In 2022, I celebrated my sixth year in the stock markets, marking my most successful year to date. As always, I've embraced opportunities for learning and personal growth as an investor. Over the past 12 months, my investment approach has undergone further refinement, and I'm eager to share the valuable insights I've gathered. In summary:
Constantly reading and searching
I am not a person who sits down on January 1th and makes a plan for the whole year, I am constantly reading and analyzing businesses. I watch news, read articles, publications made by the companies and the moment I spot something interesting, I sit down and I analyze the business in details. Normally I do not stop there, I continue with analyzing the all companies in the sector the company operates. If I like the company and see potential in it, I go and buy some shares, usually in few transactions spread in few days or even weeks, I rarely buy all shares in one day. So, what I am looking for in a business?
For what I am looking in a business
When I pick a company for analysis, I start with reading the last quarter's "activity report" published by the company, I do not start with the "financial report" as I was doing in the past.
By reading the "activity report"(in Turkish "faaliyet raporu") I am trying to understand the business, who are the majority shareholders, who runs the company, whether they have plans for new investments, what affects the sales of the company, main expense records, etc. In short, as Warren Buffet is saying, I am trying to understand the business not the stock.
Then I continue reading the "financial report" and financial statements(the three statements: balance sheet, income statement and cash flow). I look at records like: margins, debt level, interest rates of debts, if there is any, free cash flow, export share of the revenues, cash requirements of the business, minority interests, profits, etc. also how these records are changing in each quarter is very important. I have an application(in the picture above) which I have build myself an where I keep data about the companies, I also keep notes about the companies there, so next time when I look at that company I already have many things logged as information.
In my application I keep financial data for roughly 5 years back on quarterly basis. By looking at the financial data quarter by quarter, an experienced investor easily understand whether this company is running well or not. Beside these reports I try to get information from the internet like: interviews, various news, articles written about the company, analysts reports, publications made by the company, etc. Also I check what are the products of the company and who are the customers. Some businesses are very simple, but most of them are very complex and it takes significant time to understand them.
Thinking as a business owner
After I complete with all listed above, I ask myself:
- if there were no stock market and I had to buy the company from its owner by visiting his/her office, am I comfortable buying this company with intention to hold it for years? Let say 20 years.
I try to view myself sitting at company's office, or going there every morning as an owner or some kind of a manager. I ask myself:
- would I feel comfortable holding this business?
- do I consider it as a good business?
- if I wanted to found a business, is this business fits my criteria of a good business?
- would I be proud of having and running such company?
If all answers are positive, I go and buy some shares.
Take advantage of short-term opportunities
With the process described above I could spot the best businesses in each sector. However my process does not end there.
Some part of my portfolio is allocated, there is not specific percent by roughly around 50%, to short-term investment opportunities. From the state of the economy, policies of the government, central banks decisions and forecasts, and things like that I am trying to estimate which is the sector or sectors which will be affected positively in the next 6 or 8 months. In 2022 it was obvious that it will be airlines, tourism and then with the start of the war in Ukraine - the energy and electric producer companies. So I invested huge amounts of my money in the best companies in those sectors, all went very well.
Normally I hold 5 positions, in times when it is hard to find good companies with high growth potential, my portfolio could shrink up to 12 companies(my record is 13 for a very short time) but it does not happen often. Also the size of each stock is not equally weighted. I mean, if I have 5 stocks, each stock does not have weight of 20%. In most of the cases one or two stocks comprise 40%-50% of the portfolio, when I find a good and cheap business I go big, really big. There were times when I had only one stock in my portfolio, it happens rarely but it has happened twice in the last six years.
Stock and the business
With every passing year, I look less and less at the stock price, technical analysis or things like P/E, P/B, EV/EBITDA, etc. I am not saying that they are not important but I believe that what really gives value to a business is:
- it's products compatibility strength in the market,
- position in the market,
- management quality,
- sales robustness,
- debt/cash allocation,
- reinvestment requirement,
In the long term the stock price is moving in correlation with the earnings of the company but for a period of few years they could diverge a lot.
For new investors
This method of investing has brought me roughly a +24% annual return(in EURO) in the last 6 years, in total +364%, while the index of the market in that period returned in total +26%. In these six years my portfolio went down around -50% twice so if you are having such cases know that it is normal. Good companies always recover, have faith.
If I had the knowledge(I had now) six years ago, that profit number would be a lot higher. It took me roughly three and a half years to reach to a level when I started feeling comfortable investing. For you it could be different but if you are new in the financial markets and loosing money or having tough period, give yourself some time and know that if you put enough effort and time in this endeavor with time things could change for better. Keep reading and trying new methods. Having friends who are in the game already also helps. The experience weight more than anything, it just takes time.
I would like to add that, I am not arguing that this is the best method for investing, I am constantly learning and my process is still changing. I could be doing something completely different after a year. I also make a lot of mistakes and my analysis are not always correct.
The process I follow is also determined by the size of my portfolio and the market I operate in. If I was managing 100 million euros, most probably I would not bother changing my positions that often. Right now I am in a kind of a rush and also the amount I manage is too small and I guess my process will undergo some changes when my portfolio reach one million euros, which with the current pace, I expect to happen somewhere in 2025.