Friday, July 07, 2006

Stock selection

As a former member of BCG's corporate finance practice, stock selection and valuation rank high among my interests. As an investor, I sit firmly near the conservative end of the spectrum. I find reading about new investing ideas great fun, and The Motley Fool website ranks as one of my favourites (have got some of my best investing ideas from there). My investing philosophy runs roughly thus:
  • Do not overpay. I generally avoid stocks with a P/E above 20, unless they are growing really fast. This cuts a lot of promising stocks out, but significantly reduces the risk losing lots of money very quickly.
  • Buy on price declines. I like price declines when I have the money to buy. If I don't intend to sell quickly, a price decline on a company I like is an opportunity to buy it at a discount. Who doesn't like discounts? As a Microsoft employee, I get to buy shares at a discount to the closing price at the end of each quarter. As a buyer, I am rooting for the price to go down as quarter-end approaches.
  • Dividends are good. Dividends pay you to hold. As companies grow they increase their dividends. I paid €18.6 per share of ING on average. The company has increased its dividend more than 25% since I first bought. As a result, I am earning a 6% return on the dividend alone - without any price appreciation.
  • Non-glam industries are good. Lots of companies make tons of money without any one following them. Buy them early and reap the rewards when analysts hear about them.
  • Glam industries are (usually) bad. Everyone is talking about them and has already bought them. Refer Technology 2000. China 2005? The two stocks I have been burned on (though neither was particularly expensive when I bought it) happen to be Chinese. Don't follow the story. Be there first.

Disclaimer: I own shares of ING and Microsoft at the time of writing. I am not recommending you to buy or sell shares of any company I have mentioned here (though by all means, buy insurance from ING and/or software from Microsoft if you want :-)

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