OKR Investment Process

This is a high-level guideline of my investment process. This process is not fixed and will go through multiple iterations as I continue to learn and test new strategies.

Investment Philosophy

  • Consistent outperformance of both the S&P500 and Nasdaq 100
  • Risk is in ignorance, not in leverage or volatility
  • Forecasts into the far future should be focused on qualitative measures vs. forecasts into the near future should be quantitiatve
  • Market timing is critical as one should buy when the market is fearful, and sell when the market is overly confident
  • Only buy into companies where it’ll be pure stupidity to short for the long-term

Strategy 1: Value Trades (Target 80% of Portfolio)

Shortlist companies that have clear moats, high growth potential and strong fundamentals and will outperform the market in the long run. Deep research into these companies to determine intrinsic value and invest over the long-term. Over 5+ years holding patterns.

Analysis Process:

  • Good Technical Buy Points with Clear Supports
  • Strong Fundamentals (Growth, Margins, Debt, Voliatility)
  • Clear and Simple to Understand Moat
  • Low Risks in the Macro Environment (Economy, Industry, Suppliers, Customers)
  • Strong Management
  • Trading at >25% discount with 1-2 Standard Dev Margin of Error

Screener Criteria:

  • Highest 5-year Sales/Operating Income/EBITDA avg growth (weight: 15%)
  • Highest Sustainable Growth Rate, ROIC, Return on Assets (weight: 15%)
  • Highest Net Margin (weight: 5%)
  • Lowest Debt to Assets (weight: 5%)
  • Highest 10-year + 5-year return vs S&P500 (weight: 10%)
  • Highest 5-Year and Next Year EPS growth estimate (weight: 15%)
  • Lowest short % of float (weight: 5%)
  • Lowest volatility (weight: 30%)
  • Market cap > $10bn
  • Years of financial data > 5

Grouping of Stock Watchlist

  • Rank 1 (70%): Safe, Medium growth, Industries I understand (e.g. MSFT, ADBE, MA)
  • Rank 3 (20%): Innovative + distruptive companies with high voliatility, but high potential for growth in industries I understand (e.g. TSLA, NVDA)
  • Rank 2 (10%): Safe, Medium growth, Industries I don’t understand (e.g. CPRT, UNH)
  • Research List: Safe + High Innovative companies in industries I like

Strategy 2: Swing Trades (Target 20% of Portfolio)

Companies that will do well in the short-run, but underperforms the market in the long-run. Under 2 years holding patterns. Increase this up to 80% of portfolio during high market voliatility and uncertainty.

Process:

  1. Screener to determine which stocks to review in detail
  2. Check if it trades within a pattern
  3. Check fundamentals of company over last 10 years

Screeners:

  • Stocks at prices lower than 200 SMA
  • Stocks under 35 RSI

Fundamentals:

  • Price to Fair Value (under 1)
  • Margin of safety (FCF) > 15%
  • Positive ROIC / Greenblatt ROC 
  • Short % of Float < 5%
  • Upside must be at least 25% by end of year (based on my own forecast)

Entry and Exit %

  • Point A: Entry at 3% of portfolio (predicted low) => keep at this level for low confidence
  • Point B: 2% at next level (~10% lower than previous entry) => keep at this level for medium confidence
  • Point C: 1.5% at next level (~5-10% lower than previous entry)
  • Point D: 1.5% at final level (rebound back to 2% level) => keep at this level for high confidence
  • If Point B + C never hits (bought at lowest): 3% at initial entry point, 2% at ~5% higher than entry
  • Max position at 8%
  • Exit completely when hits price target
  • Swing trades at 1 year horizon (if my prediction it will not go up anymore next 12 months, sell)
  • Value trades at 5 year horizons (if my prediction it will not meet my growth expectations next 5 years, sell)

Leverage Target

No more than 35% of Portfolio. Keep between 75% to 125% in equities.


Resources + Tools:


Disclosure: I wrote this article myself, and it expresses my own opinions. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.