As an investor and blogger I am well known among the friend circle and colleagues. One question I am facing each day is, “Did you bought any stocks? If not, is there any company in your mind to buy?". They are keen to know what I am buying because of the performance of my portfolio. WHAT IS NEXT?
No stocks in my portfolio facing lose even after the economic recession is its maximum. All of them are still profitable for me. In other words, I can sell any of them with handsome profits. This is the major reason my friends continuously interested to know what I am doing. I thought, I will give them a reply with this post:
Frankly saying, I am not doing anything now and not planned to buy any stocks at this time. Like any other investors, I too, aware that the prices of many stocks are reasonable to buy and offering to buy. Even then, I am not buying due to some below reasons.
1. At present, no stock or businesses got my attention to buy. I have scanned companies and the process still going on. Yes, this is with an intention to buy the stocks of some good companies that probably meet all my personal criteria to buy. I know you are interested to know these criteria. Certainly I will give required hints.
2. As a retail investor, I already reserved enough money in my bank account to buy some good stocks whenever it meet with my analysis and selection criteria.
3. My basic scanning criteria starts by downloading the company annual reports. After downloading at least past 5 annual reports, I will compare the management discussion to know whether they have met all those, what they said in last year to know whether the management have a habit of sticking on their promises to investors. Once if I found all the promises have done, I move to the next criteria or will drop the company at this point. Probably, once after dropping a company, I never interested to come back to them later.
4. Next criteria is to know the business and its status as a monopoly. Popularity of the products and marketing strength will be considered. Factory locations, any kind of labor issues or any pending legal activities against the company, all will come under scrutiny. Generally, I am finding such information from the stock exchange database where company required to inform the changes time to time.
5. Year to year Return On Equity (ROE) calculation is the third criteria, I have practiced. If it par with my requirement, it is the pass to another step. (Please note that, I am using the traditional ROE formula that freely available in the net but, the numbers, what I am using to calculate the ROE, is different from the numbers in the annual reports. To get the real ROE, some intelligent calculation required. If you use any numbers directly from the annual reports, it is difficult to get the real ROE. In my experience, such calculation always resulting an ROE higher than the original.)
6. Next step, my attention will naturally go to the Cost to sales numbers to understand the profitability of company and identifying how much company spending to produce a product. Less cost and more profit always better for me here but some must considerations. I am planning to write an article on, how companies generating profits.
7. Next, is the debt part of the company to know whether the company is a bankrupt candidate or not. Identifying the real debt of a company and comparing them against total asset (adjustment required) and total shareholders equity to get good idea on the debt burden to proceed with or drop. As a bonus, I am keen to identify any hidden liability that a company have.
8. Next is the cash flow section. Here, I am trying to get the exact information on, how much money a company spending in each year to maintain its existing facility or adding new facility. This is my best point to identify how a company deal with shareholders money. I never interested to any company spending huge amount each year to maintain its existing facilities.
9. As seventh measure, I will identify its cash flow from financing activity to know whether the company buying backs its shares without issuing further new shares to open market. I never interested on any company that have a practice of issuing new shares or allocating shares through employee stock option, which add hidden liability to a company.
10. In eighth step, I am trying to know how many associated businesses this company has. If it has various businesses under different company names, I am dropping the company. This is due to over diversification and the possible management inefficiency.
11. Finally to the ninth criteria, reaching to the current price to know whether it is suitable to buy or need to wait more. Certainly the macro economic factors, I mentioned in my previous article, is a great help for me to deal with this point. This is the only point I really believe in Macro Economic than micro economic. All the eight points other this, based on micro economics only.
These are the criteria I personally use to identify a stock. Whether I am winning or losing, these are the criteria I have practiced and using for my personal stock selection purpose. Please note that the method of using each of them may be different than what you are thinking. I have learned most of them from various successful practices and advices from legend investors, especially Warren Buffett. But, I am sure to not imitating them blindly. As it is a personal developed strategy, sometime it will be difficult for me to clarify and make you better understanding on some points. Even though, I will try my best to clear your doubts once if you have any doubts.
Please note that, my numerical skills are far below than any one else. Thus the calculations, I have practices, may be wrong in one or another way, when comparing with your style and expectations.
Presently, I have identified some companies and awaiting its prices to come to meet my expectations. This may be an another reason I am not doing anything as said in the beginning.
I am happy to write this article because of the dual benefit I am going to receive from it. If someone ask the same question later, I can send this link to them and thus, I am going to get a visitor to my blog.
WHAT IS NEXT?