Since I started investing roughly 10 years ago, I have come across a wide variety of opinions on different ways to approach stock picking. Early on, it was difficult to develop any kind of sound strategy when I had people telling me left and right to “put all your money in an S&P 500 Index Fund” or “you can return 100% every year swing trading.” Especially coming from older and more successful people, this can be extremely overwhelming and damaging. In my 9-5 career, I made a habit of listening to people who know more than me - people who have been doing this for a long time. And in the corporate world, that has worked very well for me. The stock market is different because there are so many different ways to make money. You can put all your money into index funds and watch your portfolio consistently fall during a bear market while an options trader may be getting rich selling puts. There’s nothing wrong with either method, but someone with a full time job can’t day trade options and a professional trader can’t make a career indexing. It all comes down to what works for you, what you can commit to mastering, and ignoring all the noise.
The problem with investing is that success is so closely tied with psychology. Traders face the mental battle of selling a position that has crossed their stop-loss level. Investors can watch a fundamentally-sound stock drop 40%+, knowing that stock could return 1000% over a long period of time. No matter how you approach investing in the stock market, psychology, not market volatility, is the biggest challenge.
I spent some time dabbling as a trader but it wasn’t for me. Despite the lack of success, I actually learned a lot that helped shape the strategy that works best for my lifestyle: long-term investing. I use fundamentals to analyze companies I think will outperform the market over a 5, 10, 15+ year time horizon. What I look for:
Founder-led companies
Growing revenues (25%+ year over year)
High margin businesses
No debt / manageable debt, strong cash flow
Companies offering industry-changing products (disruptors)
Optionality - mandatory
While it’s certainly possible that a company displaying all six of these characteristics can fail, these traits give me, as an investor, the conviction I need to hold for a very long time. Conviction is important for controlling emotions, but it is also important to control risk, which I do through position sizing and timing.
My trading days taught me that risk can be primary controlled through position sizing and stop losses. While I don’t use stop losses anymore, I do have a strategy for building positions. I generally start with a target size (2.5% - 5%), which is the most I will put into a single position before letting the stock do the heavy lifting. I’ll buy that position in lots, usually 4-5 over the course of a few weeks until I get to my ideal position size, which is usually never larger than 5% of my portfolio. For higher risk companies, I’ll limit that initial position to .5% - 1%. Since I routinely add cash to my portfolio on a regular basis, I like to rebalance on general market weakness. If the entire market is suffering, I have no problem equally dispersing cash even to my largest positions.
I also like to control risk by timing my buys. I don’t even really consider this technical analysis because I am less interested in technical indicators and more interested in valuation. I like to look at my entire portfolio/watchlist to get an idea of what kind of valuation the market is okay with. If growth is trading at a premium, I am okay with adding as long as we aren’t experiencing extremely stretched valuations (2021). The important takeaway is that I won’t shy away from something that may be trading slightly higher than the rest of my stocks, but I certainly will not pile into a stock simply because of a low valuation. Sometimes stocks have a low valuation for a reason.
Takeaway: it took years of failure to find what worked for me. Everyone has a slightly different approach to investing in the market. Any strategy can work if you stick to it and master every facet of it. It’s also helpful to write it down and reread it from time to time. This helps me stay the course.