This is the first draft (v0) of my investment checklist. This document follows a value investing philosophy. Future versions will include:
- Momentum strategies
- Growth strategies
- Automated scripts to look for local minima/maxima and cycles
* No current plans to start trading options or make short-term trades
Start with this screener and order by increasing EV/EBIT values. Inspect all the columns and ask the following questions:
- Is this an industry I’m comfortable investing in or familiar with?
- Get a sense of the company’s financial state by comparing the cash/revenue/equity per share to its market price.
- If cash/share > price/share, it MBAGTB!
- Look at the cash & revenue per share graphs and see if they’re stable over time. If they’re stable, but the price is depressed, it MBAGTB! (See mean reversion)
- Determine whether the EV/<XXX> ratios look low enough to be attractive but also not abnormally low.
- If the values are too low, something might be fishy…
- If the graphs are historically stable but currently depressed, it MBAGTB!
- Determine whether the P/<XXX> ratios look low enough to be attractive but also not abnormally low.
- If the values are too low, something might be fishy…
- If the graphs are historically stable but currently depressed, it MBAGTB! (Mean reversion)
- Look at the company’s liabilities. A high value is not a deal-breaker, but worth understanding.
- Debt/equity ratio.
- If the value is really low, that’s great!
- Look for a ratio that’s ideally decreasing over time.
- If the ratio is high, try to understand why.
- Current ratio
- If the value is high, that’s great!
- Look for a ratio that’s ideally increasing over time.
- If the ratio is low, try to understand why.
- Debt/equity ratio.
- Dividends. There have been studies showing that optimizing for dividends underperforms, but having a portion of your portfolio be dedicated to high dividend payers is a good way to diversify.
- In 2020, a dividend of 5%-10% is great!
- If there is no dividend, that is okay.
- If the dividend is extremely high, try to understand if it’s maintainable given the depressed price. If the payout ratio is too high, it might not be a good sign…
- Look at the dividend per share graph and look for something that is stable and ideally monotonically growing. (See dividend aristocrats)
- Look at a company’s return on equity and assets. A low value is not a deal-breaker, but worth understanding.
- A ROE > 20% is great!
- A ROA > 10% is great!
- Look at the ROE and ROA graphs and look for something that is either stable or growing.
- If it’s unusually high, something may be fishy…
- If the value is currently depressed but historically stable, try to understand if it’s a permanent or temporary change. If it’s temporary, causing the price to be depressed, it MBAGTB!
Go on Google and read a few articles and headlines about the company.
- Avoid it if it’s facing weird legal, regulatory or political issues. This is too hard…
- Avoid it is it’s facing a weird taxation situation. This is too hard….
- Avoid it if there’s a bunch of bad press about its management. This is a bad sign…
- Is the stock part of a cyclical industry (energy, commodities, semiconductors, etc…). It might hurt in the short-term, but cycles do tend to repeat, so it MBAGTB!
- Are global political/economical events (i.e. a pandemic) going to have long-lasting effects on the company?
- Are there any catalysts that may trigger the price to go up in the near future?
- Make a list of investors/economists/money-managers you trust, and look if they’ve been trading the stock. If they’re buying, it MBAGTB! If they’re selling, you probably shouldn’t buy at this point in time.
- Go on SeekingAlpha and look for an overall general sentiment of what people are saying, but do not let this bias you.
Look at Stockrow’s summary of the balance sheet at https://stockrow.com/<ticker>/financials/balance/quarterly. There are no specific guidelines here so just think it through.
- Look at the breakdown of the company’s assets:
- A company that keeps a lot of cash could be valuable and live through tough times.
- A company with no cash on hand may be risky since it could default.
- A company that has a lot of assets tied up in inventory might not be able to sell it.
- Consider discounting assets that are illiquid (e.g. manufacturing plants).
- Look for a company whose assets are growing over time (or it’s paying a really good and stable dividend if not).
- Look at the breakdown of their liabilities:
- Will the company have to use up its cash reserves to pay out bonds or accounts? If so, this could be risky…
- Is the company tied up in a bunch of pension/retirement funds? Not a deal-breaker but could be a problem if the number is too large.
- Are most of its liabilities short-term rather than long-term? If so, this may be why the company is cheap. It’s facing hardships in the short-term.
- Shareholder Equity
- Look for a company whose shareholder equity is stable or growing over time.
- If the shareholder equity is stable, will it remain that way? Is this a “dividend play”?
- If the shareholder equity is low or declining, will the company turnaround or is it simply doomed to die?
- Common Shares
- Look for a company whose shares are either flat or decreasing.
- If it’s decreasing, did the company do buybacks at high or low prices? If it did, management might be making bad decisions…
- If it had a sudden spike up in outstanding common shares, try to understand why they did a secondary sale.
- Net income. Look for something that’s stable or growing.
- If stable, is the company paying good dividends and is the principal safe?
- If it’s declining, try to understand whether the decline is temporary or indefinite…
- Operating cash flow. Look for a company with positive stable, and ideally growing, operating cash flow.
- If it’s negative, is it temporary?
- If it’s stable, is the company’s principal stable and is it paying good dividends?
Listen to the most recent or upcoming earnings call of the company and think about the following:
- Get a sense of the management team
- Get a sense of the company’s plan
- Understand their economic moat and how they compare to their competitors
- Get a feel for their long-term strategy
There are a lot of tools (stockrow.com, openinsider.com, gurufocus.com) that make it easy to track insider trading.
- If there is a lot of insider selling, don’t touch the stock!
- If there is a lot of insider buying, it could signal that the stock is undervalued per the judgment of people who have more information than you.
- Note that sometimes there is insider buying to create false public hope and bump up the stock.
Position sizing, selling and holding periods are a very difficult problem that no investor has an answer to. Simply keep the following in mind
- Try to hold stocks for at least 12 months to get the benefits of long-term capital gains.
- Personal experience: If something > 2x in a short time period, consider taking some money of the table even before the long-term cap gains kick in.
- Is this a compounder or dividend payer I plan to hold in perpetuity?
- Is there going to be a nearterm catalyst?
- Consider putting a long-term limit sell order in case there’s a huge (> 3x spike) that just happens for some reason.
- Pick a % of how much of my portfolio I want to allocate to this stock.
- Invest the money all at once?
- Invest in 25-50% initially, and the rest in chunks on a weekly or bi-weekly basis.
* MBAGTB: May Be A Good Time To Buy