How To Have A Successful Stock Picking Process
This Article was first published on 29th Feb 2018 on our Asia-In-Focus Newsletter. To get the latest newsletters, click here.
Feb 2018 Edition
The Story Of Two Of My Favourite Stocks
As a retail investor, my stock portfolio can be considered as quite diversified. I owned roughly 30-40 stocks. Yet, the time I spent on monitoring and updating my stock’s progress is minimal. That is really due to the way I have structured my portfolio. And that is really demonstrated from the two of my favourite stocks; Nestle Malaysia Bhd and Tencent Holdings Limited.
Two Stocks From Two Worlds
From the surface, the two stocks could not be more different. Nestle Malaysia, the listed subsidiary of Nestle SA, is a consumer staple company that has a long history in Malaysia. It is one of the few “blue-chip” stock in Malaysia that has a stable earnings and dividend. It is the ultimate boring business where there are no much changes from year to year. It is not a fast-growing company but many people would underestimate just how good an investment it can be. If you have invested in Nestle Malaysia back in 1992, you would have seen a total return (including reinvested dividends) of more than 3,700% or 37 baggers! That means that a RM10,000 investment in Nestle Malaysia back in 1992 would be worth more than RM380,000 in your portfolio. Nestle Malaysia is a classic example of how the slow and steady can win the investing race.
Yet, on the other spectrum in the investing world, Tencent Holdings is more about being the fast and the furious. Tencent Holdings has been growing its revenue and net profit at a rate of more than 70% a year compounded since 2001. In its most recent quarter (Q3-2017), the company is still growing its revenue by 61% year on year. Today, Tencent is one of the largest technology companies in the world, literally shaping the future as we speak. If you have invested in Tencent Holdings since its IPO in 2004, you are sitting on a 59,000% total return. That means a $10,000 investment in the company since 2004 is now worth about $5.9 million!
I know it is hard to imagine yourself owning these two stocks concurrently as they are two distinctly different type of stocks. Nestle Malaysia is what I termed as a stock with income value while Tencent Holdings is a stock with growth value.
However, I would argue that it is important to invest in both types of stocks to ensure a good future for your portfolio. The way I restructure my portfolio allows me to invest in many companies like Nestle Malaysia and still be able to take risks safely in investing in high-growth companies like Tencent Holdings.
Having A Good Investment Process
Not many people see our own investment as a business. However, that is exactly what it is for each and every one of us. We are investing mainly in the hope that our investment might one day bring us more wealth and even financial freedom. Isn’t that quite similar to the reason of starting a business?
That is why I would encourage you to treat your investment as if you are starting a new business. You are now, starting to be a fund manager. That means we have to form a structure and a process for our investment. This is how I do it.
This is the way I structured my investment process. Of course, I am not saying that this is the only way to do it. You can definitely use my process as a template and creating something of your own.
Basically, like all business, we have to set our mission and vision of our investment fund. We have to be clear about why we are investing and what do we want to achieve at the end of the day from this venture? If we are merely investing and buying stock in a random fashion, it is highly unlikely we will be successful in the long term as there is no guidance on why we are investing in the first place. It will just become either a hobby or an entertainment for us.
After having a proper mission and vision, we are now ready to setupour SOP (Standard Operating Procedure) for our “investment fund”.
My SOP includes:
- My screening process of finding the first round of companies worth researching on
- Checking through these companies with my 5-Finger Rules, a checklist we discussed in detail in our Book “Value Investing In Asia”. (You can download our free 5-Finger Rules E-Book below)
- Once we have collected the remaining companies that passed our 5-Fingers Rules, we will do enter them on our Watch List. This can be a physical booklet that you keep or just a note on your mobile.
- I would then do a detailed analysis on each of them, focusing on 4 key layers;
- The Business
- The Management
- The Risk
- The Valuation
- Only after I have a clear understanding of the company, then I would make a decision on whether to invest in it.
- After investing in the company, we have to take a step back and view our entire portfolio as a whole and see which are some of the exposure we are lacking and then we can go and search for the next stock.
Being A Bi-polar Investor By Design
I am a relatively conservative investor by nature. I wanted a portfolio that would allow me to sleep soundly at night. So most of my stocks are very similar to Nestle Malaysia. They have established companies, mostly in the consumer space, that has a reputation for stable earnings and strong dividends. These are what I call my “core holdings”. Around 70%-80% of all my stock investments are in these types of companies.
These investments gave me a reliable source of dividend every year which I can then reinvest them on a regular basis. With the main bulk of my investment in these stable companies which I am quite confident that they will still be around in the next few decades, allows me to take more risk with the rest of my capital.
And I would use the rest of my capital investing in high-growth companies like Tencent Holdings. Structuring my portfolio in this manner allows me to achieve a few things;
- Not spending too much time managing my core holdings.
- Having a stable stream of dividends to reinvest every year.
- Still be able to invest in growth companies that could change the future of the world.
- Not too affected when I make a mistake.
Your Portfolio Should Suit Your Needs
If you invest in the stock market thinking that you will make money in every single trade that you do, you would be in for a great disappointment. In fact, if you are able to make a profit in just 60% of your trade, you are already considered quite a good investor. At the end of the day, investing is all about managing risk. Which is why I focused on these two types of stocks to help me diversify and grow my nest egg for the future.
Till Next Time,
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