There are two ways to invest in stocks. One is long term value investing through fundamental analysis, and the other way is short term trading through technical analysis.
If you are doing fundamental analysis, you must do research in the company, analyse the company and study the company. This is both tedious and time consuming.
If you are doing trading, you have to monitor the stocks prices on a regular basis because trading is time sensitive.
That is why many of my clients felt that investing in stocks is just too tedious and troublesome.
As a result, they either do not wish to invest or if they do invest, they would neglect their portfolio.
It is true that if you invest, you need to do some due diligence.
For me, I help my clients do fundamental analysis for long term. The approach is to find very good companies with good fundaments.
For the purpose of this post, I want to demonstrate to you that finding good companies is not so difficult.
Let’s assume that you just use 4 criterions to find good companies. These are:
- Gross margin of at least 60%
- Operating margin of at least 20%
- Interest coverage ratio of 14 times and
- The return of capital employed to be 20% as shown below.
In 2008, there were 40 companies that meet these criterions as shown below.
Do note that at the beginning of 2008, it was the worst possible time to invest. It is the worst possible time because if you had invested in S&P500 at the beginning of 2008, you would have suffer 50% loss as shown below chart.
Let’s say you invest in these 40 companies at the beginning of 2008 in equal weightage and you do not do anything to the portfolio.
In 2022, the chart below shows you that your portfolio not only made positive returns - it would have surpassed the return of the S&P500!
It is interesting that with these 4 simple criterions and you would surpassed much more than the S&P500.
But let’s look at greater details. The original 40 companies would have reduced to 22 companies in 2022. These 22 companies are shown below.
What happened to the rest? Apparently, half of the stocks went bankrupted, or it was acquired. In this simulation, I assumed that when the company is acquired, you just encash everything.
If it went bankrupt, the stock value would have gone to zero.
However, this buy and hold strategy has an issue. Although it gave very good return, your portfolio will have shrunk to just half in terms of number of stocks from 40 to just 22 stocks. Hence, your portfolio would be very concentrated. Concentrated portfolio means increased in risk.
There is also another issue. Such buy and hold strategy is contrary to most investors who are short term investors. Many investors’ time horizon is just 3 to 6 months.
Most investors do not have the patient to wait for so long. Another reason why many investors are short-term is because emotion, When you see losses you become very emotional and become very upset.
That is why when the market is bad, many people give up and sell at a loss. And when market is good, people just rush in and buy because of emotions – also because they do not wish the fear of losing out. Hence, many buy high and sell low.
As a financial practitioner, it is my duty and my job to help my clients achieve their financial goal by having good investment return. However, not everyone will find my service suitable.
If you are a short term investor, it is not likely you will find my service suitable as I tend to produce good result on a long term basis. On a short term basis, it may not perform according to your expectations.
Another reason why not everyone will find my service suitable is because of emotion. If you tend to be very emotional, you will find my service not suitable.
If on the other hand, you are a person who is a long term investor who are not emotional due to short term fluctuation, I will be interested to talk to you.
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