My first requirement before making an investment is that I am able to quantitatively value the investment. I set quantitative revenue and earnings growth targets for my stock picks, and to try and predict its performance in 5 to 10 years. Some people believe that no one can see that far into the future, that one should just pick companies based on a given strategy (growth, value etc.), and not apply silly valuation models which creates an illusion of certainty out of an uncertain future. I beg to differ. My estimates of the future are never precisely correct, but even an estimate is valuable in helping me see if a stock is clearly over-valued right now. By making quantitative estimates of revenue and earnings, I can see when the company is not performing as expected, and then act to revise my valuation or sell the stocks. Lastly, because my valuation models take into account the prevailing interest rate and the company’s earnings, they reflect the state of the economy and the business cycle, and helps me avoid market downturns.
My second requirement is that the investment method involves a low labor outlay. I have a day job, and cannot afford to spend hours a day closely tracking the ups and downs of every stock I own. Day trading is definitely out for me. I buy and hold stocks for the long term. For me, the dream stock will be one that I buy once and hold forever; the company just keeps growing and growing, while I lay back and sip my martini on my couch.
Lastly, taking a page from Warren Buffett’s playbook, I am extremely averse to a permanent capital loss. My investment style is very conservative, and I invest only in companies with strong fundamentals that are very under-valued. I thoroughly research and study each stock I buy, taking a long time to become comfortable with a stock before I invest. Because this necessarily limits the number of stocks I can buy, I tend to put a substantial amount of money into each stock (although I am trying very hard to increase the number of my stock holdings so that I am at least moderately diversified).
