I’ve achieved a 15% compound annual return in my personal stock investing portfolio over my 12-year investment career and here are 10 of the rules I followed to make it all possible. Hopefully, they will prove to be valuable information for budding investors in the stock market and, for the experienced investor, maybe there’s something new there to think about or, at least, to validate how you’re already investing in the market. Enjoy.
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by Robin Speziale
- I’ll only hold 25-40 core stocks in my portfolio, because at that point I’m well-diversified, and am not diluting my portfolio with ‘so-so’ picks…
- I don’t let any stock grow larger than 10% of my portfolio. That opens me up to potential risk. My winners will approach 10% position size as they grow, so I take profit off the table, and allocate those funds to my new emerging opportunities.
- I only invest in companies where I can confidently project future cash flows. I can’t confidently project cash flows for companies in cyclical industries like mining, financial services, and pharmaceuticals, etc…
- I don’t invest in “price-takers,” like oil & gas companies that have to price what they sell based on prevailing crude oil market prices, for example, but rather invest in “price-setters,” that can raise prices year-after-year to generate higher revenues…
- I invest in companies that can achieve both price and volume growth. Also, revenue needs to be sustainable and recurring over time…
- I really like companies where the addressable market for their products/services is virtually everyone in the world. That’s why companies that can become near-monopolies, with little-to-no competition, like Google (NASDAQ: GOOGL), are ideal investments, especially at early stages in their business life cycle.
- The companies that I invest in need to have a competitive advantage…I ask, “How hard would it be for a competitor to take any of their business?” and, “Can technology or innovation disrupt this business model?” I also employ Porter’s 5 Forces to validate a company’s competitive advantage.
- Companies that cost-cut to generate profit, and appease the Street for however long, aren’t worth my time. I want revenue growth. Companies that are growing are hiring, investing, and spending.
- …I always invest in relatively new businesses and avoid mature business models. I want to invest in the wealth-recipients, like Netflix, for example.
- Companies should be earning high rates of return on capital (ROIC), generally around 15%, (and at a minimum above their cost of capital) consistently over at least 5 years, and preferably over 10 years. I don’t rely on Return on Equity (ROE) as a measure as it can be distorted with big debt loads – and lots of debt can sink companies.
The above rules are just 10 of my 70 Rules – yes, 70! – on investing in stocks.
If this article is well received by the viewing public I will follow up with more of my 70 rules, which in their totality, allowed me to achieve a 15% compound annual return in my personal stock investing portfolio over my 12-year investment career
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