Learning To Invest | DYOR - How Much Is Enough Before You Act?

1st Dec '18 by jared007

15 comments 5359 reads

Hi All,

I have recently decided to take control of my investments and retirement planning with more of an active involvment. I'm a new member of Stockopedia and love the site. I am still getting to grips with all the tools and how to interpret the Stock reports. The daily lesson emails are excellent and well paced, and I also love getting the small cap report email each day.

Now to the actual question - I quite often see people giving their synopsis of a stock, but then finish up with "But DYOR" (do your own research). I take the message on board, but I'm not sure what to practically do at this point. What do other people do with regards to this?

- Study the Stock reports again and again?
- Read the integrated RNS new feed looking for clues?
- Get out into the world and find more information (company website, newspapers, visit actual stores if possible)
- Google something?

And then, at what point do you consider yourself well versed enough to execute the trade? Or put another way, what is your personal policy of "Due Diligence" before you take a position?

Thanks, Jared.

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Trigger14

1st Dec '18

Wow that’s a tricky question and a good one to ask. Unfortunately, I think the answer is that it depends... on what your overall approach is. Some approaches rely on doing really detailed research to fully understand all the relevant prospects and risks of the business so that you can invest with high conviction (value investing), while others are more statistical and systematic and rely on the idea of investing in broader baskets of shares that have characteristics that make them more likely to succeed (e.g. the Stockranks).

I can tell you what I do - I’m more in the latter camp. I don’t use Stockranks but my approach is systematic in that I only invest in very high quality businesses. I assess this by asking the following questions:
1. Is the business consistently highly profitable (Op. margin and ROCE)?
2. Does it have a consistent track record in growing revenues and profits over time?
3. Does it have a clear competitive advantage that will endure over time?
4. Does the business and the market it is in have good growth prospects?

I try to keep my research high level as I think it’s much more important to be asking the right high level questions than getting sucked into irrelevant detail. I wrote a recent post on this which you might find useful:

https://qualitysharesurfer.com/2018/08/20/ignorance-is-bliss/

Lots of different ways to skin a cat though - I suggest you first need to think about what your overall strategy is...

The Third Man

Hi Jared. Trigger 14s response is without doubt very sound. But I question how much time and what skill level is required to adopt his suggested approach. Where to find the data? How much expertise is needed to analyse the results? How do you deal with his questions 3 and 4?

This not at all a criticism of Trigger14 far from it. I simply wonder how many subscribers to Stockopedia are capable of what he suggests and also have the time.

Good luck!

jared007

Thanks for sharing your link above: https://qualitysharesurfer.com.... This part stands out for me today:

"Investors are highly motivated to seek out and use all of the available information to reduce the uncertainty of their investments. However, beyond a certain point much of the uncertainty simply can’t be reduced in practice"

I am investing for the long term having recently (couple of months ago) bought all my pension pots together in my SIPP. I've also opened up ISAs to further invest with. I have 15+ years till retirement age so I figure I can aford to make some mistakes early, learn and recover.

I have a day job, and so just don't have the time to devote 8hrs a day to company research (also - can you believe some published research from people that may just be talking their book?). So perhaps using stock ranks, and the awesome clear layout of company information from the StockReports already gives me a leg up. Coupled with diversification across industries and market cap, and perhaps that's good enough for the part-time personal investor?

PhilHofGrowYourDough

I'm a farmer, that is I use screens driven by fundamental data to generate lists of companies that match my investment criteria.

I then apply some technical analysis to time the purchase of the screened stocks.

That's about it!

Crazy huh?

the screens I use have been based on some of the Guru screen here at Stockopedia with some additional tit bits that I have picked up from here too.

If you do think I am a little crazy for do no further research into the companies, consider that the Guru Screens here at Stockopedia also have no ability to do further research on stocks yet many will routinely outperform many investors.

Best of luck
Phil

Gromley

I agree with most of what has been said thus far. In particular Trigger14's point that "it depends".

It depends very much on what "type" of investor you are aiming to be (and your diversification, expected holding time) and I would agree Phil's point that there are entirely valid investment approaches that involve know virtually nothing (other than factors) about the companies you invest in. I'm sure there are many different investment approaches that can be successful.

However, given the original question I am going to assume that jared is sitting somewhere in the school that believes in understanding something about the companies invested in. The answer is still imho "it depends", particularly on what are the 'things' (I was going to say factors, but that's effectively a reserved word) that drive you investment decision, how diversified you are and therefore how important is it for you to attempt to nver be wrong.
You can probably only learn this in the context of your personal investment approach over time.

However, there are some important generalisations to DYOR that I can recommend; especially if, as inferred by the original post, you are using the views of others to inform your investment decision.

If the other person provides facts in their posting, validate them! And I would go further than looking back to the Stock Report, but go back to the original documents - ie the actual RNS or company accounts - despite accounting standards the whole information set is rife with different interpretations of factual numbers not to mention errors in transmission.
If the other person then makes assumptions on the facts, validate them! Perhaps by testing them with other people or by researching similar situations or by using your own logic. I you cannot really validate them then you either have to discount them or take a view as to the likelihood that the assumption being wrong and the impact of that being the case.
If the other person makes predictions perhaps based on claimed expertise, then validate them. Similarly to assumptions, if you cannot validate the prediction then you need to consider the risks.

There are essentially, imho, two risks in relying, to whatever extent, on the views of others :

They may be mistaken - whatever their track record and apparent expertise.
They may be trying to deliberately mislead - whatever their track record and apparent credentials.

The community here at Stockopedia I consider to be head and shoulders above most other boards I have seen both in terms of expertise and trustworthiness, but even so I take virtually nothing at face value.

In general (and perhaps a bit cynically) I think when a poster states DYOR they mean one of two things :

Don't you come crying to me if you lose money, you will be the schmuk that made the investment and perhaps failed to get out quick enough. (Most common)
By inviting you to "do your own research" I am actually suggesting to you that I am responsible and honest and that in fact in this case you can just take everything I have said at face value. (That might sound a bit perverse, but I have certainly come accross instances where that seemed to me to be the case.)

"Trust no-one" as a mantra, would probably be taking things a bit far, but I work to the basis that Trust can only be hard earned and never becomes truly unconditional.

Sorry if that's all sounding a bit jaded and cynical, perhaps a better phraseology would be "test and validate. Always, test and validate."

All of course IMHO, DYOR, DYCCTMIYLM, etc. etc. ;-)

skinner66

yeap stockopedia is the best,, ive met most of the peeps and nice,, stockopedia gives the ease of trying to find the facts out on any company but also its down to the person to do own extra research if needed to invest . its not a magic wand if it was we all be millionaires, paul and grahams, daily posts to me are the reason i sign in every day,,and i agree jared007 if you post have facts unless asking for advice, and i know many here will help..

brballs

Good questions, and some equally very good advice.
I find with the volume of information available to us now, especially with the like of Stockopedia, there isn’t enough time in the day to analyse every fine detail. I do use several screens here, then do further research, but at a reasonably high level. If a stock appeals to me based on the broad criteria I look for, then I often take a “starter position”. This works for my own mindset as it both focuses my mind, gives me an incentive to research in much more depth, and also means I’ve already got some “skin in the game”. I often have a handful of starter positions at once. I never ever average down, and I probably cull more if 1. Further research changes my mind or 2. Price action isn’t too good.

2nd Dec '18

You may be right Third Man. I think of my approach as straightforward but it’s probably a lot more complicated than I give it credit for. The Stock Ranks are a better example of something systematic and straightforward...

Jared - Yes that would be my view broadly speaking. I reckon stockranks and reports and a sensible way of judging should give you a leg up. You do take some risk by not exploring things in detail but I agree you can mitigate this to a large extent with appropriate diversification. I think it could make sense to only start looking in more detail where you are trying to develop conviction in a stock that you want to invest more heavily in.

I’d also suggest you read the ‘NAPS’ strategy post if you haven’t already - where Ed sets out a diversified stockranks strategy that has done pretty well over time...

Thank you everyone for your insight and advice, it has all helped.

gus 1065

Hi Jared.

I take it from your post that you’re relatively new to actively investing your capital. Good luck with your endeavours.

When most people think about investing in the markets, they consider the broad macro market picture (state of the economy, political trends and possible shocks such as Brexit or Trump trade policy) and the micro specifics of a particular stock (is it a sound company with good prospects that’s likely to go up in value etc.) in making their decisions on what and when to buy (and sell). Most of the above posts focus primarily on the second stage i.e. having identified a stock, what next and how much do I need to do before pulling the trigger. This makes sense, since it’s very difficult to predict future macro events and even when you are correct the market often moves in the opposite direction (think back to the bull run in U.K. stocks after the expected Armageddon caused by the Brexit referendum result). Conversely, there’s a lot less to know about an individual stock and a bit of work studying Stocko pages, annual report, broker research etc., should give a decent level of familiarity.

A third and often neglected aspect of investment research (especially for a newcomer) is their own behaviour, especially in times of “stress” (be it excitement for a screaming buy or depression at a share price slump). It’s pretty well documented by the market academics that there is a substantial “behaviour gap” in investment returns (I.e the difference between an index market return and an individual’s investment return) caused by bad decision making due to various biases and behavioural tics that cloud judgement.

As part of a wider DYOR exercise, I know I benefited from taking a step back and trying to establish a sounder psychological framework to investing. Plenty of literature on the subject - my personal favourite is Dan Crosby’s “Laws of Wealth” - but they all more or less come to a similar conclusion that the monkey brained human is not very well wired up for logical investment decision making without a bit of help.

Gus.

mmarkkj777

A great post and some really great answers.

Keep doing what you are doing...thinking about it and asking questions, I say. Then make your own decisions.

Tips are OK (if the source of the tip is good, and Stocko is better than most for this) but the best investors find their own stocks in which to invest. They don't follow others (in which to buy or when to sell). Most Stocko members realise this and usually merely just suggest a share is worthy of a debate and collective research/thoughts sharing (via this forum). Hence the phrase DYOR crops up. People here often want the devil's advocate views to their line of thought as part of their selection process, which is great, and really good general reading for others (both for their views and their thought process). I'm learning a lot on here, but my biggest enlightenment was the realisation of how much I didn't know!

Be wary of people, even on Stocko, who directly recommend others to invest in a share or other investment. If they do it, it is probably either because they are new (and a bit naive), or they are doing it for other motives. Even those most capable to do this here don't do it, because its not right (the ones that try it here often quickly get voted down with red thumbs).

As stated by others above, the Stockranks and various ranking criteria provides a well researched methodology to selecting stocks, either a basket for the farmers, or a shortlist for the hunters. Use it to validate the ones that have been mentioned. Make sure you get the up-to-date financial info. from the latest company reports, though.

AnonymousUser252054

DYOR to me, means everything from examining the published details of a Phase II drug trial, to the issues with developing vanadium redox flow battery technology, the likelihood of a uranium mining permit being granted in Spain, watching live as a select committee interrogated the CEO of Morses Club (LON:MCL) a few months back, or listened to Surrey Council debating (streamed live) a retrospective fracking planning application. It's not possible to find out all the answers you might want but the internet makes research far more feasible compared to even a generation ago.

Hi shine66,

That's quite thorough! Do you have a feel for whether all this has helped to pick more winners, or avoid more losers? Has it been effort well spent, or would you have done just as well without this extra mile of research?

Actually I can see when my attempts at research have been counter-productive. For instance reading the phase II drug trial research I mentioned convinced me the drug concerned was ineffective - which meant I failed to on-board for the incredible ramping prior to the Phase III results when the share price soared five-fold (before it was decimated upon release of the RNS). Bah humbug!

DYOR - How much is enough before you act?

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Jared007

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