Finding your personal investment style
This post will be a basic guide to how you find your personal investment style, about active and passive investing and finding your leverage in the market.
As they are different ways to build a house there are different ways to invest. While the risk profile I talked about in my previous postss is definitely important, more profound questions need to be answered first. In order to make this easier on the eyes I tried to channel my inner artist and created a quick flowchart. Keep in mind that this chart should give you an idea where to start from rather than something you would follow blindly. If you are unsure if you actually want to invest I recommend you have a look at “The risk of investing” and “Why investing IS important” before you get started otherwise this might be confusing for you.
As seen in the flowchart I tried to break down the decision-making process into 6 steps. I will explain them and then I will write an article about the actual process where I try to evaluate this from a real life experience with actual stocks. I will focus on the Y=Yes decisions.
1.Do I want to invest actively?
So basically you have to figure out for yourself if you want to be concerned with your financial investment strategy and play an active part in it or if you don’t. For the latter, invest into indexes (ETFs). There are several guides out there for index investing. However due to the nature of this blog I won’t focus on those (maybe later).
Now there are two ways to invest actively. The fundamental analysis of an investment and the technical analysis part. Whereas the fundamental analysis focuses on the investment itself (metrics) the technical analysis only focuses on the share price development. Technical Analysis claims that stocks might follow certain patterns which can be recognized and taken advantage of. I also touched the subject in “The risk of investing”, however, we focus on the fundamental analysis.
2.Do I like to think about specific company’s/industries to invest in?
If you invest actively this is where to start. Walk around with your eyes (&mind) open and try to indulge in the world around you. Talk to people and try to find out what concerns them or what they like to do. The more specific the better. For example if you noticed the more and more upcoming term “Netflix and Chill” you could have looked into the emerging streaming business.
Anytime between 2009 and 2015 and even later would have been a highly profitable entry point. I picked this example as it obviously is one example most of us would know, especially the younger generations. This can also be a good clue. Talk to younger people as they are often way more in tune with what is happening from an emerging market perspective.
3. Pick something & develop a hypothesis for your investment
Lets keep the Netflix example. The hypothesis would be that streaming will replace watching television in the coming future, especially due to the on demand feature.It could be argued that this might be a fact nowadays rather than a hypothesis but bear with me. Try to figure out who the competitors are and what they distinguish from each other.
Also you have to get a basic understanding of their business model. For Netflix this is fairly easy. They try to get lots of subscribers. The amount of Subscribers times their average service price is roughly their revenue. If you can’t explain to someone in maybe 2 minutes why your hypothesis could work, then you should reassess it.
4. Do I want to follow-up on my investment ideas (read related news)
This be an extension of part two. If you have a hypothesis but don’t want to follow the related news it makes no sense to invest. This would be more like gambling rather than making an objective decision. Try to read industry related news from time to time and/or subscribe to information services on your preferred social media like Facebook or Reddit.
5. Use metrics to compare and evaluate if they fit your investment hypothesis
So, we have the stock in question figured out: Netflix. There are two type of metrics to look at.
- The general metrics for the stock their competitors and their industry.
- Financial metrics like PE-Ratio, EPS, forward PE and forward EPS, Market Cap and whatever else you prefer (if these basic metrics don’t mean anything to you read “Neat finance formulas”)
Who are the competitors? A quick google search revealed that would be Amazon, Hulu and HBO (although HBO is basically a cable company).
- Netflix: 125 Mil. subscribers
- Amazon: 100 Mil. Amazon-Prime subscribers, how many use prime-video I couldn’t quickly get from a google search but lets say 40% (this number is a personal estimate just from my gut)
- Hulu: 20 Mil. subscribers
- HBO (bought by Walt Disney recently): 142 Mil. subscribers
Additionally, look into how many subscribers a company makes on an annual basis, what their average service price is, in how many countries they are represented and if they have additional advantages (like offline watching) or disadvantages (like advertisements). This is just an example of stuff you might want to look at. Use your time wisely. It is often enough to look into the financials and read a few articles about said investment.
6. Buy the stock/industry ETF
So if your data and research fulfils your hypothesis that’s when you would like to invest. If you have the feeling that your hypothesis still works but the investment in question is too high-priced at the moment (e.g. rose too quickly in the past or has a high PE-Ratio) then you have three opportunities.
- buy it anyway
- cost average into it (buy small portions over a bigger timeframe to even out price volatility while keeping in mind your transaction fees)
- wait for a better entry point
While there are definitely some tools that MIGHT help you finding a good entry point it comes down to your personal risk profile and your conviction in the company.
To sum it up:
This might look like a lot of effort to find an investment (and it is). However, you don’t need to do all this work. Often there are already good investment articles about your hypothesis written and the depth you invest into the research can vary as long as you think your investment hypothesis holds. Once you have some experience you can get a good grasp (although on a superficial level) about certain company’s in maybe five minutes. What you do with your insight from there is up to you.
Also, try to find something that gives you an advantage. For example, if you are extremely into smartphones or biking have a look into those markets. And even if you don’t find a juicy stock you might have figured out an industry which fulfils your hypothesis. In this case look e.g. for an ETF that includes your hypothesis-sector.
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