Friday, February 13, 2015

Investment Process Review

One of the first books I read was "Successful Investing is a Process" and come to think about it, I don't think I have a very good process now. I feel that my investment process should be mechanical and unemotional, preventing me from being biased and irrational, and therefore making uncalculated mistakes that can be mitigated with risk management. By making certain tweaks and emphasizing certain factors, I can statistically improve my long run returns. The process has to logically work on paper and also has to be applicable in real life.

But come to think of it, my process is kind of sloppy now. I think that my current watchlist now is a good telltale sign of my laziness.

It's basically a haphazard mosaic of stocks that I think look decent. It was pieced together after multiple sessions of looking at different stocks based on different things. On hindsight, I have spotted a few wolves in sheep's skin hiding within my watchlist. How many others have slipped through the cracks? This does not look good. I don't want to be second-guessing myself when I pull the trigger.

I will be ripping up my entire watchlist now and starting from scratch. This time though, I will be more systematic and unemotional with my process. I must admit I can get a bit swayed by sexy narratives.

Perhaps this exercise should even be an annual exercise. We shall see about that.

I think I will do this in 3 stages:

Stage 1: Starting with the entire SGX universe and apply broad fundamental screens to narrow down the universe to more favourable companies.

Stage 2: From the remnants, sieve through and scrutinize each company if they should belong in a long term portfolio based on business model, balance sheet and operating metrics.

Stage 3: From that final list, run valuation screens to see which of these pre-approved companies are selling at fair or cheap valuations. Apply simple technical analysis to optimize entry positions.

I know that this is not going to be an easy task. If it was an easy thing to do, tons of people would have done it already. I am certain that this is going to take a lot of time and a lot of effort, but hey, you know what? I'm still young! I can do it!

So, as an on-going side project, I am going to be focusing quite hard this. I guess if I don't start now, when will I ever?


Haiz, I am a bit lazy to start, but Emma is watching me, can't back out now!

8 comments:

  1. Hi GMGH

    Your last comment about Emma was funny there.

    Maybe can share with us the list ;)?

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    1. Hey B,

      Mmm Emma *droolz*

      Sure, I'll share it once I'm done! However, I am a little worried about blowback like "why not XXX? it's great!" or "why is YYY inside? it's horrible!". Oh well, sharing is caring I suppose!

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  2. Question really is, how do you know if the processes yield the correct result (i.e. not as a result of chance)? That said, with the proper processes, you remove those choices that you tend to make on impulse or emotions.

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    1. Aye, that is a very very very good question Singapore Stock Picker!

      Maybe I should also do a blog post why I have screened a certain manner and also my supporting ideology and data behind my reasoning!

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  3. Hi GMGH,

    It's natural that biases may influence our investment decisions. We're humans after all. I myself am susceptible to them.

    To help myself, I have a 20-point checklist which I use to evaluate S-Reits. The checklist differs slightly between REIT categories (industrial vs. retail etc.), but I try to be as systematic as possible.

    That said, some aspects are hard to judge - for example, proficiency of S-Reit management. For those aspects, I apply a subjective evaluation.

    All the best in creating your own investment process!

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    1. SRSI, you are like a robot REIT analysis generator! Feed you the financial statements then POW, one big report come out! I can see that your process is very well-formed and I hope to be able to have a structured process too. Maybe with a little wiggle room when it comes to allocation and weighting to express certain biasness on things a bit more subjective :P

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  4. Hi GMGH,

    I'm very encouraged by your post to not get complacent when it comes to screening for stocks. Like yourself, I have an ever-growing watchlist simply because I don't bother to delete the old ones as I feel that my work would have been wasted. A list of 10 stocks have grown into 30 stocks where my past analysis are no longer relevant as the stocks have moved.

    Upon reading your post, I have decided to wipe my whole watchlist and rebuild this watchlist, with careful consideration to wipe and rebuild the list perhaps on a monthly/quarterly basis. Or else years down the road I'll probably have the whole SGX in my watchlist haha!

    Based on my experience on Step 1, screening through the whole SGX should take just under 2h to finish the first level of filtering. Step 2 would prove to be a challenging one with fundamental research involved! Perhaps you can consider combining Step 3 with Step 1 so while filtering stocks, you can also filter out those that are approaching your entry/exit levels based on technical analysis.

    All the best with your endeavor!

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    Replies
    1. Hi Aloypro,

      Haha, yes I was worried too that I'd eventually end up with the whole of the SGX on my watchlist!

      Actually, I think I will permanently keep the list generated from Step 2, and then just periodically run Step 3 and look for cheap valuations on a monthly basis perhaps. Maybe redo Step 1 and 2 once a year. I feel myself gravitating away from only looking for fair companies at bargain prices towards looking for great companies at fair prices also. I still want to be kept aware of some of the blue-chip stocks and perhaps accumulate on weakness. Having a broad valuation screen initially will remove most of them, since they generally tend to have higher multiples.

      I am glad I got you inspired! Good luck on your new mission! Feel free to also ask Emma to also watch you! Do post your findings on your blog if you're okay sharing, I would love to see what you come up with!

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