Wednesday, 21 November 2018

The Investment Checklist for Stock Picking


For most of the retail investors, investing in few and diversified mutual and index funds will provide a good long-term return. That approach will require a minimum time and effort from an individual investor and should achieve a satisfactory capital growth if the investments are held for a long-term.

However, if you do want to carry out your own stock picking to achieve a market-beating return, then an investor should have his or her own checklist before purchasing any stock.

I have created my own investment checklist and will go through each of the main components in the detail. This is not a final checklist and I am always trying to find other indicators that will help me to choose a better investment.


1) Return On Capital Employed (ROCE) to be at least between 15-20%, averaged for the past 5 years

ROCE is a profitability ratio that measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed. Higher the number, better its profitability. In a current low-interest environment, where average return on a saving account or from a government bond is yielding 2-3%, I am looking for a company which provides a good return (15 to 20%) compared to the safe but low return from government bond.

ROCE number can be calculated using a company's financial reports or can be obtained easy from websites such as MorningStar.com.

2) No debt or low debt: net gearing is not more than 20%

In an ideal investment, I'm looking for a company which doesn't have any outstanding net debt. However, for a time to time, a company may borrow capital to finance an acquisition or to finance an expansion project. 

I like to see a gearing ratio, which is a ratio of owner's equity to borrowed funds, not more than 20%, as this will give enough capacity for a company to service its debt obligation in severe economic conditions. You can also use Free cash flow to debt ratio to determine the company's capabilities to pay down its debt.

Net gearing ratios for Utility companies are generally higher due to the regulatory framework under which they operate and hence this rule doesn't apply to their valuations.

3) Company management does talk about their mistake

As companies are run by people and not by computers, it is normal for a management team to make a mistake running a company. This could be related to misallocation of capital to a failed project or an expansion or an issue with a business acquisition.


The management always has more information about the company than the investors. And, hence, the management can hide a previous or an ongoing issue to the public and it would be very difficult for an individual investor to find out about this issue until its too late. Hence, I would like to see an honest management team where they are not hesitant to admit their mistakes in annual reports, conference call or in other public forums.

4) Positive Free Cash Flow (FCF) for at least last 4 out of 5 years

In most of the companies, the net income doesn't normally equal to a free cash flow number. Therefore, positive FCF numbers for the past few years will indicate a company's strong ability to generate cash from its profit.

Ideally, a company should have a long history of free cash flow generation for 10 years and an ability to increase cash flow every year. However, it is possible that for a short-term, a company may spend cash generated within the business to expand its products or services and hence may have 1 or maximum 2 years of low or negative cash flow. But, in a long-term, the company's FCF capacity will determine its valuation.

5) What is an exit strategy?

It is very important for an investor to determine the holding period of a stock before he or she decides to buy it. If a company fulfils all of the above 4 criteria and an investor understands the company's competitive advantageous position in the sector, then the investment can be a part of the portfolio for a long-term (5 to 10 years).

However, if the company doesn't fulfil some of the above-mentioned criteria or it fails after a couple of years of holding period, then the investor will need to carry out in-depth valuation again and then to decide whether the company should be part of the portfolio or need to be sold.


Important Information: This is not an investment advice so you need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.

Wednesday, 31 May 2017

Long-term Investment Portfolio - Part 2

In this second part of my investment portfolio blog, I will give you details about my investments in Active mutual funds. Over the last few years, I've been adding and removing a few mutual funds in my portfolio as I wasn't finding the right balance of enough diversification and at the same time, concentrated portfolio because I didn't want to stretch my time to look after 10s of mutual funds regularly. I think I have now completed the construction of my core holdings and will share my ideas here.

My investment philosophy is to buy and hold. And, hence, naturally, I'm drawn to mutual funds where investment managers have a similar style in their investments, either in stocks or in bonds, with a very low turnover rate. Currently, I'm holding good position sizes in each of the below-mentioned funds.

As with any investment decision, it is very likely that I may change my view on these funds in the future and increase or decrease my holdings. It is also possible that these funds may get a new investment manager or a different stratergy that may change my original thesis. And, hence, you should need to do your own research before you decide if any of these funds are a right choice. I have given a percentage allocation recommendation for each of these funds where I have assumed that I have only these assets in my portfolio.

1. Fundsmith Equity Fund
Terry Smith, chief investment manager, and his colleague, Julian Robins, run this fund with 20 to 30 share holdings. Their Annualized Rate of Return since 2010 has been +19.8%, which is exceptional when you compare it to Index funds or return by other active managers in the similar asset class. Of course, there is no guarantee that the return will be repeated for the next 5 or 10 years, however, the investment team is sticking with their investment philosophy and I'm very optimistic that the fund will generate a good rate of return in the future. I would allocate 25% of my investment assets in this fund.

2. Lindsell Train Global Equity
This fund is similar to Fundsmith and investment managers hold 20-35 companies in this mutual fund. The mutual fund company, Lindsell Train, has a few funds in their portfolios, however, this Global Equity Fund combines the best ideas from their other funds and bring US, Japanese, UK and European companies in one fund. The company publishes very detailed monthly reports and annual report is very educational as well. I would allocate 20% of my savings to this fund.

3. Stewart Investors Asia Pacific Leaders
The above two funds invest in the developed market only. For those who are looking to invest their savings in China, India, etc 'emerging market' companies, I found this fund is the best in class. Similar to Fundsmith and Lindsell Train, this fund has very few holdings and invests in large and mid capitalization equities in the Asia Pacific region (excluding Japan). I would allocate 20% to this fund.

4. Marlborough Global Bond
Marlborough Fund Managers' founder Geoff Hitchin launched this award-winning Marlborough Global Bond Fund in 1987 and remains at its helm today. The fund invests in bonds issued by governments and companies around the world. Portfolio turnover rate is 20.52% and the fund is unconstrained in its allocations to countries and regions. I would allocate 20% of savings to this fund.

5. MandG Emerging Market Bond
At least 70% of this fund's asset is invested in bonds issued by the governments, government agencies or companies of emerging market nations. The fund is currently offering more than 5% of underlying yield. Compared to the above 4 funds, however, this fund may have wider price fluctuations in a short period but this shouldn't concern a long-term investor. I would allocate the remaining 15% of my asset to this fund.

Important Information:  This is not an investment advice and hence you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.

Sunday, 7 May 2017

Long-term Investment Portfolio - Part 1



In this blogpost, I will go through my Investment Portfolio, focusing on Index Funds. As a long-term investor, my aim is to preserve and grow the real value of my assets. World's most renowned investors, including Howard Marks & Warren Buffett, suggest low-cost tracker (Index) funds as a best for retail investors to invest their money in. These funds should be used for a long-term investment (5-10 years) and not advised to do short term trade in and out.


Most of the below funds are available as an either income or accumulation share class for the UK investors. Furthermore, most of the funds are also available with another layer of discounts as some of the investment platforms have negotiated further discounts on already low-cost ongoing charges (OCF).
This is a low cost tracker fund which tracks the performance of the Markit iBoxx GBP Non-Gilts Overall TR Index. The OCF for the fund for a retail investor is 0.16%. The fund is currently yielding just above 3% and gives a good exposure to world's corporate bond market.
Legal and General Investment Management has done a great job of providing very low cost index funds across the major investment sectors. This is an Equity index fund tracking the performance of the FTSE World Europe (excluding UK) Index. The Index consists of a broad spectrum of European companies and currently advertised at OCF of 0.12%.
It is a well known fact that most of the investors have a home bias when it comes to investing their savings. Being aware of that and also knowing that a few of my individual stock investments are within FTSE 100 companies, I have a minor portfolio holding in this fund.
Again, this is one of my smaller portfolio holding. This fund provides tracking of FTSE 250 Index and has OCF of 0.18%.
This fund replicates the performance of FTSE USA Index. This index has a few more companies compared to SP 500 index. For the UK retail investor, I found that this fund provides the lowest OCF compared to an SP 500 index fund and hence I have selected this fund over an SP fund.

I do not have any emerging market index tracker funds. There are few reasons behind this as I think most of the emerging market indices do not correctly represent emerging or developing markets. The second reason is that I do not believe that those markets are efficient or free from inside trading.

I hope the above list will give you a good starting point to start constructing a balanced portfolio and than add an active investment funds. It is possible to reduce the number of Equity Index funds from four to a single fund by investing in an International Index Trust if you do not want to allocate your funds to these individual funds.

I will write a separate blog featuring my investments in Active Mutual Funds.

Important Information: I do not give investment advice so you need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.

Friday, 18 March 2016

Value Investing



Few years ago, while reading an article about various investing methods, I came across the value investment approach, which was first introduced by Benjamin Graham, and made popular by Warren Buffett. Those who are not familiar with either of them, I would recommend these books: 'The Intelligent Investor' by Benjamin Graham, and either 'The Snowball' by Alice Schroeder or 'Buffett' by Roger Lowenstein.

At the heart of the Value Investing, there is a simple concept of buying a share in the company where its shares are selling at considerably less price than company’s total net asset (generally, value of its tangible asset) value and sell the share when it reaches near to that value. Of course, there is a lot more investigation required by an investor to find out a company's valuation and where the other part of the value investment principle, of 'margin of safety', becomes invaluable.

If you would like to start investing in the UK and EU based companies or want to start your research, I found below websites are very useful:

https://www.fidelity.co.uk [Mainly mutual funds]

http://www.hl.co.uk [Mutual funds and shares]

https://www.halifaxmarketwatch.co.uk [Mainly stock markets]

It has never been easier and cheaper to start investing, especially true for the UK residents. One can start investing in the stock market (or in bonds, gold, etc. for that matter) with as little as £25 per month with low management fees.

Some of the UK based Mutual fund managers I follow are:

http://www.lindselltrain.com [Fact sheets & insights]

https://www.fundsmith.co.uk [Annual reports and videos]

http://www.sanford-deland.com [Fund based upon Buffett's investment methods]

https://woodfordfunds.com [Diverse investment although not a value investment]


and US based websites:

http://www.berkshirehathaway.com [Annual reports and letters]

https://www.oaktreecapital.com [Memos from Howard Marks]

http://www.theinvestorspodcast.com [Books reviews, interviews & Podcasts]

I leave you with the below quote which caution a potential investor before buying shares in a 'turnaround' company:

"When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact."
- Warren Buffett



Important Information: I do not give investment advice so you need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.


Wednesday, 21 November 2012

Passion for Career, Hobby or for Life

We often see most of our friends are being passionate about their careers. Not all career opportunities give hefty financial returns. Still, most people are very ambitious about their careers. Almost everyone wants to reach to the "highest" position in their career ladder.

Some of us divert this passion to achieve something totally different. Many artists love their skills and sometimes go beyond anyone's imagination to achieve their dreams. They create astonishing art even their career doesn't bring financial or social stability. While others, devote their entire life for the service to others.

I have a passion for day-to-day life. It's certainly not a struggle for me to survive a day. However, I like to make the most out of everyday. For some unknown reason, I "don't" have any dream which I want to achieve in my life. For me, living a life is an ultimate satisfaction. That doesn't mean that I don't think about short term goals. I do. And I'll try my best to fulfil them. My passion is knowledge, I like to know more, want to understand everything there is in the nature to understand, want to live in the present time and enjoy the most out of it. 

As Gautama Buddha has said,

"Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment."

We can't change what has already happened in the past. In the present moment, we can't do anything to influence our faraway future. Hence, I think the best way to enjoy the life is to be passionate about the life and enjoy the current moment.

Most people have few goals in their life, they may want a managerial post at some point in their career, earn thousands if not millions of pounds, have a luxurious life style, own the costliest technology products, have a big and a beautiful house, etc etc. For me, I have none of these things as goals. I believe that if I can be here, without thinking about the future and planning ahead for 2-5 years, I think I can be a good position with just living a life without targeting any of these so called "goals". Money does bring happiness. More money also brings more happiness and more ownerships of the objects. However, there is no end to this acquisitiveness.

One should feel satisfied with what he or she owns. We should be thankful for the food and shelter. We should be more focussed towards helping family and community. We should share knowledge and have a desire to learn more. By living a simple life, we can achieve more.

Wednesday, 21 April 2010

Selfishness


I see everything happening in and around the world, always have some resemblance in our personally life, too. The recent volcanic ash incident brought various political, psychological and scientific thoughts in my mind. Until last Thursday night, everything was fine on the ground and in the air in the UK. But, when I tuned into news on Friday morning, I found that due to ash clouds from Icelandic volcano has caused airspace closure and there is no flights to and from UK airports. The situation worsened during the weekend as that ash covered most of the Europe and literally whole Europe was under no fly zone.

The weirdest part of the whole incident was that everything felt very calm and normal on ground level. There wasn’t any single thing I noticed different in day-to-day life. But when I read more about the affects of airports closures, almost no commercial flights services and economic effects of it in almost every parts of the world, I released how severe the problem was.

We all know that we are helpless against nature’s will. We don’t have knowledge to predict such an event neither we have power to stop such a thing happening. But, we are definitely strong enough to help people after this kind of incident. And, I have seen that UK government has helped people and authorities in such events, more recently in earthquake-hit Haiti, Southeast Asia when Tsunami struck, etc. But, I see very less help on this case when hundreds of thousands of British people are stranded all over the world. There has been some development in bringing these people back to home, but it’s a very little effort when you know how much resources British government has. If government really cared about their own people, they just could use their unused military aircrafts, they could use money to hire private aeroplanes so that they can take stranded passengers from UK to their destination country and bring British people back to home. But, they aren’t doing such a thing. I see government is letting commercial Airlines’ to sort this issue out. And, we all know that Airlines are not in business to help people, they are in business to make money.

All these lead to me a typical human behaviour. We do not act very fast and with confidence when our loved ones asks for our help or when they ask us to be there in their side in problem. This is a very common but a bizarre psychology that I have seen in people. Why some of us act very fast to help someone else's issue and why we hesitate to help our own people? When a person or as in above case, government, justify this by giving reason that because they are our own people, they will understand why they have given them second priority while placing something else before them. I strongly disagree with that. How can we expect British people to understand why government is not acting to bring them quickly to home while sending millions of pounds to a country where they do not have direct connection? How can a person understands a reason when his or her loved once put her or him second and gives a priority to a third person?


I believe that if we can take care of our own family first, and if everyone does so, then the whole world will be a far better place. Sadly, most people consider this kind of act as selfish. But, I don’t see that way. I firmly believe that we have to be on the side of our loved ones first before we think about how that decision will affect anybody else. Even if that means that we may not be able to satisfy everyone but at least we will be able to make our loved one happy. And, if we will be able to do so, then I am sure that everything will work out for the best at the end for everyone.

Friday, 16 April 2010

Lisbon visit

Portugal was a second country I visited in mainland Europe. As I was here for a business purpose, I didn’t get chance to visit any other parts of Portugal apart from its main city and capital Lisbon and its surroundings. Lisbon is located on the coast of Atlantic Ocean where river Tagus flows into the ocean. Although it was almost end of November, the weather wasn’t very cold as compared to the UK and apart from 1-2 days of light rain or shower, my 7 days worth of time went good.


My hotel was located in middle of historic old town and commercial district. Hence, it was very convenient for me to go to my work place and sightseeing in the evening and in weekend. From my hotel to the company, the journey was about 15-20 minutes ride by Taxi. And, that was the most weird and shocking part of my daily activity. And, the reason was Taxi drivers. Unlike other rich European countries, Taxi fares were very cheap and I found that most of the Taxi drivers are from poor financial background. And, there was a language issue as well with my conversation with drivers. Hence, each trip to and from company had different experience with drivers’ behaviours, towards me and in general, as well. Later I found out that it was due to shorter trips. As this was very short trip between company and hotel, the average fare I paid was around 5 Euros. And, most of the drivers didn’t like that et al. But by law are required to take these short journeys, they weren’t happy.
  
Lisbon’s old city has a quite a few historic buildings. Most of them were built after 1755 as major earthquake in that year demolished most of the city. New city was built afterwards and due to visionary thoughts from then equivalent to Prime Minister, Marquis of Pombal built the city with larger space between buildings and hence you will find very wide roads and good size pavements, which are very unlikely to see in any other larger city in whole Europe. Portuguese are very proud of the achievements of Vasco de Gama and they have honoured him with creating a fantastic Vasco de Gama sports centre near the coast. In the nutshell, Lisbon is a city with modern architect, nice coastline, cheaper than other European cities and also a great place for shopping.

Friday, 10 July 2009

Honesty

When I created this blog, my purpose was to keep record of my thoughts and my views on various life changing issues. I have to be honest on what I write here because I do not write here for the sake of other people but I write here so that in the future when I read these articles, I can understand who I was at that point and where I have come from there.

Most of us are afraid of change. Some of us are also afraid of expressing our real thoughts on various subjects. When we think about ourselves how we were couple of years ago, then we generally realise how wrong or right we were at that particular instance. We see same thing differently at different stages of life. Due to that, it is obvious that we develop certain feelings towards daily issues that we might not have done so if we weren’t gone through certain changes in our lives. There is nothing wrong with believing something that is totally opposite to what we believed few months or few years ago, as long as it doesn’t contradict with the common sense and our self believe doesn’t harm anyone.

Life teaches us all sorts of things. Each of us is unique and live in different environment, sooner or later; we all go through life altering experiences. Those of us who dare to think about religion, philosophy, science or nature and asks questions on any of these subjects, gets answers at some point in their life. Some people do not bother to think about these basic issues of life while some people do but hesitate to express themselves thinking other people wont understand them. But if we cannot be honest with ourselves, we cannot live the life as we suppose to.

Wednesday, 27 May 2009

Meaning of a life

One of the most important questions we ask ourselves all the time is that what is a meaning of a life? Life is mysterious with plenty of strange things around us. The complexity of religion and science puzzles most of us, who are capable enough to think about the meaning and seeking for an explanation about the purpose of human life. Why cant we just keep life simple and make our own purpose out of it for living?

When a newborn baby dies after few hours, what should we make of her purpose? Did she do something wrong in her previous life that she even didn’t deserve proper life on earth? Or, was she really so good that god wanted her back to the heavens. It is common in other animals that newborn animals die and we treat these deaths simply as a nature’s survival principle and its result. So, why we have different feelings and perception about life for humans and animals?

Most of us find our own purpose and meaning of life within our work. Doctors want to save people’s lives, and that’s what they think their purpose is. Engineers want to create new instruments and make people’s lives better. And, criminals want to create chaos in the society and that’s what they see as a purpose of their lives. But, is it really what we suppose to do? Shouldn’t we looking for answers to the basic questions, shouldn’t we looking for a purpose and meaning of our lives on earth?

Wednesday, 20 May 2009

Is it right to be wrong?

In the population of more than 6.7 billion people, the significance of an individual person is very minuscule. Our act and knowledge influence only few people and outside of professional and social network, an individual person is just a stranger to others. What someone has to do so that millions of people can notice him? The act should inspire other people to do better things.

The world is full of bad people. It is still a living place because of hard work done by good people. Yet, those bad people influence our everyday lives and make more impact in the society. Those people who make and try to keep world a better place often do not want any publicity and they are our unsung heroes. However, in order to inspire our new generations, it is also necessary to recognise these people. And, how someone can make a positive impact on people’s mind? What one has to do to influence millions of people to move forward in positive direction?