What's my investment strategy?

Foreword

As you probably know this blog is not about intraday strategies or doubtful golden rules. I am sure you can easily find swindlers out there that promise you stellar returns simply by clicking on their effing link.

I don't believe in a market that is predictable and bounded to the past. But I do believe in inefficiencies. And as soon as humans remain involved in the market those inefficiencies will persist. For this reason, an investor shall be active and prepared to take advantage from them. But what do I mean by inefficiencies?

Let's assume that after running your own due diligence you decide to buy a stock that is trading at 20% discount from your target price. For some days since you purchased the stock price has been dropping by 10% - and it did not pay any dividend. Your assumptions however are still valid; nothing really changed significantly. If your assumptions are frank there are at least two conclusions you can draw: some market participants do not share your same idea or the market made a blunder. If you strongly believe in the latter you have then a nice opportunity to fool the ones who are selling that stock - careful, don't be too arrogant.

The explanation above may seems unsophisticated and to some degree it is. But the message I want to pass is: "do not let the market says what a stock is really worth". Or using Ben Graham's words: "Mr. Market’s job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to."

My process

Said so, let's jump to my investment strategy which is composed by 4 steps.

1) stock selection
2) monthly cash-in
3) hedging activity
4) repeat

My stock picking process starts from a quite detailed fundamental analysis of the company. I like to model the business of the company that I am analyzing because it allows me to understand the key variables that drive the stock price. On the other side, I dislike complex businesses because they amplify the margin of error of your forecasts making your target price too unreliable. After forecasting the free cash flows, I go through a series of calculations to end up with the target price. For some companies I use the dividend discount model. I always pair the fundamental analysis with a multiple valuation aka relative valuation. I tend not to include too many companies in my portfolio - five to ten stocks depending on the market conditions. Remember these wise words: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” - Warren Buffett.

Every month I deposit part of my salary in the broker account and increase the position in the stocks which are under-performing or are having a negative total return. In this way I can take advantage of the divergence in prices to lower my average cost and increase my upside potential.

I do hedge from time to time selling futures of the indexes that give clues of an upcoming correction and for which I have an exposure. I find it more practical and cheaper than selling all my positions in bulk. By doing so I keep a neutral position on the market by limiting the systematic risk. If I get it right I use the proceedings to increase the position in the company that witness a stronger correction. If I don't get it right I get acquainted with the price of hedging, like in an insurance contract in which we pay a premium but we don't receive any compensation.

I repeat this process over and over again trying not to lose the big picture. "Wax on, wax off".

Additional info

Until now I never felt the need to re-balanced the positions because the majority of my stocks have been moving together. I do keep some liquidity aside to make some "swing trading" or to "buy-the-dip".

Conclusions

This is in short the strategy I adopt to invest my money. In the next days and weeks I will expand many concepts that in this post have been only touched upon for the sake of clarity and conciseness. Feel free to reach me out on Twitter or on the Guestbook to share your comments or just to say hi!


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