Having an investment strategy is by far the most important step to becoming a successful investor. Before I go into why this is the case, let’s have a look at what is an investment strategy. In its purest sense an investment strategy involves defining a specific number of criteria which need to be met in order for an investor to purchase a stock. My own investment strategy includes a number of factors that I analyse against each stock I research and these include but not limited to:
1. Market cap
2. Enterprise value
3. Valuation of peers
4. Is it in the right sector
5. How many do directors hold
6. How many do top 20 hold
7. Performance of current directors
8. What are its upcoming milestones
Sticking to this investment strategy saves me from impulse buying as well as giving myself every chance of purchasing the stock at the lowest possible price.
I ran a poll on Twitter to work out where most people were when it came to having a specific investment strategy written down and adhered to religiously. The results were shocking, to put it mildly. I think it’s safe to assume that the people that answered no probably didn’t know what is an investment strategy!
A whopping 84% of people said they didn’t have a formal written trading plan that clearly outlines their investment strategy. This is a recipe for disaster as it means that
So I thought perhaps the people that participated in the poll had tiny portfolios and were just early in the game and learning from scratch. So I ran another poll to work the value of
Nearly half had portfolios valued at over $100k and 88% were over $10k. So people are risking 6 figure portfolios investing in speculative stocks based on nudges and gut feelings which is simply insane. It would be safe to say that most of these people will blow their accounts up in the near future.
I’m being really ruthless here because I was this same person when I first started investing and I blew up my account twice! So if you are in the same boat please stop investing until you have an Investment strategy in place. Start by knowing what is an investment strategy then get onto actually creating one.
Ok so you may be thinking this all sounds great but I don’t know how to put an investment strategy together. I will try and tackle this now but in reality it’s not possible to cover everything in one blog article. But use this as a starting point.
The first question I would ask is what type of investment time frame do you feel comfortable operating in? A week, a month, a year, multiple years? This is important because if say you are only willing to hold a stock for a month but the next quarterly is due in 3 months and that’s the big catalyst you are waiting for, then that automatically cancels out that stock for the moment.
Second is what is your risk appetite? There are some people who will only invest in a company unless it’s established and generating a profit each quarter. There are others who are willing to take much higher risks and invest in companies that don’t generate any profit. This is important because it greatly impacts your mindset while holding. If you are generally a risk averse person then you probably would be up all night worrying about a stock if it was outside of your risk appetite. You need to be comfortable in the stocks you hold because if you aren’t then you will be on edge all the time, resulting in emotional based decisions rather than process based.
The last item I will cover in this article is what factors about a stock are important to you? For me having well known successful people in the top 20 is important but for you it might not be. Are you looking for a company with expected short term catalysts on the horizon or long term profitable growth? If You are a trader then what indicators are you looking for in a stock. There is no right or wrong answer here and the first strategy you write down will definitely change in time as you tweak it based on results and more experience.
If you don’t really know the answer to this question you can start with the 8 factors I mentioned above. It’s also worth reviewing your historical trades and identify which ones performed really well and which ones didn’t. Was there a correlation or trend in the ones that did perform compared to those that didn’t? for example were your day trades your worst performers and those that you held for a few months your best? This analysis will definitely help you formulate your investment strategy as you may have been applying an investment strategy to the stocks that were performing without even knowing it.
So now let’s assume you know what is an investment strategy as well as have one written down. Next step is to ensure that every stock you research is put through the strategy to see if it’s worthy of purchasing. Use the attached excel spreadsheet image as a guide and list all your investment criteria’s down with a column free to insert stock codes. If you want a copy of the actual excel spreadsheet please subscribe to my email list then send me an email requesting it and I will send it through.
Then simply write down the details for each of your criteria for that individual stock and identify if this
If you can implement the above and have a written investment strategy then you have just increased your chances of long term success exponentially. Ian Cassel, a micro-cap investor and founder of @MicroCapClub that I have a lot of respect for and highly recommend you follow tweeted “Extraordinary returns follow extraordinary discipline. Don’t be afraid to say no to 99.9% of investment opportunities. You only need to find a few great companies early to beat the market and to change your life”. I love this quote and it rings true to everything we have been discussing on investment strategies above.
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