Because investing as never been as hard as now
I have been in the stock market for almost 3 years and at first, I didn’t have a clear strategy and thus I was selecting stocks based on the current trends. I was investing into trendy tech companies like Uber, Virgin Galactic, without having a clear vision on where I wanted to be in 10, 20 or 25 years. I was also doing very little research about the companies I was investing in.
After 6 or 7 months of struggle and reading blogs and books, I finally came up with 9 criteria.
Please note that this strategy is fully personal, and I recommend doing your own research, given that on the stock market almost everyone has a different strategy. You might be someone that would prefer more risks and accept a volatile stock, but I am not this person. You might want to have rapid growth and trade daily or weekly; I am not this person either.
My strategy is simple. I want to perform the minimum number of trades in my portfolio, and I want in 25–30 years to be able to live from investment using dividends.
Now that you understand my line of thought, here we go with the criteria I have. I am keeping each point relatively short in order to not lose you along the way.
1- A minimum of $500M USD of capitalizations
The advantage of this criterion is that a company that is worth more than 500M is very unlikely to disappear in the future, and it’s also a great protection against volatility, which I am trying to avoid.
2- The net income of the company must be increasing
Many people are focused strictly on revenue; high revenue doesn’t mean the company is doing well. That’s why I think it makes more sense to look at the net income. The net income is the result of revenue minus spending.
3- A 15-year of dividend yield increase
his is an optional criterion, but I try to look at this before shopping for stocks. It is always a good sign that a company keeps increasing its dividends overtime.
4- Understand the company activity and its sector
This is a golden rule for me. If you don’t understand at a high level the business of the company, just avoid it. However, I don’t need to fully understand every product or project the company is working on.
5- Payout ratio to shareholder between 30–70%
If you reach this point, you understand that I am looking for companies that give dividends to its shareholders. The payout ratio is the amount of money that the company is giving to its shareholders. Basically, I don’t want the company to keep all its money and I also don’t want the company to give away everything to its shareholder.
6- Below 50% of amount debt
This is a flexible criterion, but I always look at how much the company is in debt: above 50% I feel it is too risky.
7- Price needs to be below 20% of its latest peak
It’s nearly impossible to buy a stock at its “best price”, but there are 2 parameters you can control on the stock market: 1) when you buy a stock and 2) how long you keep it.
Considering this and looking at the history of a stock, I always try to buy the stock at least 20% below its latest peak, to avoid losses in case the stock collapses. In my opinion, it’s always a high risk to buy a stock at its peak.
8- Check and get to know the CEO
I don’t invest in companies if the CEO is a known “rockstar”; some companies like Tesla are mostly influenced by Elon Musk. Microsoft isn’t influenced much by Bill Gates anymore, and I don’t want my portfolio to be a kind of TV reality show.
For example, I watched some videos of the CEO of Merck, and it helped me understand the high-level strategy of the company.
9- Understand the risk of the investment and choice made
Investing is always risky and there are always some unknown events that can happen, but that’s the case for any investment and any choice you make, whether in the stock market, real estate or business.
I often try to understand and balance risks by having a diverse portfolio and stick to the criteria I have. So far, those rules have been working well, but it has happened that a few promising stocks failed. In my case, since I have between 15 and 25 stocks, I believe that I can make a mistake once or twice, but I wouldn’t risk too much.
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