The Art of Stockpicking...

20th Apr '09 by MrT

7 comments 2766 reads

Starting a thread on the art of Stockpicking...

How much do you weight the sector dynamics of a given stock? Do you start with a top down approach based on sector rotation or bottom up approach based on the screening of a given company? Or do you just fling another dart at the board?
What's the most important factor in selecting a stock? Is it: i) Value, ii) Growth, iii) Relative outperformance vs. its sector, iv) Top Notch management, iv) The quality of the biscuits at the AGM?
What do you tend to look at in the accounts - tangible vs intangible assets, goodwill etc? How do you deal with hedging policies (especially miners) or the risk that currency swings can impact profits? What about pension schemes?
Do you build a full on valuation model based on discounting cashflows at the weighted average cost of capital or just scribble comparative multiples on the back of a fag packet?
What screening methodologies do you use? Has anyone made money from a Dog of the Dow type approach?Does anyone use CAN-SLIM?
How much do you weight technical vs. fundamental analysis? Is technical analysis as analytically deficient as voodoo?!?!

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MrT

20th Apr '09

Speaking of wisdom, this is Charlie Munger's take on the topic - really worth a read: http://www.vinvesting.com/docs/munger/art_stockpicking.html

I'd like to once again talk about investment management. That is a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That's the way it has to work. Of course, that isn't true of plumbing and it isn't true of medicine .If you're going to make your careers in the investment management business, you face a very peculiar situation. And most investment managers handle it with psychological denial just like a chiropractor. That is the standard method of handling the limitations of the investment management process. But if you want to live the best sort of life, I would urge each of you not to use the psychological denial mode. I think a select few a small percentage of the investment managers can deliver value added. But I don't think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up if you want to maximize your chances of becoming one who provides above average real returns for clients over the long pull.

Betasurfer

21st Apr '09

Slightly off-topic but have been digging around the net in relation to this area and I really like that quote in this PDF from Nathan Rothschild during the Napoleonic wars: "Buy to the sound of cannons and sell to the sound of trumpets". I am definitely of the view that while fear and panic rules, we should be filling our boots!

http://institutional.newton.co.uk/core/library/documents/white_papers/stock_picking_the_lost_art.pdf

This is also quite interesting - a piece examining what might be the Munger Network of Mental Models, mostly obvious but some good stuff in there. http://www.focusinvestor.com/FocusSeriesPart3.pdf

Gradders73

I like this comment from Jim Rodgers on diversification:

Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued [for making bad investment choices for clients]. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket.

Stocktaculous

22nd Apr '09

Some of the key rules of thumb to screen for are:

Obviously, a low price-to-earnings ratio, especially as compared to similar comps
Insiders buying the company’s stock or the company buying back its own stock
A low gearing or debt-to-equity ratio, especially as compared to comps

3rd May '09

On the subject of great quotes about stockpicking, this is from Fred Schwed's "Where Are The Customers' Yachts?" (1940):

When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this-- just wait for the depression which will come sooner or later. When this depression-- or panic-- becomes a national catastrophe, sell out of the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you'll have the pleasure of dying rich.

pennant

15th May '09

Yes loads of quotes but what are your strategies? Are you still seaching ? How far have you got? Perhaps the best way to illustrate your strategies is to share your trade history over the past month or two and explain the reasoning behind it. These are my trades so far this year:

CRA B15 06/02 S34 17/04

CRA B15 06/02 S30 23/04

AQP B160 04/03 S257 17/04

AQP B160 04/03 S285 07/05

PVCS B93 09/04 S122 07/05

CWR B101 04/03 S133 07/05

HYD B 116 04/03

I suppose my strategy has been to take advantage from a predictable rise in the market with shares that appeal to me. I have to like the idea of the business to invest and to be able to understand what they do. This rules out for example tobacco, old and dirty technology, telecoms, IT and finance. I much prefer to invest in companies that have a trading history. I timed my exit of CWR very badly and HYD has been disappointing but I'm still holding. I'm almost entirely in cash again now as I feel the market is overdue for some retrenchment probably to below FTSE 4000. I called 3500 the bottom and its turned out to be 3512 (so far!). I find it difficult to hang on to shares for the long haul - change happens so quickly these days and and the fortunes of even the most attractive companies can wax and wain very rapidly. If I find a company that I like I am more likely to trade in and out of than to buy and hold through thick and thin. I find bulletin boards of share disciples both sad and tedious. I like bottom fishing but for some psychological reason I find it much more difficult to buy in once a share has already made gains ( I get this irrational feeling that I have missed the boat). One thing I have started to do is to sell enough of a shareholding to cover my original stake and let my profit run on. It takes all the stress out of it when you are dealing with free shares! Anyway enough from me - hopefully this post will encourage more than a quote. TG

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MrT

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