Sunday, November 12, 2006

Investment Process

An investment process is a SOP (yucks I hate to use this acronym!) that you follow when you want to invest in a stock. For the sake of many non-Singaporean guys and Singaporean gals who have never bother to find out what their boyfriends did in the most unproductive 2.5 yrs of their lives. SOP stands for Standard Operating Procedure: a set of strict execution procedure to follow, during NS.

Anyways, SOP for investing is pretty simple, for me. You should modify your own investment process to suit your style. Investing is as much about your personal style as making money. Your investment process should help to drive your investment philosophy. The process I follow is summarized below

1) Screening
2) Fundamental analysis
3) Valuation
4) Technical
5) Monitor

Screening is the most tedious part of the whole process. Usually it takes a long time to come up with stock ideas if you do not have the relevant tools. Professional fund managers use screening tools to "screen" stocks that fulfill certain criteria. This would be like low PER, high earnings growth, high ROE etc.

Fundamental analysis is what a main part of this blog has been talking about. Things like financial statements analysis, financial ratios, SWOT analysis, intrinsic value etc. The company that you want to invest in must first pass the screening, and then you look in-depth into the company. This is the part when you see the company under the microscope. Scrutinize everything.

If everything looks ok up till now, look at valuations from all angles, PER, PBR, EV/EBITDA etc. A good company must be cheap. If it is expensive, there is no value to be gained by buying. See this post.

Technicals: buy when the timing is right. The general market is on a positive trend, but not too bullish. No analysts are looking to downgrade the stock. i.e. most of them have SELL or NEUTRAL ratings. Charts look ok. Overall sentiment is good but not overly optimistic. Of course, true value investors do not look at this because over time, prices correct themselves and move towards its intrinsic value. But a stock can still drop 10% 2 days after you bought them. If you don't like to stomach this kind of shock, better take a look at technicals.

And finally, when you have bought a stock. Monitor it. Not by looking at its daily price. But by looking at its business. Make sure they are making money, doing the right thing. If things are not going as expected. Sell.

Investing in a stock should be viewed very much like buying an house or a car. The more homework you do, the less likely get conned or lose money.

See also Financial Ratios
and Brokers cannot be trusted
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