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How I Pick Investments

How To Win The Game?

If you have read my work before, you will hopefully already be familiar that I always approach investing from the angle of 'I don't know'.

That investing is really difficult. And that you are competing in a global arena. That investing is brutal. And any time that you become overconfident, you will lose capital - which is synonymous with losing the game.

So what kind of traits shift the odds ever so slightly more towards our side of the table?

A Company Worthwhile Of Investment?

This is a very contentious discussion. However, since you are reading this, I will assume that you are interested in knowing more about my investment style.

I try to understand two different but crucial traits of the businesses I select. How is the capital moving around the business? Is the business a going concern?

1) Is the business generating enough capital to sustain itself?

As you can in the table above, Company A continues to dilute its shareholders. So, even if the company's top line had increased by 12% from 2017 to 2018, and all else remained equal, the shareholder would be no better off.

This is not a great business to invest in. And I would avoid it. Because from the information I have provided, it would appear that this business sustains itself by selling shares, rather than selling products or services.

As a comparison, Company B (below) appears to be so free cash flow generative that it can even repurchase its shares every year, in the past 9 years.

This type of business appeals to me - a business which throws off cash.

2) Is 'Business A' a going concern?

Highlighted above is a business, Company C, which is clearly not stable enough to warrant investment from me. The pace of deceleration combined with the fact that it has persisted for at least 4-5 years, shows that it is not some temporary problem. But rather something innately wrong with its business model. The business model appears to be unraveling itself.

Having said that, this type of investment in Company C, can be done. But this a very different investment strategy, which requires diversification into 25-30 companies. It can work, but it is not something which I specialize in.

Which Businesses Do I Like To Invest In?

I like businesses which have an FCF margin % (defined as FCF/Revenue expressed as a percentage) preferably higher than 5%. These businesses generate large amounts of capital, typically unleveraged. Please see Company D, below.

Of course, there are numerous exceptions for every investment rule, but these straight forward simple rules will help you stay away from chasing hot stocks. And approach investing with caution!

Thanks for reading!