Stocktake: improving my process

The blog has been up and running for a couple of months and I’ve had a few thoughts for how I can improve its presentation and along with it my own investing process. The two go hand in hand.

What can I improve?

One rather trivial thing is the presentation of the website. I have reorganised it a bit, including adding a menu on the right categorising previous blog posts so they are easier to look through.

More importantly, I’ve thought about how to improve the transparency and clarity of my own investing strategy. My strategy has two stages. The first, more resource intensive, stage is to construct a watchlist of the highest quality shares I can find, by making an assessment of their quality entirely independently of their share prices. The second is to then use that watchlist to identify which shares to buy when funds become available (on the basis of momentum, quality and valuation). Funds become available when an existing holding meets my fairly mechanistic rules for when to sell (generally profit warnings or reversals in momentum).

I think there are two issues with my implementation of this strategy at the moment:

  • I currently only write up a review of a share’s quality when I make a purchase rather than when it is added to watchlist. Because of this how my watchlist is generated or amended is not clear or consistent. In practice what I am actually doing is making a very shorthand assessment of quality at the stage where a share joins the watchlist and a more thorough one only if and when it joins the portfolio. Given my time constraints this makes sense – I don’t think embarking on detailed assessments of every share on my watchlist is feasible or necessary. However, I think it would help for me to acknowledge and clarify the process for generating and improving the watchlist.
  • I currently only report on the the share I ultimately choose to join the portfolio. Because of this it is not clear how I choose from the 40 odd shares on the watchlist. I think it is crucial to acknowledge that the more practical and important question when deciding what to invest in is not whether an investment is a good in an absolute sense but rather whether it is better than the alternative choices available. I am concerned that my process for choosing a new candidate from the watchlist is a little haphazard in practice. It’s simply too difficult to choose between 40 options without breaking down the choice a little. I think more consistency and clarity around how I do this is needed.

I hope that reporting on these issues more clearly will not only improve the blog but will also improve my investing process and my returns directly.

How can I improve?

The main improvement I have thought of is to more clearly record my shorthand assessments of the quality of the various shares on my watchlist. I have broken down how I look at quality into a simple analytical structure previously – I can use this to score the different dimensions of quality of the watchlist members in a systematic way. The result is a simple spreadsheet.

Using this spreadsheet as a record, I intend to review my watchlist periodically, including:

  • Considering possible entrants to the watchlist more systematically as I pick them up in my screens
  • Considering certain watchlist members in more detail (e.g. where they score highly or when results are published recently).

I can also use the spreadsheet to score the momentum and valuation of the watchlist members. This can make it easier when buying a new holding to narrow down the list of 40 to a handful (e.g. 4-5) of potential candidates and consequently to explain why I have chosen a particular candidate rather than any of the alternatives .

I think  a spreadsheet like this is a useful way of recording my thoughts on the relative merits of different shares. To be clear the scores on the watchlist spreadsheet are just a simplified record of my thoughts – I intend to use it as a visual aid rather than a means to mechanise my process.

I have already created the spreadsheet and it already seems very useful (indeed the discipline of filling it all out has caused me to rethink my opinion of certain shares where previously my assessment had been a bit patchy). I will report on how the spreadsheet works (and provide it) in my next post.

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