Stock Investing isn't that hard

My dummies guide to picking stocks

I've had a few people ask about my stock investing strategy. Even though I try to study as much as possible on making the best stock decisions, here are a few caveats:

  1. I have a tiny portfolio
  2. I'm not a finance expert
  3. My purchases are for learning purposes
  4. I'm not that smart

But if you're still interested in knowing how I choose stocks let's dive in.

1. Industry

My current portfolio is spread across

  1. Tech
  2. Energy
  3. Precious Metals
  4. Real Estate
  5. Utilities

First, I identify what industry I would like to buy into, there's a few restrictions I impose upon myself mostly around ethics or faith. Right now, industries I'm looking into are Solar Panels and Renewable Energy, Semiconductors, Aviation and commodities. I often find industries that I personally feel are very relevant or would be relevant mostly through research or gut feeling. Once I have an industry, I begin my research and finding a company that meets as many of my checklist criteria

2. Financial Health

I'm quite an old school on this. But the reality is being a Nigerian, I'm not open to buying a company that's structured like Nigeria. For financial health, I try to look at a companies debt levels and see if it's reasonable. Debt for most companies is a good thing (esp. in a bullish market), but can be disastrous at the slightest economic tremor (a case study of Hertz). I often find companies that are in a good financial spot and don't have too much debt hanging over their head. I often aim for a debt/equity of under 70% depending on industry and industry averages, certain industries have higher debt exposure than others, but the closer it is to zero the better.

3. Revenue Growth

It goes without saying, I'm interested in companies that are still growing and have a high potential for growth. I'm more interested in a slow but steady growth around 5-20% annual growth in the last 3-5 years than a company that grows 90% one year and shrinks by 60% the following year. I of course love big numbers but prefer consistency. Consistent revenue growth gives me an (a perceived) indication that

  1. The company understands their market and is doing a good job solving a problem
  2. The company is expanding: the bigger the pie, the bigger my bite
  3. The company could become relevant in the industry if it's taking good market share

Rapid/Inconsistent growth often seems to me like a miracle or luck. Can be more rewarding but it's harder to time.

4. Valuation

Just like everyone, I love a bargain. I'd love to buy a good company on a discount, it's like paying 70cents on the dollar, who doesn't like a great deal? On valuation, I find good companies that are trading below their fair valuation or great companies that are trading just around their fair valuation. There are several methods to calculating valuation but, personally, I use the valuation from simplywall.st. The higher the discount the more interested I am. I'd like to buy a company at a 20-30% discount from it's valuation and hold it for as long as I can.

5. How good with money

I learnt that when reading summaries, companies have legal yet deceptive ways of masquerading the true depth of their financial mess, while burying it in the fine print. Similar to how a company can bury crazy terms in their 50-page T&C document, auditors can also hide a mess making it less obvious but they still have to be truthful. I try taking a look at a companies cashflow over time, i.e where their money comes from and where it goes to, in more savvy terms I look at

  1. Operating expenses: I'd love to see this relatively constant or better shrink
  2. Earnings: I love to see this getting bigger
  3. Free cashflow: I love to see a positive value getting bigger