Be ag­gres­sive in­vest­ment se­lec­tion

Finweek English Edition - - INVESTMENT -

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.