Saturday, June 03, 2006

Investment Philosophy and Process

This post is update in 2024.

An investment philosophy is a set of rules or guidelines that you abide to help you navigate through treacherous markets. Just as in life, most of us have moral principles that we abide, for e.g. we do not steal or commit adultery but tell our wives we are working when we go to pubs, we value life and are filial to our parents, we try to help the needy and are loyal to friends etc. In investment, you must also lay down the rules, and learn not to break them. Collectively, this set of rules and principles will be known as your investment philosophy and will serve you well in time to come.

An investment process is the execution. It will determine how you start looking for stock ideas, when to buy them, when to sell, what are the maintenance research that you have to do etc.

The investment philosophy that I subscribe to, is similar to that of the world's greatest investor. I look for

1) Stocks that are cheap, i.e. trading below intrinsic value
2) Margin of Safety: chances of losing money would be minimized
3) Stocks with strong free cashflow

The investment process that I subscribe to, in simple form which hopefully make sense to most readers:

1) Idea generation from stock screens, discussions and observations in daily life
2) Due diligence to study the company in detail and form an idea around entry price and intrinsic value
3) Discuss the idea with like minded investors to look for blind spots
4) Buy and observe the company and stock before putting more money
5) Sell when company is overvalued and deploy money to other ideas

Investment philosophy and process evolves over time and is different for everyone. A day trader will have another set of guidelines and process, but the most important rule is to figure out what works for you and then stick to it and not deviate!


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