Stock Picks | Question - Do You Follow An Investment Decision Making Process?

9th Mar '15 by WarrantStar

10 comments 5635 reads

Do you follow an investment decision making process?
How long does it take you to make a decision to buy or not?
What proportion of shares that you investigate end up with a decision to buy?

My answers are;

1) Yes I do follow a process for making decisions on potential purchases. For sales my process is not so well defined. Sales are generally decided by looking at which shares that I own have the weakest prospects. I am a bit fanatical about making improvements to my investment decision making process. I believe in continuous improvement.
2) About 3 hours from start to finish for a purchase. I can rule out many investments without going through the whole process. But I must go through the whole process before I allow myself to buy any share.
3) Approximately one in three shares that I investigate end up with decisions to buy

Please provide your answers to the above questions along with any comments.

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TheWatchmaker

25th Apr '15

Hi Warranstar,

NB Post has truncated after 1st picture - I'll re-write lost sections in additional responses below

My Buy process is as follows, accounts for c. 70% of portfolio value and aims to expose me to PE re-ratings for growing small cap companies.
Stage 1 : I run a Stockopedia screen for growing earnings as an initial filter. This returned 67 companies today. Only one or two of these might get through the full process.

Stage 2 : I check the Graham Formula score in the Margin of Safety beta box. If negative or slightly positive then the stock will be thrown out at this stage. I'm looking for big positive values here. Currently this is a manual process - if anyone can tell me how I can easily incorporate this into my screen then that would save time. Maybe half or more get rejected at this stage.

Stage 3 : I enter data into a spreadsheet to see if I get a similar answer to the Graham Formula that this stock is undervalued. Really I'm looking for stocks with high growth and forecast continued high growth and that the PE rating is currently much lower than I believe it should be. My spreadsheet generates a graph with target price and current stock price. The one below is for Sprue Aegis which worked extremely well having bought in at 180p and sold out at 343p. The target line therefore also acts as a sell trigger unless further big growth and re-rating is envisaged. Not all choices work out this way and often the growth stops and I can make a loss.

Stage 4 : Final stage. I enter data into a scoresheet form 'Selecting Shares That Peform : Koch & Gough, Way IV' to confirm if this scores well - if it does then it could be a big winner for me. This is a somewhat subjective scoring system and care is needed to avoid getting the results you're wishing for.

Additionally, for the output stocks I will check discussions, accounts, RNSs etc to ensure I'm not heading for imminent disaster.

Time taken for whole market screen : appx 5 to 8 hours
Number of Buys : One or two from the screen (c. 60-80 screened initially)
Successful choices from this process typically 40-50% success rate but successes far outweigh failures in returns.

If I get a lead (other than from screening) then I can put it through Stages 2-4 in maximum one hour.

My process is also being revised frequently - I didn't follow it in a very disciplined manned in 2014 and had poorer results. Reviewing last years figures has resulted in this revision which appears to have generated a positive turnaround in my fortunes in last 2 months.

Updated monthly by reviewing stages 2,3,4. Daily RNS checks at 7 a.m.

WarrantStar

26th Apr '15

Hi TheWatchmaker
I too have tried to find a screen for the Graham formula MOS but can't see one.
But there are a couple of other things that you can do:
A) Screen for a low PEG ratio
OR
B) Screen for a low long term broker EPS growth forecast. They call it ""long term growth forecast" on here.

I'll mention this, just in case that you were not aware of it. If you click on the "Graham Formula" text as above, then you can then insert your own assumptions instead of using the Stockopedia assumptions.
Warranstar.

PhilHofGrowYourDough

Hi Watchmaker,

Are you using the Stockopedia default values for the Graham Formula?
I ask because the Stockopedia valuation tool defaults to a 20 year AAA Corporate bond yield of 5.22% whereas according to Yahoo Finance the current value is 3.3%.

This adjustment can have a dramatic effect on the valuation.

Thanks in advance
Phil

Hi PhilH
I have previously questioned Stockopedia about this apparent anomaly. They reckon that the value of 5.22% that they use is appropriate. Although I never got an answer from them on how often they review this figure. Personally I prefer to compromise between the two figures and use 4.3%
WarranStar.

Hi Phil,
Yes, Stockopedia default value is the one I use - but I don;'t use this for the final decision. I suppose that I could be rejecting some companies that are worth further investigation. I'll have to look into this a bit further.
Thanks for heads up on this.
Cheers Geoff

mpat89

So here's a question, why do people not use Stock Rank > 90 to mechanically construct a portfolio of 20-50 * stocks (using min. market cap to filter out illiquid stocks) and rebalance quarterly? Does anyone have success adding subjectivity and if so, how?

Hi mpat89
I think that some people do use an approach something like you have described. It obviously would have the benefit of taking less time to make investment decisions. However, I believe that I achieve better results by doing further research and being more discriminating. Fortunately for me I have the time and enjoy doing the research. Don't get me wrong, I do think that the stock ranks are well worth taking into account. I just don't rely on them exclusively.
WarranStar.
It seems likely to me that Ed Croft & Stockopedia will launch a fund to do something like you have described.

Question - do you follow an investment decision making process?

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WarrantStar

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