The Amateur Investor Ep. 16: Run it up the flagpole
A big part of starting any venture on your own, is learning to establish your own protocols. Established methodology aside, part of what’s important is knowing how to organise your own systems and the motivations behind those processes. Rock climbing is a pretty good example of this. Before a trip outdoors, I would normally lay out all the essential gear I have on the floor of my room, pick out what I need for the trip out, and then sort out essential first aid items to make sure that I come home. All this is generally done while listening to some 70s rock (lately, the Steve Miller Band).
Once the appropriate gear is sorted out, the excess is put away, then I go through the meticulous process of checking each individual piece of kit. Carabiners are inspected of any wear beyond cosmetic, chalk bags are checked for capacity and refilled as needed. Then we come to the climbing shoes, essential if you’re planning on getting anything done on the rock. First thing I do is check the sole, making sure the grip surfaces are still there and that they haven’t been worn through to the underlying leather (a surefire way to wind up falling during a move). Then I check the shoe for flex, bending it to and fro in my hands to ensure I have the right amount of flexibility. Next comes the climbing rope, every inch is checked for breaks in the rope core or any breaks or nicks in the outer sheath. Finally, I’ll pop my helmet on and check it for fit and comfort, adjusting the chin strap until I’m happy with it. Then I pack my food and water for the day, maybe a book to read and hop into bed, hoping for a good night’s rest before the day’s trials. It is quite an involved process, driven by a mixture of preparedness and not a small amount of climber superstition.
I’m working to develop a similar strategy for looking at stock investments, assembling a pipeline of appraisal that should in theory, give an order-of-operations type approach that will make things a bit less manic and structured. To throw back to the nautical analogy, we have a boat, but no clue of what direction we should be going in, where we are in the grand scheme of things or where the other ships are. In practicality, the plan is to have it set up in kind of a worksheet format with some spreadsheets to help run the numbers out. I haven’t got very far yet, but the bones of it look somewhat like this;
Overall Strategy
- What overarching trends are we hoping to take profit on?
- What is the current time frame on this?
Industry
- How much is the industry worth and what’s been happening in it recently/what will happen in the future?
- What percentage of the industry does the company currently hold value for?
Weight
- What is their Return on Equity over the last 5 years?
- What is their current Debt Ratio?
- What is their current insider ownership?
- How is their DCF over the last 5 years?
- What is their management like?
Vote
- What PE is this company currently trading at?
- What is the company’s overall reputation?
- What are the services they provide and how popular are they?
Allocation Strategy
- What percentage of allocation are we looking at?
- How long can we expect to hold the position for and what’s the exit contingent if things go sideways?
I’m hoping to assemble an actual spreadsheet to do some of the maths for me. But that’s just the bones of it for now. I’ll run it by a few of my fellow Mockers and see if they have any input for this, I might look at a few of the valuation spreadsheets that Hsuan has sent around to get an idea on how to run my own ship. I’m also planning to order some books on investing so that I can actually commit properly to the learning process.
I’ll let you guys know how it all goes.
For now,
Go slow, play small, learn the process.
P.S. I’m going to loosen up the posting schedule a bit, since this last little while I’ve been trying to put together more definitive research on topics. I’ll still try for once a week every Tuesday, but as with this and a few other posts, things may run a little late.
