Background to My Approach

Investment Process

My thinking is unashamedly based on old-fashioned fundamental analysis; as with any approach you often see it go in and out of fashion, but to my mind the attraction of consistent long term durable returns whilst being mindful of capital preservation should be the objective of all investors.

I have coupled this with what is best described as an evidence based approach that builds on the fundamental analysis to see were an investment is in relation to its history – hopefully helping you avoid buying a great share at the wrong time!

Timing or long term forecasting of future revenues and earnings is not for me but I am interested in looking at what’s gone before to help identify periods of under and over valuation.

All this is drawn together in what you will hopefully find a straight forward manner that provides a framework for the decision process.

Where I Start – Market Overview

Before looking at individual stock selection I like to have broad overview of UK market conditions and where we are in relation to history; this can help identify anomalies – and more importantly opportunities – at a market and individual stock level.

To get this broad overview I used a combination of indicators that encompass both sentiment and fundamentals; if you want to take a closer look at how these work why not watch my short presentations by clicking on the following pages (Building a Risk System and  Market Returns)

When looking at sentiment I consider moving averages, distances from highs and lows and volatility  amongst other things to gauge risk. At the same time fundamentals can offer an insight into potential market returns, the laws of mean reversion still stand the test of time and using a sample of shares as “bellwethers” can be extremely insightful (our “Real Life Experiment” in the strategy section is also available to download).

Stock Selection – Overview

Whilst evidence based investing is also used in my analysis of stocks the starting point is fundamental analysis; the initial screen is aimed at finding 30 or more stocks in the FTSE-All Share (even in the current financial repression of recent years)before whittling this list down further to those that I consider worthwhile of some more detailed analysis.

After initially identifying a share it’s often easy to think “Wow this is great let’s look a bit deeper…..I know this is a good share!” be warned confirmation bias is dangerous. It’s at this point I change the angle of my analysis to “Wow this is a great share…….why isn’t everyone buying it? What’s wrong with it?” It’s here where scepticism and thoughtful analysis pays dividends.

The process of share assessment can then start in earnest and ultimate selection in my view should be dealt with as four separate components

  1. Financial Security
  2. Fundamental Factors
  3. Value Factors
  4. Qualitative Factors

Numbers one to three are intrinsically linked and all about the numbers but qualitative factors are important too, this could be anything from whether a firm is moving into a new industry to their history when it comes to relationships with the workforce.

Stock Selection – What I am Looking for?

I suppose the main question is, whats the ideal share to buy?

Well here’s my description…………..

  • Financial secure, its going to be around for a while!
  • Positive long term fundamentals – these can be depressed on a temporary basis but not on a long term.
  • Share price has underperformed in recent times relative to market and sector.
  • Price ratios are undemanding, not only compared to the market but to the shares history.
  • Linear Regression* implied future returns are positive across a selection of reliable indicators
  • Positive qualitative factors.

* Click to find out more on Linear Regression

Investment is a process

Find out the factors that we use when considering stock purchases