Top shares
For the seventh successive year Skaffold has identified 50 of the best stocks for the year ahead for Money magazine and then filtered that down to a Top 5 portfolio. Skaffold is an objective, quantitative share research tool. By applying a process methodically, it can remove the emotion that often clouds investing and stick to fact-based decisions.
There are about 2000 companies listed on the ASX. We use this approach to whittle them down to 50 and then to five. Time is the ultimate test as to whether a process works or not, and the evidence is mounting that this is an effective methodology.
Over the previous six years this approach has led to the initial notional capital of $50,000 growing to $124,401. The initial amount was spread evenly over five stocks then updated at the start of each year. Overall the performance equates to a return of around 16%pa – the sharemarket, as measured by the S&P/ASX All Ordinaries total return index, returned around 10%pa.
Our search for five standout shares for 2018 has proven difficult, as all our regular metrics point to a stockmarket that is currently representing full value. Despite this, we remain committed to our investment process and continue to follow a disciplined selection process. We use our traditional criteria to select the stocks that we know represent high-quality businesses.
Consistency is key
Reading about a track record is interesting but history is only useful to the extent it provides lessons for the future. The question we all want answered
is, “Is this performance repeatable?” The future by its very nature is uncertain. We cannot predict with any accuracy whether the 2018 portfolio will outperform the market, or even provide a positive return.
The first thing to understand is that we are investing, not trading and certainly not gambling. When you invest in a share, you are buying partial ownership of a business. That business is engaged in activities to try to generate a profit. At least at a high level, you should try to understand what it does to make those profits. It could be digging up dirt to sell, or taking a bunch of commodities and turning them into a physical product, or providing a service such as education, banking or healthcare. And, of course, there are many other things that companies do to create something of value for their customers.
Traders and speculators are not so concerned with what the business does. They are hoping that the shares will go up in price today because they did yesterday or betting that next month the company will strike gold. Warren Buffett reads annual reports for fun and can process the financials for thousands of companies in his head. If that doesn’t sound like you, then you will need a tool to help you sift through the ASX’s 2000 stocks as well as thousands more listed around the world. We use the Skaffold research tool to analyse 10 years of financial statements for each company as well as distil three years of forecasts.
Using a consistent process helps us to make objective decisions rather than emotional ones. This enables us to arrive at a portfolio of stocks that