What You’ll Learn
- How to create a shortlist of stocks
- How to keep tabs of your stock
- How to do quick valuations
- The INVEST1000 portfolio revealed
- How to avoid “torpedoes” that can sink your portfolio
[update] Now you can track the live results of the portfolio with this interactive chart.
If you’re new to the INVEST1000 case study, follow the links to get the previous articles. This is the 3rd installment.
To recap episode one, we went through ways to read and interpret the Old School Value Action Score, went through a couple of examples like GME vs FB, reviewed how to create a shortlist, rules of thumb when selecting stocks, and a brief overview of allocation.
At the end, I gave Lester a mission to work out his stock shortlist for his $1000 portfolio based on the following guidelines.
In this episode, Lester has chosen his stocks which we’ll go through. We talk about why he chose them and take a broad look at the stocks he chose.
Funny as it sounds, we don’t get into individual stock analysis as it is beyond the scope of INVEST1000.
After all, Lester is new to value investing and fundamental analysis. His goal with INVEST1000 is to use value investing and quant investing.
But I do go through a short session on how to do quick fundamental checks to make sure he isn’t buying a torpedo stock that could sink his returns.
Lester’s $1000 Portfolio Revealed and Discussion
Click the image below to watch the video (2x speed makes it easier) or skip to the video table of contents below.
Video Table of Contents
[00:42] Episode 2 overview
[01:51] Lester’s shortlist method of finding stocks. What criteria he chose and why he chose them.
[08:23] Difficulties encountered during the picking and buying process
[10:15] Lester’s portfolio revealed for INVEST1000
[10:22] What is a breakout stock?
[12:50] What is a retracement stock?
[13:15] What is a bull rally stock?
[14:21] What to do if your stock drops in rank
[16:09] Portfolio maintenance guides – fundamental analysis and checks to keep up with a company
[18:16] Why you should check for market sentiment and opinions
[19:35] 1. Quality checks using the OSV web app
[24:46] 2. Real world example number 2 – Nu Skin (NUS)
[26:08] 3. Third check – Check quality models
[26:55] How NOT to invest. Don’t sink your portfolio.
Lester’s Thoughts and Process of Fishing for Stocks
Looking for the stocks following the homework actually took longer than I expected (~3 hours).
Here are some thoughts I had going through it:
- I had an initial criteria that was stifled by my $1000 capital size. So, I widened my restrictions.
- Had to add in B action score stocks, since I am not currently doing OTC’s.
- Sold my 4 initial stocks, since they started looking bad and wanted a fresh start for you following.
- I isolated 300 “A-B” action score stocks, that turned into 45 good looking stocks.
- Due to price restrictions, I ended up with 23 candidates.
- I ended up with 6 out of 23 stocks in the “Property & Casualty Insurance” industry.
- I was thinking that I might end up doing a little less than 20 stocks based on Jae’s feedback. At least, it could potentially make for some interesting returns – as well as risks!
This step didn’t work out well because I couldn’t get an initial list of 40 stocks.
My very first step was to get all Action Score grade of “A” due to having the least historic downside risk based on George Wu’s tests and analysis.
Afterwards, I filtered out any stock with a Piotroski Scores of <7.
Anything under 6 goes out.
As for exchanges, I only trade in NYSE and Nasdaq.
I want to sleep at night knowing I don’t have to time my positions due to liquidity.
The last thing in valuation, I want the margin of safety to be >=25%.
Here’s one method of screening for valuation from the OSV Online App. Adjust the sliders to meet your criteria.
As for technicals, I want the 100 SMA (simple moving average) in the daily chart to be an uptrend.
As a bonus, I would like to see the price rebounding from the bottom of a 20,2 or 100,3 Bollinger Bands. The icing on the cake would be a counter trendline being broken by the price favoring the long side.
If you’re interested in knowing which technicals I used to pick the stocks, here are examples of five stocks I chose. I categorized the stocks as
- Bull Rally
Click the images to enlarge for my notes.
I also explain this in the video call.
Back to you Jae.
This is the INVEST1000 Portfolio
This is the final list of stocks. All stocks listed were purchased and this is the latest.
You can download this spreadsheet of the stocks below in the resources section.
This portfolio is being tracked in the free portfolio tracking spreadsheet below.
NOTE: VOO was added to the stock portfolio spreadsheet as the benchmark. It was not purchased. That is why it is categorized as “watch”.
The interactive bar chart below shows you how it has been doing so far. Place your mouse over a bar to see the stock and return %.
The benchmark VOO is at the very top.
Following Up On Stocks
I am (Jae) clueless regarding technicals, so I can’t help Lester in that area.
But I did go through a quick guide of the actions to perform to quickly assess a company.
A question I get often is when to sell.
If an “A” grade stock drops to a “D” or “F”, what do you do?
First thing is to do a quick inspection.
The 4 step process I show Lester is what I do and it’s simple. Don’t try to over complicate it.
Objective: always look for red flags
- Check breakdown of each Rating and Score
- Initial or follow up valuations
- Check quality models for red flags
- Check investor sentiment (not opinions)
It’s easiest to see the video as I go through a couple of examples. The part of the video that does this starts at
- [16:09] Portfolio maintenance guides – fundamental analysis and checks to keep up with a company
Thoughts from a Reader on INVEST1000
This goes back few weeks, but I want to share a reader’s (Richard) thoughts on INVEST1000.
Here’s what I have learned and what your subscribers will most likely learn from the INVEST1000 project.
For one thing its difficult to know how successful an investment strategy will turn out by examining things on a micro scale. What I mean is following the ups and downs of one portfolio on a day to day basis. I have been monitoring two portfolio strategies from OSV since Jan 3rd, 2017 and have what appears to be contradictory results. One portfolio is up by 9% (it was up 18% a month ago) and the other portfolio is down by 5%.
Does that mean the portfolio that is down by 5% a bad approach?
Actually no. What it means is that the time period is too brief to come to any meaningful conclusion. Its quite common to see a good investment strategy do poorly in the short term or simply drift and do absolutely nothing. This could play out over a period of months or even years.
In this wide ranging study I have used multiple approaches such as a mechanical value approach as well as more involved strategies. It is interesting to note that even simple mechanical strategies can produce very good returns over long periods of time.
The main conclusion I have reached from these multiple studies is that it really doesn’t matter what way you select stocks (so long as they are reasonably rational) and you the investor are consistent. The most important ingredient to successful investing is the most difficult. Patience. As the old saying goes, “investment success is derived not from timing your investments, but time in the market”.
Avoid Torpedoes that will Sink Your Portfolio
Lastly, there are right and wrong way of allocating money. With just $1000, it would have been easy and tempting to bet all in on a single stock and shoot for the moon.
If it works out, you label yourself as a genius.
If it doesn’t work out, you call it bad luck.
But if you use a platform that is free like Robinhood or anything else where you can buy stocks for cheap, you can still do it the proper way without gambling your money away.
That brings us to the torpedo stock we discussed – Rite Aid (RAD).
Read a post on Reddit where a person replaced his entire portfolio and then goes all in on RAD. This chart shows what happened just 1.5 days after his decision to go all in.
In 1.5 days, he lost 20% of his portfolio. Today, it’s down 40%.
Feel sorry for the guy, but it was a bad decision with a bad outcome.
Bad Decision + Bad Outcome = Poetic Justice
The goal is to limit and protect your downside. With little work, the best way to reduce downside risk is by holding 20-25 stocks. That way, if one happened to tank, your portfolio doesn’t sink with it.
What’s In the Future?
This concludes the coaching calls and this short 2 part series.
The goal was to show you that it’s not complicated and that newbies can follow along. The hard part for new investors isn’t having to remember hundreds of ratios.
It’s the basic step of sticking to a process. As Richard mentioned, the key ingredient is patience. We only have a 1 year period with INVEST1000, so it’s not that bad. But if you’re new, it’s too tempting to jump in and out of things.
Lester, a new investor was able to pick and buy a portfolio of stocks by keeping it simple and fishing where the fish are.
To keep up to date with the performance, bookmark this page as the spreadsheet will be updated with any transactions as it takes place.