side, as very few of its car loans are more than 90 days past due.

Bad loans, repossessions, and charge-offs total just 0.13% of assets across the bank – a fraction of the national average for a bank its size.

The stock is trading at just 11 times earnings and yields 3.48%.

It has increased the payout by 5.8% a year over the past five years, so you can reasonably expect the yield to increase over time.

Bank on Fat, Lifelong Gains from Now On

The low P/E–high yield bank strategy builds a portfolio that includes big banks and small banks from all kinds of markets all over the country.

There will be business-focused banks, banks that only do single-family mortgage lending, and everything in between.

What all the banks will have in common is that they are undervalued, and regulators have determined that they are financially strong enough to pay out their cash in the form of dividends.

Historically, it has delivered higher returns with lower risk, and I’m confident it will continue to do so in the future.

— Tim Melvin

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Source: Money Morning