My Investment Process

The Art of Stock Picking

Hello Stock Pickers 👋

I made this chart (sorry, still learning to design 😄) to give a visual of my investment process.

Here are the steps I go through when deciding to invest in a stock:

Stock Identification

The first step is quite logical. You need to hear of the stock for the first time. Either from a friend, a neighbor, TV, online news, maybe you consume its products or services or maybe you have worked in that company! But don’t have any bias from the tip (regardless of the origin of the tip).

We hear and see lots of companies on a daily basis. If one caught your attention, it might well be your investor’s gut feeling. Explore it, but don’t let your gut decide alone.

Subjective Analysis

The second step is to find everything you can in terms of news (recent, but also old and how these old events were handled), management and its incentives (remember: “show me the incentive and I'll show you the outcome.” - Charlie Munger), products…

In fact, try to identify all the factors that impact the stock and make your personal assessment of its “moat” (= competitive advantage) by comparing to competitors for example.

Objective Analysis

To be fair, that’s the easy part. Because it’s real. It’s the tangible part. Because it’s something investors can touch, see and feel, too much time is spent on this part and the other are completely forgotten. But don’t get me wrong: this part is still crucial.

Look at the earnings: are they strong and growing over the years? Are they expected to continue growing (any growth catalysts in sight?)? Is the balance sheet healthy (look at the debt servicing!)? Is the valuation in line with historical valuations and with competitors? If not, why is it cheap or expensive?

Expensive doesn’t mean you shouldn’t buy. Cheap is also not an invitation to buy. Often times stocks are cheap or expensive for a reason. What about price targets of Wall Street analysts? Do they confirm the fair value you have reached?

Portfolio Suitability

Very important: if you buy a new stock, you are diluting your existing positions. Always keep that in mind. Is this new stock at least as attractive as your current positions? Does it fit your portfolio strategy and time horizon?

Is the stock going to add or remove volatility from your portfolio? Is the stock going to cause you to be undesirably overweight in a particular sector?

Exit Plan

Last but not least: how long do you plan to hold the stock? Do you have a target in mind? If you are planning to hold forever, that means there is no ceiling. Is it reasonable to assume the business will grow until the end of times (maybe I exaggerate but that’s the spirit)? What change or changes in fundamentals will make you sell the stock?

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Answer all the above honestly and in writing - and keep the writing in your cloud. In the future you might want to remember what made you buy an asset and what factors would have make you sell it.

That’s my own investment process. It is not universal. It is just one I like to apply when picking my stocks. Perhaps you will find it helpful.

So… hopefully the above is useful. Thank you for liking and don’t hesitate to comment. 💚🙏

Etcaetera