How I invest?

My long term investing methodology

Since I work at a modern brokerage bank (Trade Republic), I get this question a lot:

How should I start investing?

In this article I share my investing principles, the things I do before I invest. These principles can be extended to any asset class. Investing is a great way to move the world in the direction you want to see progress.

Disclaimer: This is no financial advice, this is just what I do. Principles and methods are updated with new ideas and strategies to adapt with the current world conditions.

Every investment must go through a rigorous analysis. Before any analysis I reinforce my investing mindset.

  • My principles (You need to spend a lot of time refine your set of principles, it is a system you use to reason and make decisions)

  • Everything is for the long term

  • The asset/company has high accountability and thinks long term

Principles

Expect volatility: It is impossible to time the market. I go with dollar cost average. I pick up assets in small chunks in regular intervals to benefit from volatility. I should feel comfortable to buy at the peak, otherwise it is probably a bad place to invest.

Three phases of research and validation

  1. Rigorous due diligence at the Micro level

  2. Aligning that view with the Macro environment

  3. Having the right trade environment

Micro Level

What company qualities to look at?

Barriers to entry: How hard is it for competition to enter the same space? Are there alternatives? Can big companies enter this space with ease?

Growing industry: Think future, think about the world you see and how the industry will grow, some of the trends I watch:

  • Climate Change

  • Increased automation (AI and manufacturing)

  • Increasing population

  • Increasing connectivity and trade

High return on capital: What is the long term return on capital? Capital must be spent on valuable assets and resources that do not depreciate quickly.

High margins relative to competition: Always compare with peers when possible, is the company more efficient? How is the supply chain integrated? What parts are outsourced?

GOOD MANAGEMENT: The most important quality to look in a company, watch how leadership communicates. Watch for management signals from the company (High insider ownership, Well respected, Clean accounting)

Do the following before investing, Do not skip this step

Understand where I want to go with the investment. What is the Target Price? What is the impact to be made?

The target price is the product of a forecasted earnings metric multiplied by the expected multiple. This multiple can be P/E, EV/EBITDA, EV/Sales, or any other reasonable metric. Some metrics are industry-specific and more valuable for those industries than the general ones. Regardless, if you provide a target price, you need to explain how you arrived at this target, and the stages of your thought process to get there.

Where is the company trading relative to its historical multiple? Should the multiple trade at a premium or discount given how the company has changed over the years, and where we are now in the business cycle? Where is the company trading relative to its peer group? If the entire market has seen multiple expansion, then is it fair that this company should too? In other words, is it expensive or cheap relative to itself historically and/or its peers, and can you explain why this might be wrong?

Target Price = Your Earnings Estimate × Multiple

  • Earnings Estimate is a value you derive by looking at the company earnings and projecting a value into the future

  • Multiple I derive a multiple by looking in the peers and getting a general feel for how the company is valued

What are the catalysts that will cause the company to beat earnings (e.g., higher revenue, higher margins, lower interest expense, share buybacks, etc.)? Paint the picture of how, when, and why there will be a catalyst that supports your view. Providing an opinion without fully understanding and explaining the relevant value drivers will be a recipe for failure.

Conviction - I have to feel extremely convinced by the price target. I invest only if my price target is at least 3 times the current price within the next 10 years.

Macro Level

What are we dealing with regarding the performance, structure, behaviour, and decision-making of an economy as a whole? Where do you want to get involved? Which aspects do you understand best? It is hard to earn money so you want to be sure you are investing into areas that allow you sleep in peace. I am focused on technology (65%), consumer goods (25%) and technology infrastructure (10%).

Technology

Technology sector has the biggest leverage on all things. Since technology is infinitely scalable, it has the potential to quickly capture big markets that are not possible otherwise. Finance has been this industry for the longest time but there has been a clear shift in the last 10 years. Every sector is seeing itself being digitised and re-invented. Understanding technology and its use-cases to empower business models is where I spend most of my time when I do research.

Consumer goods

As an average consumer, it only makes sense to invest in the products you use as this is something you clearly believe in. If I love my iPhone, it makes sense to invest in Apple. By buying a new product, we signal to the company where we are willing to spend our money. Taking this a step further is to actually invest in the companies that are offering the kind of product you want. The biggest companies are B2C companies, I am not interested in B2B companies as it is very unlikely for a B2B company to be the biggest company. I focus on companies that are solving the biggest problems for mass market. Consumers will always want the following:

  • Good ethics

  • Cheaper, faster, better (efficiency, sharing economy)

  • Care for our planet (social, environment)

Technology infrastructure

Without the infrastructure there is no real way the technology itself will function. An iPhone is useless with electricity and the internet. Some of the important infrastructure moving forward includes clean energy, 5G, AI, Semiconductors.

Trading Setup

Before investing into a company, ensure that you can invest into the company with ease.

  1. Ensure the platform you use is safe and secure. Selling assets because you want to move depot can create unnecessary losses.

  2. Ensure you have access to market with ease. You can trade during market hours.

  3. Make sure it is easy to report your taxes

  4. Be aware of exchange rates, are you exchanging currencies a lot? how is your portfolio affected by the currency you hold.

Invest responsibly, invest to build a future you want to live in.