Part 5: Process or How the heck do I Invest in Equity Successfully?
5.3 Finding opportunities in real time by Fast-Tagging every stock
How do you select stocks to invest in? Is there a way to identify and manage stock opportunities in real time?
The first thing most investors think of is asking someone is which stock should they buy now? We have seen why you shouldn’t do this in the first chapter of this book. A better question is how should one find which stocks are worth investing in at current prices.
The common answer is by using a screener. A screener essentially requires you to set the criteria and it filters out the stocks that pass this. For example, if you set a criterion of “’sales growth of 15% or more in the last 3 years’ the screener will give you a list of all companies that pass this.
A screener helps create for you a shorter list of stocks to study or invest in. It has its uses. But the limitation of standard screeners is that it requires you to set the criteria and then it gives a list of stock and whatever data you chose to see. Every time you need to find the answer you need to run the screener. If you use multiple criteria in your search, you will not know which stocks have not passed which criterion.
We need a more dynamic system which can handle the fact that stocks are not static entities but are ideas that are that are constantly evolving. We need something that has a ‘finger on the pulse’ of every stock and tell us the best ideas when they are ripe for investing. And it should prevent you from chasing any and every idea and getting distracted. We need an Investing Opportunity Managing System.
Are such systems or frameworks in use elsewhere? Large companies and business leader use a framework called the Innovation Funnel Framework to manage the Research & Development ideas and initiatives.
They start with a large enough number of ideas and put them through different gates. The first gate usually rates ideas on key parameters to check whether it is worth developing further. Then teams are asked to develop the ideas that pass the first gate and see if they can pass through the second gate and then through a third one before the idea is chosen for commercialisation. This is the basic design of the Innovation Funnel Management System- a funnel with multiple...........Read More
Warning: Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
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MoneyWorks4Me method for rating and ranking mutual funds for SIP
MoneyWorks4Me rating and ranking of funds for SIP is available to subscribers only. Moneyworks4Me is not a rating and
ranking agency, however it is required that users have a way of selecting funds and building a Portfolio. The method used by it are described below to enable users to understand the logic behind the rating and ranking Subscriber will find more details on this in the
various content made available from time to time. In case you need more please write to besafe@moneyworks4Me.com
MoneyWorks4Me rates and ranks mutual funds based on the following data-driven system:
Performance Consistency: This is measure based on whether the fund has beaten the benchmark index consistently. For
this we compare the 3-year rolling returns of the fund with the benchmark for a minimum of 5 years and preferable 10
years. The period of rolling is one month and holding period is 3 years. Fund are color-coded Green on Performance when
the fund beats the benchmark more than 90% of the time. It is Orange if it beats 80% to 90% of the time and Red if less
than 80%. Funds with less than 5 year data are color-coded Grey.
Quality of Portfolio Holding: Moneyworks4Me has color-coded stocks as Green, Orange and Red based on whether the
company's performance has generated a ROCE above a threshold level (cost of capital) over 10 years (minimum 6 years) and
generated positive Free Cash Flow. For Banks it checks whether ROE is greater than 15% and sales has grown over previous
year. Stocks that perform consistently on these combined metrics are color-coded Green (min score 14 out of 20), Orange
(between 8 and 14) and Red (less than 8 out of 20).
Fund are color-coded Green provided the portfolio has 70% holding in Green stocks but not more than 10% in Red stocks.
Funds with more than 15% Red stocks in the portfolio are color-coded Red. The rest are Orange funds
Funds ranking in screeners: Performance Consistency and Quality are two parameters used for ranking funds for SIP. The
ranking as follows GG, GO, GR, OG, OO, OR, RG, RO and RR.
With the same color-coded funds, the one with the higher Average 3-year rolling returns (over 5 to 10 years), the number
that appears in the Performance tag, ranks higher.
Here is the summary:
The third tag Upside Potential is not relevant for SIP. It is relevant for lumpsum investments in Mutual Funds.
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