How I Structure My Share Market Investing Research

How I Structure My Share Market Investing Research


This post is a framework to show how my team and I structure my share market investing research and decisions, and is also a reminder/reference to help keep us focused and on track whilst riding the share market roller coaster day to day.

Here is how I break my share market investing research down:

  1. Style: Value Investing
  2. Goal: Greater than 15% (preferably 20%) per annum
  3. Strategies: Great Companies, Cyclical Companies and Asset Plays
  4. Methods: Price vs Value
  5. Stock Screen: Finding Great and Cyclical Companies to Research
  6. Quick look: A New Company we have Stumbled Across
  7. Initial Checklist: The Financials & Finding a Buy Price
  8. Watchlist: Keeping an eye on Companies that made the List
  9. Research Checklist: Full Research Analysis
  10. Portfolios: Present and Past Holdings
  11. Portfolio Notes: Thoughts and Updates on Current Portfolios

 

Style: Value Investing

I follow the value investing style of share market investing. Value Investing was ‘founded’ by a guy named Benjamin Graham and has since been made famous by Warren Buffett. Value investing is the only style of investing that makes sense to me personally. Until I learnt the value investing principles about 13 years ago I couldn’t get my head around the share market, as it just seemed like a big gamble.

In it’s essence value investing is actually quite simple, it’s just buying something of value for less than it’s intrinsic worth. Value investing makes sense to me, has been successful for me, and I will continue to follow the value investing principles well into the future.

‘In essence everyone is a value investor.’

Let me explain why.

Walk with me through an imaginary fresh foods market for a few days in a row. The first day we stop in front of the bananas and they are $40 per kg. You look at me and say, ‘No way am I paying that for bananas!’ I agree so we come back the next day. The next day the bananas are $5 per kg. You look at me and say, ‘That’s fair, I’m going to by a hand of them.’ The next day we come back again and the bananas are now $0.10 per kg. You don’t even look at me this time, you look directly at the vendor and say, ‘I will take every banana you have!’

This is how I personally view the value investing style of share market investing. But there is another big advantage to being a share market investor as compared to a banana consumer. As an investor you do not have the concern of going hungry if you don’t buy and you also don’t have to worry about the investment going off in your pantry when you do load up.

This is why I like value investing, it makes sense to me, so I stick with it.

 

Goal: Greater than 15% (preferably 20%) per annum

My goal as an investor is: ‘To produce long term compounding annual returns over 15% (preferably 20%).’

For this to happen I need to ensure three things:

  1. The companies I invest in need to return over 15 / 20% p/a.
  2. I need to ensure the company can more than likely perform this way for the long-term at as low of a risk as possible.
  3. I need to purchase my shares at less than fair value to ensure my investment returns are over 15 / 20% and allow for a margin of safety / error.

 

Strategies: Great Companies, Cyclical Companies and Asset Plays

During my research and screening processes I look for three different styles of potential share market investment opportunities, based on value investing principles:

  1. Great companies at a fair to discounted price compared to my valuation.
  2. Solid cyclical companies at a discounted price compared to my valuation.
  3. Asset Plays, companies trading at a large discount to their net tangible assets, that also have a little something extra.

This is my order of preference, with great companies at the top of my list, cyclical companies second and asset plays third. The reason for this is a great company should keep churning out large profits well into the future, a cyclical company as the name suggests will require you to keep an eye on the cycle and price more closely, and an asset play will be an investment you usually sell within 1-5 years once the market has realised it’s value or not.

 

Methods: Price vs Value

Great Companies

When looking to invest in Great Companies for the longer term there are only three things I believe I really need to know in order to make a sound investment decision.

  1. Does the company have a durable competitive advantage?
  2. Does the company have sound financials?
  3. Is the company available at a fair to cheap price?

Cyclical Companies

When looking to invest in Cyclical Companies there are only three things I believe I really need to know in order to make a sound investment decision.

  1. Does the company have a durable competitive advantage?
  2. Does the company have sound financials that can survive and recover in an industry downturn?
  3. Is the company available at a cyclically cheap price?

Asset Plays

When looking to invest in Asset Plays there are three things I believe I really need to know in order to make a sound investment decision.

  1. What are the companies true net Assets & Liabilities?
  2. Is the company currently making any income? If not is there potential and what is the timeframe?
  3. Is there some likely potential or upside on the horizon?

 

Stock Screen: Finding Great and Cyclical Companies to Research

Now that I have defined what we are looking for we start the search.

The most efficient way I have found to find ‘Great’ and ‘Cyclical’ companies is by running stock screens. A stock screen is a tool that allows you to enter a set of parameters that you want to filter your company search by. Many companies provide stock screens, most trading platforms, financial information providers, google and yahoo – take your pick.

The parameter I find most useful to ‘weed out the weak’ is ROE, return on equity. From my experience greater companies have strong and consistent returns on equity and weak companies do not. However, you have to be careful, as poor quality businesses do have the potential to have solid ROE numbers for a few, if not many years in a row, so you cannot stop your research there.

Also, a company with high ROE figures may also be trading at a high share price and even though it may be a great company, it may not turn out to be a great investment if bought at a high price.

 

Quick look: A New Company we have Stumbled Across

I like to travel, read, observe, listen and learn.

Here’s an example most of my male friends hate going shopping or to the mall with the girlfriends/wives, I like it. I buy a coffee or juice, the financial newspaper or a book, read and then wander around watching how people purchase, what they are wearing, what they are buying, what shops are full, what shops are empty and talk to retail assistance about brands and trends.

If there is not much going on I simply read my book or the paper. Quite often reading the paper a new company I haven’t looked into previously or has newly listed will grab my attention. If I have bought a book (usually I read, science, history, psychology, economics or biographies) I will learn something about how the world or human nature works and it may lead me to thinking about long-term economic or human trends and then may lead to an idea I hadn’t previously considered.

Once I have an idea or my team have an idea. We will then have a quick look.

 

Initial Checklist: The Financials & Finding a Buy Price

Now that we have found some companies that are worth digging deeper into we run them through an initial checklist.

  • Durable Competitive Advantage
    • Can we identify a durable competitive advantage?
    • Is there consistent long term earnings growth?
    • Is there consistent long-term return on equity (ROE) over 15%?
    • Is there consistent long-term return on capital (ROC) over 15%?
    • Is there consistently high profit margins?
    • Is there consistently low to medium levels of debt?
  • Price
    • Is the company available at a fair to cheap price?

 

Watchlist: Keeping an eye on companies that made the list

  • Companies
  • Investment Strategy
  • Compound long-term annual growth rate
  • Price vs estimated value chart
  • Investment thoughts

 

Research Checklist: Full Research Analysis

  • Introduction
    • Share Price History
    • About
    • Operations & Investments
    • Key Management
    • Financials Brief
  • 10 Checks
    • Check 1: Earnings Per Share
    • Check 2: Return on Equity
    • Check 3: Return on Total Capital
    • Check 4: Debt
    • Check 5: Competitive Advantage
    • Check 6: Employees
    • Check 7: Management
    • Check 8: Shareholders
    • Check 9: Markets
    • Check 10: Valuation
    • Conclusion

 

Portfolios: Present and Past Holdings

  • Australian Blue Chip Portfolio (ASX300)
  • All Australian Geared Portfolio
  • International Portfolio (not yet investing)

 

Portfolio Notes: Thoughts and Updates on Current Portfolios

  • Company announcements
  • Company thoughts
  • Portfolio updates
  • Portfolio thoughts
  • New Buys and Sells

 

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To view my Watchlists, read my Checklists or follow my Portfolios you are welcome to subscribe here.

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Enjoy the ride!

 

Wade Adams signature


Disclaimer – Please remember, I don’t make recommendations, give advice or manage others money – If that’s what you are after, sorry I or this website can’t help you (see the TOS). Readers should not rely on information contained in Shared Investor for Share market, equities, securities or any financial related decisions but should seek licenced professional advice.  Shared Investor does not give or purport to give investment advice or make any recommendations whatsoever in relation to any securities mentioned in Shared Investor.  What I do is purely share my story and my investments exactly how I manage them.  I do this as I believe there is great value and enjoyment in observing the experiences of others, especially when it comes to investing.  Enjoy the ride!

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