Your Investment Criteria

[robertbanking]

Hello you very wonderful and amazing individuals that make up this forum. I do hope your week has started off great.

I do note everyone has there own criteria when evaluating stocks and after further research, deciding to put stocks on your Watchlist. I please kindly wondered what you look for initially when analysing stocks, do you mainly go for small cap stocks, and do you look for growing profits, do you focus on Return On Invested Capital over an above percentage please? What criteria would you say is the most important to look for when looking for well run companies? If anyone kindly had any thoughts on this i would be forever grateful and thankful it would mean the world to me.

A very sincere very best wishes to you all and hope your investing continues to achieve massive success. A massive thank you to everyone on these forums who have helped me learn so much, without your amazing input, i would not have the skills i have today. Hope you enjoy the rest of your week. All the very best to you.

[tjh290633]

Any share that goes on my watchlist has to have a yield greater than the FTSE 100 average.

TJH

[PrefInvestor]

Things I look for personally:-

1. Revenue growing
2. Profitable and profits growing over time
3. Low debt (ideally reducing over time)
4. Minimal impairments (issue for banks and financials mainly)
5. Decent yield (as an income investor)
6. No surprises !. I dont like those......

ATB

Pref

PS Personally I dont even consider any startups or very low market cap entities. And if its on AIM I definitely dont go there. But thats just me....

[Urbandreamer]

I suspect that I'm an outlier.

The first thing that I look for is something that I can be interested in. I have real difficulty investing just for money. Sure when it gets to further research I look at profitability, debt, geopolitical issues, environmental issue etc. However my starting point is am I interested.

Sure others may stock screen for dividend cover etc, then research what the company actually does to make money and how. But I seldom work that way.

You might as well buy the market warts and all if that's your attitude, IMHO.

Or even get someone like the pension provider Aviva to buy the market, sans what they don't like, for you as a "passive" investment. After all why should you bother to make your own ethical decisions, when you can simply accept theirs?

[GoSeigen]

There are probably almost as many answers to this as there are investors!

1. I have a macro bent.
2.I also have an engineering background where I spent a considerable time studying the maths of periodic systems. I consider financial markets to have many aspects in common with other real-life periodic systems.
3. I decided long ago it was important to understand bond maths and pricing as it is fundamental to valuation of all tradeable securities.

I'm a relative beginner when it comes to buying shares. What I do though, is feed the above three elements into my choice of shares. I am watching the macro environment closely. Within that I am looking for the periodic trends and the forces that underlie them. I recognise that sectors are often collectively subject to those forces since they share common economic properties. I use bond ideas to get a feel for risk spreads and what they imply for asset pricing. Then I buy within the sectors I favour without worrying too much about which company to buy, rather I will use careful risk management in tandem with technical analysis to build positions in those sectoral shares.

I've used similar principles in the past to take (progressively) large positions in cash, gilts, senior and subordinated bonds and other fixed income securites. I have little interest in FI for now, because IMO risk spreads and yields became ridiculously compressed/low and consequently bond markets are going to face a long, formidable headwind in the form of a secular bear market and higher inflation than prior.

That's my overall take on markets currently. I additionally dabble in other positions which might hedge against a misreading or the inevitable market caprice. e.g. I have held variously short index futures, precious metals, mining stocks when bullish on gilts, short and long options and others. I even took a long bet on DJT being elected in 2016 'cos I hoped he wouldn't be and thought he had little chance, but it paid out with a nice Japanese meal for the family when we were all disappointed at the result.


Obviously you will not be able to mirror the above exactly. Rather each investor must choose their own strategy and become expert at it. Find aspects of investing that really interest you and learn something about them. Then experiment and learn more from mistakes. If you have any sort of aptitude you will soon get decent results.


GS

[jaizan]

1 Low PE, unless it's an exceptional business
2 Some evidence that it's a reasonable business
3 Evidence of competent management, who own shares in the business. Ideally founder management.

I avoid IPOs for at least 18 months, anything with crypto, hydrogen, cannabis, blockchain, renewable or any other fads.
I also try to avoid businesses with a great story, fantastic growth & profit projections 2 years out and a sky high valuation. Generally, the valuation assumes the projections are a nailed on certainty, not some inflated BS to underpin the latest round of capital raises.

[stevensfo]

I suspect that I'm an outlier.

The first thing that I look for is something that I can be interested in. I have real difficulty investing just for money. Sure when it gets to further research I look at profitability, debt, geopolitical issues, environmental issue etc. However my starting point is am I interested.

Sure others may stock screen for dividend cover etc, then research what the company actually does to make money and how. But I seldom work that way.

You might as well buy the market warts and all if that's your attitude, IMHO.

Or even get someone like the pension provider Aviva to buy the market, sans what they don't like, for you as a "passive" investment. After all why should you bother to make your own ethical decisions, when you can simply accept theirs?

No criticism, just a comment. Honest!

Some of my worst decisions in the past were due to being interested. I am a Biochemist and was very interested in loads of small companies in the 80s and 90s. They looked like they were going places.

Fast forward 30 years and I've learned my lesson.

Large and very boring. Repeat ad infinitum!

Steve

[Urbandreamer]

No criticism, just a comment. Honest!

Some of my worst decisions in the past were due to being interested. I am a Biochemist and was very interested in loads of small companies in the 80s and 90s. They looked like they were going places.

Fast forward 30 years and I've learned my lesson.

Large and very boring. Repeat ad infinitum!

Steve

I don't take it as such. Because I have had such. I've also had the reverse. I got a lot of very good ideas from a journal called "The Engineer". No it's not about investing, but a technical journal.

Currently my best return Xirr 17.6% over the last decade is from a company mentioned in the IC, that galvanizes metal! Dirty grimy work, but galvanizing results. (Well in truth it produces road furniture, crash barriers etc)

More recently I have sold another investment at a slight loss. Because the very reason that the company exists is being eroded by LLM AI.

Anyway, I'm not alone in thinking that having an interest in something can actually lead to knowing more, and hence to better returns. Indeed didn't a fairly well known stock picker publish a book upon the subject. The Zulu principle was named in reference to his wife's quick expertise in a small area.

[SalvorHardin]

1) Look for companies whose businesses have what Warren Buffett calls a "moat", a sustainable competitive advantage which prevents its products from being turned into commodities. This lets the business charge a premium price and become a price setter (they have some control over the price that they can charge, whereas commodities become price takers as they have no pricing power).

Examples are strong brands, barriers to entry, economies of scale, geography / location (e.g. North American railroads), network effects (Facebook is a great example of these), patents, proprietary technology, strong customer loyalty, high switching costs. More contentious are businesses which are protected by government regulation and laws which restrict competition. If this protection is damaged by a change in the law, the business can quickly find its products turning into commodities (which drastically cuts its profitability).

To again quote Buffett, "'Try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.'"

2) Relatively sane management. You don't need geniuses, just reliable people who know what they are doing and aren't afraid to admit that they've made a mistake (easier said than done).

3) A business where you can understand how they make money. It's surprising how many businesses obfuscate how they make money. Lots of startups rely on a good story with little idea as to how they are eventually going to become profitable. The cartoon "South Park" made mockery of the dotcom boomin 1988 in the episode "Gnomes" which featured the "Underpants Gnomes" and their amazing three step business plan which goes: 1. Steal underpants. 2. ??? 3. Profit
It's a variation on the movie "Field of Dreams" tagline "If you build it, they will come". Maybe, maybe not. Clip linked below:
https://www.youtube.com/watch?v=a5ih_TQWqCA

Disney is a textbook example of a company with very strong brands that has been very poorly managed in recent years (so badly that lost money on a Star Wars movie). Disney's management has deliberately undermined customer loyalty by piling headfirst into identity politics (the Snow White remake seems to have pissed off almost everyone who has read about it and it has been held back for a remake). The new audience that Disney isaiming for doesn't pay as well as the old audience that they're losing. Consequently recent films have been a licence to lose money and Star Wars is no longer the bulletproof franchise that even the prequel films couldn't damage (the recent South Park episode "Joining the Panderverse" absolutely sewers Disney).

4) Look for businesses which have become out of favour, where the pessimism has been overdone and the share price seriously undervalues what the business should be worth. Unfortunately it can take a long time for the underpricing to be corrected and sometimes the market is right.

[CliffEdge]

1) Look for companies whose businesses have what Warren Buffett calls a "moat", a sustainable competitive advantage which prevents its products from being turned into commodities. This lets the business charge a premium price and become a price setter (they have some control over the price that they can charge, whereas commodities become price takers as they have no pricing power).

Examples are strong brands, barriers to entry, economies of scale, geography / location (e.g. North American railroads), network effects (Facebook is a great example of these), patents, proprietary technology, strong customer loyalty, high switching costs. More contentious are businesses which are protected by government regulation and laws which restrict competition. If this protection is damaged by a change in the law, the business can quickly find its products turning into commodities (which drastically cuts its profitability).

To again quote Buffett, "'Try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.'"

2) Relatively sane management. You don't need geniuses, just reliable people who know what they are doing and aren't afraid to admit that they've made a mistake (easier said than done).

3) A business where you can understand how they make money. It's surprising how many businesses obfuscate how they make money. Lots of startups rely on a good story with little idea as to how they are eventually going to become profitable. The cartoon "South Park" made mockery of the dotcom boomin 1988 in the episode "Gnomes" which featured the "Underpants Gnomes" and their amazing three step business plan which goes: 1. Steal underpants. 2. ??? 3. Profit
It's a variation on the movie "Field of Dreams" tagline "If you build it, they will come". Maybe, maybe not. Clip linked below:
https://www.youtube.com/watch?v=a5ih_TQWqCA

Disney is a textbook example of a company with very strong brands that has been very poorly managed in recent years (so badly that lost money on a Star Wars movie). Disney's management has deliberately undermined customer loyalty by piling headfirst into identity politics (the Snow White remake seems to have pissed off almost everyone who has read about it and it has been held back for a remake). The new audience that Disney isaiming for doesn't pay as well as the old audience that they're losing. Consequently recent films have been a licence to lose money and Star Wars is no longer the bulletproof franchise that even the prequel films couldn't damage (the recent South Park episode "Joining the Panderverse" absolutely sewers Disney).

4) Look for businesses which have become out of favour, where the pessimism has been overdone and the share price seriously undervalues what the business should be worth. Unfortunately it can take a long time for the underpricing to be corrected and sometimes the market is right.

Most modern films and dramas are garbage.

[Urbandreamer]

It's a variation on the movie "Field of Dreams" tagline "If you build it, they will come". Maybe, maybe not. Clip linked below:
https://www.youtube.com/watch?v=a5ih_TQWqCA

I prefer Dilbert myself.
https://www.youtube.com/watch?v=4X_KljEI7ck

[minnow]

Perhaps a controversial view : don't bother doing "research". Countless other highly-informed investors have already decided what a given business is worth. In an efficient market, you'd expect all stocks to offer the exact same return per unit of risk.

Let's suppose you decide to do some "deep research" on Amalgamated Paperclips Plc (which presumably means reading through all the information that's readily available to every other investor out there). You come to the conclusion that A/P is undervalued by 10%. What's more likely : you genuinely found an anomaly, or you missed an important risk factor that other investors have already identified ? And furthermore, even if you're right, what's the guarantee that other investors are going to recognise their error ?

I posted on another thread that even Ben Graham, the "father of value investing", had largely given up on security analysis by the 1970s. Do it if you enjoy reading spreadsheets, but otherwise don't waste your time. Just buy a broad basket of stocks (ie, an index fund), and wait. Alternatively, if you really must indulge in stock picking, just throw darts at a dartboard. It's more fun, and the success rate is probably better.

[CliffEdge]

Perhaps a controversial view : don't bother doing "research". Countless other highly-informed investors have already decided what a given business is worth. In an efficient market, you'd expect all stocks to offer the exact same return per unit of risk.

Let's suppose you decide to do some "deep research" on Amalgamated Paperclips Plc (which presumably means reading through all the information that's readily available to every other investor out there). You come to the conclusion that A/P is undervalued by 10%. What's more likely : you genuinely found an anomaly, or you missed an important risk factor that other investors have already identified ? And furthermore, even if you're right, what's the guarantee that other investors are going to recognise their error ?

I posted on another thread that even Ben Graham, the "father of value investing", had largely given up on security analysis by the 1970s. Do it if you enjoy reading spreadsheets, but otherwise don't waste your time. Just buy a broad basket of stocks (ie, an index fund), and wait. Alternatively, if you really must indulge in stock picking, just throw darts at a dartboard. It's more fun, and the success rate is probably better.

How does that correlate with investment criteria though?

[CliffEdge]

1) Look for companies whose businesses have what Warren Buffett calls a "moat", a sustainable competitive advantage which prevents its products from being turned into commodities. This lets the business charge a premium price and become a price setter (they have some control over the price that they can charge, whereas commodities become price takers as they have no pricing power).

Examples are strong brands, barriers to entry, economies of scale, geography / location (e.g. North American railroads), network effects (Facebook is a great example of these), patents, proprietary technology, strong customer loyalty, high switching costs. More contentious are businesses which are protected by government regulation and laws which restrict competition. If this protection is damaged by a change in the law, the business can quickly find its products turning into commodities (which drastically cuts its profitability).

To again quote Buffett, "'Try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.'"

2) Relatively sane management. You don't need geniuses, just reliable people who know what they are doing and aren't afraid to admit that they've made a mistake (easier said than done).

3) A business where you can understand how they make money. It's surprising how many businesses obfuscate how they make money. Lots of startups rely on a good story with little idea as to how they are eventually going to become profitable. The cartoon "South Park" made mockery of the dotcom boomin 1988 in the episode "Gnomes" which featured the "Underpants Gnomes" and their amazing three step business plan which goes: 1. Steal underpants. 2. ??? 3. Profit
It's a variation on the movie "Field of Dreams" tagline "If you build it, they will come". Maybe, maybe not. Clip linked below:
https://www.youtube.com/watch?v=a5ih_TQWqCA

Disney is a textbook example of a company with very strong brands that has been very poorly managed in recent years (so badly that lost money on a Star Wars movie). Disney's management has deliberately undermined customer loyalty by piling headfirst into identity politics (the Snow White remake seems to have pissed off almost everyone who has read about it and it has been held back for a remake). The new audience that Disney isaiming for doesn't pay as well as the old audience that they're losing. Consequently recent films have been a licence to lose money and Star Wars is no longer the bulletproof franchise that even the prequel films couldn't damage (the recent South Park episode "Joining the Panderverse" absolutely sewers Disney).

4) Look for businesses which have become out of favour, where the pessimism has been overdone and the share price seriously undervalues what the business should be worth. Unfortunately it can take a long time for the underpricing to be corrected and sometimes the market is right.

An invasive culture subverts an indigenous culture unless the indigenous culture is valued and its adequate defence is put in place. But part of the invasive culture's strategy is to brand the defences of the indigenous culture as immoral.

[SalvorHardin]

Perhaps a controversial view : don't bother doing "research". Countless other highly-informed investors have already decided what a given business is worth. In an efficient market, you'd expect all stocks to offer the exact same return per unit of risk.

Let's suppose you decide to do some "deep research" on Amalgamated Paperclips Plc (which presumably means reading through all the information that's readily available to every other investor out there). You come to the conclusion that A/P is undervalued by 10%. What's more likely : you genuinely found an anomaly, or you missed an important risk factor that other investors have already identified ? And furthermore, even if you're right, what's the guarantee that other investors are going to recognise their error ?

I posted on another thread that even Ben Graham, the "father of value investing", had largely given up on security analysis by the 1970s. Do it if you enjoy reading spreadsheets, but otherwise don't waste your time. Just buy a broad basket of stocks (ie, an index fund), and wait. Alternatively, if you really must indulge in stock picking, just throw darts at a dartboard. It's more fun, and the success rate is probably better.

You've described strong efficient market theory, which is the theory behind index tracking funds. The thing is that it is possible to beat the market; strong efficient market theory has been shown to have quite a few holes in it, notably by the behavioural economists.

Some of us have beaten the markets over the years and it isn't by chance. Markets in practice are nowhere as efficient as markets are in theory. Warren Buffett's essay "The Superinvestors of Graham and Doddsville", published in 1984, looked into the efficient of stockmarkets with many examples.

https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

If markets were as efficient as the efficient markets theorists claim they are I'd still be working. Instead I retired twenty years ago thanks to some of us on TMF having spotted the severe underpricing of small oil companies which had proven reserves (the market gradually reacted to the underpricing over the period from 2000 to 2007). Efficient market theory told us that the market should have instantaneously reacted to Soco International's big oil discoveries offshore Vietnam, yet it took more than a year for the market to gradually realise what had been found. In the meantime quite a few of us went "drilling on Wall Street" (as it is known).

Trying to beat the indices is a bit like gambling against the house. The vast majority of gamblers can't beat the house and will thus lose money over the long run (or underperform the market). But some gamblers consistently make money. Unlike the stockmarket, casinos kick successful punters out when they catch them and use facial recognition software to stop them getting in whilst the bookmakers will close your accounts and refuse to take your bets in the shops (I'm one of these people, provided that I stick to the horses and cricket).

IMHO it's more fun anyway to own shares in certain companies rather than ABC Index Fund. Fortunately I'm wealthy enough to indulge myself with a few of these selections

[GoSeigen]

Perhaps a controversial view : don't bother doing "research". Countless other highly-informed investors have already decided what a given business is worth. In an efficient market, you'd expect all stocks to offer the exact same return per unit of risk.

Perhaps a consensus view. no?


I invest on the basis that:
-the market is far from efficient
-highly-informed investors do NOT set the price, desperate, dumb or lazy investors do. A smart, highly informed investor would not purchase for a higher price than necessary (i.e. more than the counterparty will accept) or sell for lower, no matter what the business is worth.
-highly-informed investors do not form the view of risk, frightened or greedy investors do.

Correctly priced assets are a statistical phenomenon: like the famous stopped clock being right twice a day, stocks will spend a large part of their trading time priced "about right". Just common sense will tell you that there is also a lucrative tail of mispriced securities that are available and can be found with patience and application -- avoiding fear, greed and laziness -- more so at those times when it's popular not to care about price.

It's worth reading a history of the London stock market (I recommend John Littlewood's) or even one about "bubbles" (e.g. Galbraith) to get a feel for how complacent investors can become about price at certain times, a situation I feel is being repeated lately.

I'd agree that one should not become focussed solely on valuation as there are other important factors affecting returns, e.g. risk management, asset allocation, psychology etc.


GS

[tjh290633]

Some of us have beaten the markets over the years and it isn't by chance. Markets in practice are nowhere as efficient as markets are in theory. Warren Buffett's essay "The Superinvestors of Graham and Doddsville", published in 1984, looked into the efficient of stockmarkets with many examples.
....
IMHO it's more fun anyway to own shares in certain companies rather than ABC Index Fund. Fortunately I'm wealthy enough to indulge myself with a few of these selections

The big problem with the markets is the influence of a few heavyweight companies. Equal weighting or an approximation can often provide better results than an index tracker.

Over the years I have seen my own portfolio outperform the FTSE100 by a considerable margin. Not every year, but sufficiently to convince me that equal weighting is the way to go. In practical terms, I set a maximum weight limit, currently 1.5 times the weight of the median holding value. Originally with fewer shares I set 10% of the portfolio value.

I am no expert stockpicker but equal weighting is the only way that I can explain my outperformance.

TJH

[tjh290633]

Further to the above, this is the comparison of my "income units" with the FTSE100:

Year-end   Value   FTSE       FTSE Rel
Dec-87      0.88   1,717.00       0.88
Dec-88      1.00   1,773.70       0.91
Dec-89      1.28   2,367.00       1.21
Dec-90      1.25   2,167.80       1.11
Dec-91      1.37   2,418.70       1.24
Dec-92      1.54   2,846.50       1.46
Dec-93      1.87   3,396.50       1.74
Dec-94      1.72   3,083.40       1.58
Dec-95      2.01   3,687.90       1.89
Dec-96      2.16   4,092.50       2.10
Dec-97      2.97   5,132.30       2.63
Dec-98      3.51   5,882.60       3.02
Dec-99      3.95   6,930.20       3.56
Dec-00      3.72   6,179.90       3.17
Dec-01      3.43   5,217.40       2.68
Dec-02      2.68   3,940.40       2.02
Dec-03      3.09   4,476.90       2.30
Dec-04      3.52   4,814.30       2.47
Dec-05      4.27   5,618.80       2.88
Dec-06      5.16   6,220.80       3.19
Dec-07      4.83   6,456.90       3.31
Dec-08      2.79   4,434.17       2.27
Dec-09      3.71   5,412.88       2.78
Dec-10      4.06   5,899.94       3.03
Dec-11      4.30   5,572.28       2.86
Dec-12      4.73   5,897.81       3.03
Dec-13      5.61   6,749.09       3.46
Dec-14      5.55   6,566.09       3.37
Dec-15      5.61   6,242.32       3.20
Dec-16      6.12   7,142.83       3.66
Dec-17      6.37   7,687.77       3.94
Dec-18      5.47   6,728.13       3.76
Dec-19      6.20   7,542.44       3.71
Dec-20      5.57   6,460.52       3.31
Dec-21      6.40   7,384.54       3.79
Dec-22      6.12   7,451.74       3.82
Nov-23      5.90   7,321.72       3.62

The figures speak for themselves.

TJH

[minnow]

Interesting stats, TJH. Do your figures include dividends ?

[tjh290633]

Interesting stats, TJH. Do your figures include dividends ?

No, because these are income units. I also calculate accumulation units, but I don't have the FTSE100TR figures. I don't think they go back that far.

TJH