5: My Investment Process Flow Chart

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I’ll be honest, my investment journey has been fairly short. I have only been investing for about 3 years and each year of my journey I’ve tried something different. I’ve went from day trading, to week trading, to trading small cap and now I’m a huge believer of value investing and really only investing in SWAN (Sleep well at night) stocks.

Coming from a process improvement background, I believe in mapping out how I plan to achieving my target returns. I want to separate the “luck” and “skill” aspect of investing. No different than playing a game of poker, I’m ok losing as long I’m making micro adjustments to my process every time I play that nets a positive result.

Below is my investment process so far.

I’ve separated my process in 2 steps:

  1. Pre-planning: I rather be fishing in a small pond with lots of opportunities rather than fishing in an ocean. Therefore, my pre-planning phase is about choosing the right pond I want to fish in.
  2. Trades: I’m a huge believer in dollar cost averaging. It’s tough to time the market so it’s better to invest over a period rather than a lump sump during a point of time.

Pre-Planning Phase

The first caveat here is I only invest in S&P500 stocks. The idea here is that it allows me to hyper focus my analysis on an index with only 500 stocks and I’m only targeting the biggest players. It reduces any inherent risks of small cap such as significant volatility and a higher risk of bankruptcy.

In my portfolio, I try to have a 60/40 split. 60% of my portfolio goes into stocks in which I think can “beat the market”. The other 40% is in a low cost S&P500 ETF. I’m not a Warren Buffet and I don’t currently have a decade track record to see if my strategy plays out. This is to reduce any unforeseeable risks in the future.

The reason I call my portfolio 10+5 is I have 10 core stocks. These are my highest convictions and I would hold these forever. the +5 are 5 stocks I think can potentially be the next replacements of 1 of my core 10.

My screener criteria:

  • Consistent revenue and price growth that has out performed the market
  • The volatility is low
  • Price is predictable using my forecast model
  • Large moats
  • Follows a growing trend that will allow the business to continue to grow into the future

These are my current 10+5.

The best part of this strategy is I can get extremely deep in my analysis for each one of these stocks. I wish I could do this full time but unfortunately I don’t currently have the time in my day to review hundreds of stocks. By narrowing the list down to 15, I can start to understand the nuisances of each business and specific leading indicator that is specific to the sector or business.

Trades Phase

The idea here is simple, continue to invest weekly my available cash. During times of economic uncertainty or a high probability of a recession or correction, I’ll sell off a percentage of my portfolio as a cash reserve. I will not short the market because I’m a long-term investor and the probability of long-term returns on a short position is extremely low.

When I predict that the market is undervalued, I’ll continue to add leverage, no more than 20% of my portfolio value. I’ll have a process to sell this leverage off once the market is back at fair value.

In the Works

Rather than having a human driven portfolio, I want my process to be as automatic as possible. Other than leverage and sell for a cash reserve, most of my investment decisions every week should be automated. This way, I won’t be influenced by my human behaviour of either selling on down markets or buying stocks irrationally.

Another thing I’m working on is a more automated forecast and tracking tool. I have something working offline but it still takes a lot of manual effort to check on it weekly. Ideally, I want a web based tool where it’s there when it sends me alerts, and not something I need to check on a weekly basis.

If you’re interested, here’s the first draft of the tool. I’ll continue to provide more updates as I hit the next milestone.


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