30 Sep | My New Investment Philosophy Part I
Spurred on by some drops in portfolio value that wouldn’t have looked out of place on Wall Street circa 1929, a couple of months ago I took myself back to investment school.
I needed to reinvent myself as a more astute investor. For too long I’ve taken too many risks, gambled too much of a shrinking portfolio on speculative buys. I realised I needed to pay more attention to profitability, cash flow, liquidity and debt levels and less attention to the spin and hype of fast-talking CEOs and the PR companies they employ. I needed re-tooling.
So I scanned my bookshelves and devoured some old favourites on value investing. I hit up Amazon and ordered in a bunch of new titles – from gaining a better understanding of company accounts and financial ratios, to trading diaries of the rich and successful, to tried and tested entry and exit strategies.
I burnt the midnight oil, staying up way past my bedtime. I drank coffee at a hour that should have been reserved for hot chocolate. Then I slept for a bit, woke up and did it all again.
So what did I learn?
Well, I know I don’t want to drown in fundamentals and I certainly don’t want to dismiss a company’s master plan going forward, but I need a balance of the two before making any investment decision. A healthy set of company accounts backed up by a trusted board with an innovative vision is a good place to start.
To that end I’ve taken the best of what I’ve read and employed it in my own stock screening system in an attempt to lock the fundamentals down for any prospective investment.
I’ve borrowed some stock screening principles from the best in the business. Of the hundreds proffered, I’ve chosen eight investment criteria that match my new investment philosophy. These will no doubt change over time (either in their makeup, their application or both), but you’ve got to start somewhere, right.
This initial automated stock screening process is the first step in my new stock selection regime. I plug a bunch of investment criteria into a computer and out pops a bunch of potential investments – 16 today when I ran it for the first time. It’s a starting point that narrows the field dramatically from over 2,000 candidates. I know each of these 16 candidates meets my expectations in terms of profitability, liquidity, cash flow and debt. It gives me a point from which to start my real homework.
I’ll be going through each of the eight criteria I’ve chosen in upcoming posts and running through the basics of how to punch them into free stock screening software provided by ADVFN.