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My Stock Investment Philosophy

While I have discussed my principles, experiences and learning as an investor through various posts in the past, some readers have asked for everything at one place.

So here is my investment philosophy for stocks…developed through practice over the past nine years…all at one place.

You might not agree to some of the parts of this philosophy note. But as I said, this is ‘my’ personal investment philosophy, which suits my personality as an investor. And you are completely different from what I am.

Anyways, here I go…

My Stock Investment Philosophy

1. I hold a mix of large and midcap/smallcap stocks in my portfolio, with a majority in favour of the latter (midcap/smallcap stocks). I am constantly in search for emerging blue chips and not the established ones. That is why I invest largely in midcap/smallcap companies. I believe that with time on my side, and the effort I put in to identify my stocks, even if 4 out of my 10 stocks go bad, I will still do well in the long run.

2. I am not after the ‘next Infosys’ (if it happens, I’ll count myself lucky)…but I believe that I (or any small investor) can do very well by identifying, buying, and holding a good proportion of carefully-selected midcap/smallcap stocks in my portfolio.

3. I don’t buy any stock whose underlying business I don’t understand. I have lost 50% to 200% returns in the past by missing on opportunities because those companies did not fit my style of investing…my circle of competence. But I have no regrets because the ones I hold have more or less made up for that…and I sleep peacefully at night knowing what makes up for my stock portfolio.

4. After the quality of a business, I give the maximum weightage to the quality of the management. I need to have confidence in the management of a business that I own. I like managements that put shareholder value above any superficial or selfish motives.

5. My preferred order of actions is to first assess the long term prospects of a business, then form an opinion of the management before finally taking the decision to invest if the share price is sensible.

6. I hold around 12 to 15 stocks in my portfolio. Here is a checklist I use to identify stocks for my portfolio:


7. Some specific numbers (and their long-term trend) I look for in a company:

  1. Sales and profit growth (level of growth plus consistency of growth)
  2. Return on equity. This number indicates whether a company is using its capital efficiently or not. I look for companies consistently earning more than 15% RoE.
  3. Debt to equity. I hate companies that have consistently had high debt to equity ratio (usually more than 1:1). Alternatively, I love companies with zero or minimal debt, simply because such companies can never go bankrupt.
  4. Capital intensity. I like companies that don’t require much of additional capital year after year to grow their businesses. This is because for a company that requires consistent infusion of new capital to grow its business, to take on debt on its books or to issue new shares becomes a necessity after some time. Both these factors (more debt and issue of fresh equity) hurt existing shareholders.
  5. Dividend (rising and consistent). I like companies that pay rising dividend year after year. Though I am not against those that don’t pay at all, some dividend is always appreciated.
  6. Free cash flow. A company that consistently generates free cash flow (what remains after paying off for everything, including new capital expenditure) is always a safe bet.

8. It takes me hardly a few hours to analyze a company, but it takes me days or sometimes weeks to make up my mind whether to buy that stock or not. This is because I believe that my heart (emotions) can often play a bigger role in my stock selection than my mind (rationality).

9. I calculate the intrinsic value of a stock I’m interested in by using several methods:

  • Price to earnings
  • Price to book value
  • Graham number
  • Earnings power value
  • Dividend discount model
  • Discounted cash flow

You can read my explanation on these methods in any of the StockTalk reports I’ve done till now.

I buy a stock only after I’m comfortable with the business (as described above) and only when the stock price is less than 65-70% of the stock’s intrinsic value.

10. I sell my stock(s) when any (or a combination) of these conditions are met:

  • When I realize that I made a mistake in buying a stock.
  • When a stock gets overvalued (its price moves much higher than its intrinsic value).
  • When the business model of a company deteriorates.
  • When the cash flows of a company deteriorate.
  • When the debt on a company’s balance sheet crosses my comfort level (usually 50% of equity) and is expected to remain there for some time.
  • When something happens to cast doubt on a company management’s integrity (like a bad diversification, or an overvalued acquisition).
  • When the return on equity falls below 15% with no sign of improvement.
  • When the stock surges at a rapid pace without any change in the underlying business fundamentals.
  • When I identify a better opportunity (I sell the worst stock from my portfolio and reinvest the money in this new opportunity).
  • When I need money for an emergency, which is more than what I’ve accumulated as an emergency fund (I start by selling the worst stocks from my portfolio).

11. Some other rules I follow for my stock investment portfolio:

  • I am indifferent to whether a stock I own is from a specific sector…though I don’t own stocks from the energy, pharmaceutical, real estate, and textile sectors.
  • I am indifferent to whether a stock I own is in the BSE-Sensex or any such benchmark index or not.
  • My minimum holding in any one stock is 2% and the maximum is 8%.

What do you say?
So that was my entire stock investment philosophy.

What about you? Do you have your own stock investment philosophy? If yes, what is it? (You can share for the benefit of others in the Comments section below)

If you invest in stocks but don’t have an investment philosophy, why not?

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Venkateshwaran says:

    I am aware that it is not an easy task to address such a wast and wide range of audience who are of varying Age group. .For the Lay investor advice like ” I like companies that pay rising dividend year after year. Though I am not against those that don’t pay at all ” may not mean anything. Even the several methods you mention to find intrinsic value of a stock is a little heady for a person without a Financial Flair. I believe that Individual SIP (not in the hands of an AMC) is a practical approach to staying ahead of Inflation. I have seen some people with limited exposure to Financial Jargon do well by Investing in Good Stocks and staying Invested for Long. Like one friend rightly said too much analysis leads to paralysis. I look forward to more of your posts with simple to understand, practical advice and am sure many more will benefit from your rich experience. Thanks

    • Thanks for your feedback Mr. Venkateshwaran! And thanks also for your suggestions. Let me know anything specific you would like me to cover in my future posts. Regards.

      • Hi Vishal,

        wassup!!.. i have been reading ur stuff, it seems the way you invest is in complete alignment with your personality. Ed seycota said that once, if you know yourself well, success wud follow.

        I for myself am a self proclaimed investor who is not averse to trading and derivatives either.
        I don’t deal in IPOs (read ma blog on that)
        I don’t catch falling knives (Opto circuits and like, read blog) I try to anchor my bias on intrinsic value calculated bases debt capacity rather than previous achievements or 52 week, high lows.

        I believe value investing makes sense only if you have a considerable amount of money to multiply, starting with a small base will only take you so much.
        and thats where top down approach to short and long derivatives with a month long view comes in, It has helped me build the corpus required to invest in debt bargains.

        wat else I believe in purpose of life and also ed seycota’s view that you will get whatever you want from markets. Law of attraction .

  2. Anil Kumar Tulsiram says:

    Hi Vishal

    Your philosophy reflect your maturity in capital markets over the years. I hope to reach that level but I am sure it will take time. Having incurred huge losses in the past (my sell side background to be blamed or my ignorance of sound principles or whatever), I have decided to experiment with one theme at a time. Currently I am experimenting with low price to book value and low PE ratio favored by Tweedy, Browne Company and Graham. I look for the following before investing in any stock on this theme:

    1) Price to book value of less than 1
    2) Low debt to equity ratio, max 0.5:1
    3) Free cash flow history (operating cash flow – capex)
    4) High Return on equity and return on capital employed.
    5) Sales and profit CAGR of more than 15% over last 10 years.
    6) No Consistent equity dilution.
    7) Net working capital as % of assets is not unduly high. Eg I do not like companies in infrastructure space which runs on low single digit margins and where net working capital is more than 50% of sales.
    8) Company will high dividend pay out ratio is preferable. Though I am fine even where a company is not declaring dividend but utilising its retained reserves intelligently rather than just parking it in fixed deposits.
    9) Companies which are in existence for atleast 10 years. I will not invest in any company which listed for a shorter period for the simple reason that it has not experienced a complete cycle. Though some times when Companies like JRG securities are available below their net cash, I may make exception to this rule.

    On this theme, I feel some of stock brokerage companies like Geojit BNP Paribas securities are attractive opportunity currently.

    The biggest risk of this theme is avoid falling in value trap.

    • Hi Anil, thanks for sharing your philosophy that can serve as a great ready-reckoner for people starting out (or like me, who are already into) value investing. The Tweedy document on “what has worked in investing” is really a masterpiece.

  3. hi vishal..

    some things may be in common…. I stick to stocks with low D/E ratio, Promoter group, avoid fancy stocks like Aviation,real estate,good dividend yields and percentage of pledging etc.. and also price plays a good factor…

  4. Hi Vishal,
    I have been following your post regularly and appreciate your effort you are putting to educate the small investors like me and saving their hard earn money. I have been following share market for last 3-4 years and my experience is very bad so far. Now and then the so called expert give their advice on TV, they are big liers. After going trough your post I come to know about value investing like different methods of valuing the stock.
    If you can share the formulas of Altman Z-score, Intrinsic Value etc. in excel format with my email ID I will be thanksful to you.

  5. Avadhut says:

    Hi Vishal,

    One word- *Excellent*!!

    You’ve saved many years in our learning about investing through this blog. I thank you for that.

    I would like to know how do you shortlist companies asa first step.
    Do you screen them on quantitative factors first? If yes, how do you do that, I mean on which factors do you shortlist these companies and do you use any paid databases for this study or free screener tools? Can you suggest any free tools available?

    Regards,

    Avadhut

    • It’s my pleasure Avadhut! The video series I’ve started on financial statement analysis will help explain my process of selecting stocks. But here are some broader steps I use:

      1. Observe companies that I see are doing well around me.
      2. Read a lot.
      3. Run screens to identify the best performers (financial performance) over the past 10 years.
      4. Remain within my circle of competence and exclude anything and everything that’s out of it.
      5. Compare my selected companies to research deeper into the ones that stand out.
      6. Calculate intrinsic values.
      7. Do an emotional check on whether I’m biased towards a company of not.
      8. If all’s well, I buy the stock.

      Hope this helps. Regards.

  6. Ashutosh Shrivastava says:

    Hello,
    Could you suggest 10 or 15 best stocks to invest fro a long term goal of 15-20 years.

  7. Ashutosh Shrivastava says:

    Hello,
    Could you suggest 10 or 15 best stocks to invest fro a long term goal of 15-20 years

  8. Hi Vishal,

    How are you doing? Long time…

    Please do send me the link to the The video series on financial statement analysis . I am unabel to find it on the website. Thanks.

  9. Himanshu says:

    Hi Vishal,
    I want to understand in greater detail how a (1)negative FCF, (2)high working capital requirement & (3) capital intensive nature of industry impacts the stock negatively. Is their some sort of indicator or a combination of indicators which can ‘indicate’ possible trouble in advance with respect to working capital issues? Do you have some earlier posts on these with example or can you cover it in some future posts.

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