Be aggressive investment selection
This week I want to blend two quotes from two of my favourite investment managers. They are two of my favourites because they think a lot about investing generally but also about their particular investments.
The two who I am quoting this week are Jean Pierre Verster of 36One Asset Management and Hlelo Giyose of First Avenue Investment Management.
Jean Pierre Verster once said that just because a stock exists doesn’t mean that we have to buy it and he’s 100% right. Far too often, we search the JSE universe of listed stocks trying to f ind that undiscovered gem that will make us rich and maybe even famous. In truth, what we’re doing is trawling the bottom of the barrel desperately trying to find a pot of gold. Part of the problem is that we’re looking for a stock that can be a 10bagger within weeks or months of our buying it. But as I always say, anything that can skyrocket can crash, and if we think we’ve found a new gem that will make us rich in double-quick time, it is frankly more likely to crash.
Hlelo Giyose’s comment was that before t hey even star t l ooking for investable stocks, they run a scan on every listed stock looking for ones to not bother with. In other words, they start by deleting potential investments, and if I recall correctly, he once said that when they’d finished scanning the market they end up with around 70-80 stocks worth investigating further. That’s over 400 listed shares, so less than a quarter of the market. Put the other way, the vast majority of the listed JSE stocks are not even of interest to them. That’s not to say they won’t move higher, but we don’t have to be on every bus, only the wellmaintained comfortable buses that are going our way.
The reality is that a team of investment professionals will struggle to analyse every listed stock and as non-professional investors with day jobs, we have no chance of doing a proper job on every stock.
Personally, I start by throwing out entire sectors that simply aren’t worth investing in. Construction and other massively cyclical stocks would get booted from my list, as would single-commodity producers (unless the commodity is booming).
Then I start with a scanning process (most online brokers will have a simple system that enables a fairly quick scan on a number of different metrics and ratios). Things to initially scan for are dividends, return on equity, liquidity (there is no point in finding a share that has practically zero trade) and other key metrics you put great store in.
Then start the process of looking for winners: positive and growing profits and dividends. Improving margins (at operating and net level), cash f low (not only at operating level but cash in the bank or paid to shareholders) and so the process goes.
Once you have a shortlist of winning stocks, then you can start digging deeper, singling out the more likely winners. Just because a stock ends up on your final list is still no reason to buy it (remember what Verster said). From your shortlist you start the real digging, looking for quality of management, market share and so on.
Lastly and ver y i mportantly, be aggressive with throwing stocks off the list.