Shares for the future: implementing my philosophy with minimum effort
30th December 2022 09:02
by Richard Beddard from interactive investor
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A week after explaining his investment philosophy, columnist Richard Beddard reveals the final changes to his list of favourite stocks in 2022.
I am writing this article with Yule be Boppin’ playing quietly in the background. It is one of those calm interludes between madcap dashes to far-flung relatives and festive gatherings closer to home.
Taking time out to reflect helps us develop as investors, and now is a good time for reflection because companies and other investors are taking time out too.
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Last week, I outlined my investment philosophy: “To invest in people and trust them to make money through thick and thin for everyone.”
This week, I am thinking about efficiency, which means implementing this philosophy with minimum effort. By happy coincidence today is my last article before the end of the month, which is when we publish the output from the Decision Engine.
That output is a list of shares ranked by the scores I give each share. The scores codify my investment process, so the Decision Engine is my principal method of automation, which is one way to be more efficient.
Automation
Standard numbers used by the Decision Engine such as revenue and profit come from SharePad, a software platform for investors that has a custom export capability.
Once a year, soon after each company publishes its annual report, I paste these numbers into a Google spreadsheet, and make adjustments using additional data from the report.
A formula translates the numbers and each company’s current share price into price scores. Other ratios calculated by the spreadsheet, along with my impressions having read the annual report, inform the scores I give the other four criteria: profitability, risks, strategy and fairness.
A summary spreadsheet draws the scores from all the individual sheets, and sorts the list. It also applies simple rules telling me when to trade, which, like the scores, are described in detail in the FAQ linked at the bottom of this page.
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The aim is to minimise the amount of time I spend thinking about trading so I have more time to fuel the engine with research.
A summary spreadsheet draws the scores from all the individual sheets, and sorts the list. It also applies simple rules telling me when to trade, which, like the scores, are described in detail in the FAQ linked at the bottom of this page.
The aim is to minimise the amount of time I spend thinking about trading so I have more time to fuel the engine with research.
Organisation
The research is stored as notes and, for the first time in over 15 years I have changed the software I use to create new notes and store them.
All my notes (barring this month’s) and a bazillion annual reports are stored in a program called Evernote, which for reasons too numerous to detail I have abandoned.
Evernote’s tagline used to be “remember everything” but I have found that as my database has grown to a gargantuan size, the software struggles to complete its mission.
Early this month, I started writing notes and storing annual reports in the repository that stores the Decision Engine spreadsheet and all my articles, which is Google Drive (Other cloud based storage products are available, like Microsoft's OneDrive, which I use as a backup).
Google Drive lacks only one feature I depend on in Evernote: tags. I tag every note with its stock market ticker. Happily tags can be replicated in Drive by typing “xx” in front of the stock market ticker code and appending it to the note.
For example, to find all my Focusrite (LSE:TUNE) notes I just need to search Drive for xxTUNE.
Simplification
Because my technical skills are pretty average, most of my efficiency gains come from simplification rather than automation and organisation.
Using five criteria to score a share is a simplification, and so too is my focus on just six numbers to judge a company’s performance.
Three are profitability measures: Return on Capital, Return on Sales (aka profit margin), and Return on Total Invested Capital, a version of Return on Capital that includes the cost of acquisitions.
The others are Cash conversion (the percentage of profit earned in cash), net financial obligations (i.e. total borrowings including operating lease obligations and pension fund deficits, less cash), and finally the share count.
I like my return measures to be 10% or more, cash conversion to be above 75%, net financial obligations to be less than 50% and the share count to be flat, or coming down year after year, though I make exceptions.
If a company’s financials do not conform to these levels or they are deteriorating, I will examine the numbers carefully and attempt to establish whether we are witnessing a temporary blip, or something more worrying.
While the financials are benign, I do not feel the need to scrutinise every inch of the accounts, which frees up a lot of time to learn more about the aspects of business that really interest me: strategy and culture.
This is the essence of investing, which is also the essence of business: finding where we can add the most value, and devoting most of our attention to that activity.
Notes and addenda
Responding to my profile of Auto Trader Group (LSE:AUTO), a regular correspondent forwarded an email from a friend of his who runs a motor dealership. My correspondent had forwarded his friend the article for comment. His reply included this sentence: “Have to use them unfortunately as they have a complete monopoly, charge us a fortune, just increased prices by 15% for no benefit at all...”
There is good news and bad news in these words. They support the contention that Auto Trader pretty much is the UK online marketplace for second-hand cars, but also raise the possibility (albeit from a sample of one dealership) that the company could abuse its monopoly power.
I believe Auto Trader is still innovating, and therefore adding value to the platform as it charges more, but pricing is something we need to keep an eye on because alienating customers is not sustainable.
To make room for Auto Trader in the Decision Engine, I dropped Volex (LSE:VLX), a manufacturer of power cord and electrical and electronic components and subsystems.
Hotel Chocolat (LSE:HOTC) has published its annual report. The cauterisation of its international expansion strategy and very large adjustments to the accounts have shaken my confidence in the profit figure and management. That does not mean Hotel Chocolat is a bad trade, the share price has fallen a long way, but it is a speculative one.
I have reduced its risk, strategy, and fairness scores to reflect my uncertainty, pending a full re-scoring.
Also in the queue of companies to score again are Treatt (LSE:TET), Focusrite (LSE:TUNE) anddotDigital (LSE:DOTD),because they too have published annual reports.
Since the last update, I have scored Auto Trader and re-scored Softcat (LSE:SCT). All these shares are probably good long-term investments, but I am most confident about the ones near the top of the list:
0 | Company | Description | Score |
1 | Supplies kitchens to small builders | 9 | |
2 | Designs recording equipment, loudspeakers, and instruments for musicians | 9 | |
3 | Manufactures tableware for restaurants and eateries | 8 | |
4 | Sources, processes and develops flavours esp. for soft drinks | 8 | |
5 | Manufactures pushbuttons and other components for lifts and ATMs | 8 | |
6 | Imports and distributes timber and timber products | 8 | |
7 | Casts and machines steel. Processes minerals for casting jewellery, tyres | 8 | |
8 | Online marketplace for motor vehicles | 8 | |
9 | Retails clothes and homewares | 8 | |
10 | Manufactures/retails Warhammer models, licenses stories/characters | 7 | |
11 | Translates documents and localises software and content for businesses | 7 | |
12 | Whiz bang manufacturer of automated machine tools and robots | 7 | |
13 | Sells hardware and software to businesses and the public sector | 7 | |
14 | Manufactures sports watches and instrumentation | 7 | |
15 | Manufactures power adapters for industrial and healthcare equipment | 7 | |
16 | Manufactures natural animal feed additives | 7 | |
17 | Makes light fittings for commercial and public buildings, roads, and tunnels | 7 | |
18 | Manufactures military technology, does research and consultancy | 7 | |
19 | Manufactures PEEK, a tough, light and easy to manipulate polymer | 7 | |
20 | Distributor of protective packaging | 7 | |
21 | Acquires and operates small scientific instrument manufacturers | 6 | |
22 | Manufacturer of scientific equipment for industry and academia | 6 | |
23 | Manufactures filters and filtration systems for fluids and molten metals | 6 | |
24 | Manufactures personal care and beauty brands | 6 | |
25 | Operates tenpin bowling and indoor crazy golf centres | 6 | |
26 | Sells promotional materials like branded mugs and tee shirts direct | 6 | |
27 | Manufactures surgical adhesives, sutures, fixation devices and dressings | 6 | |
28 | Distributes essential everyday items consumed by organisations | 6 | |
29 | Publishes books, and digital collections for academics and professionals | 6 | |
30 | Manufactures specialist paper, packaging and high-tech materials | 6 | |
31 | Online retailer of domestic appliances and TVs | 6 | |
32 | Manufactures vinyl flooring for commercial and public spaces | 6 | |
33 | Develops and integrates Customer Data Platforms | 6 | |
34 | Supplies vehicle tracking systems to small fleets and insurers | 6 | |
35 | Manufactures disinfectants for simple medical instruments and surfaces | 6 | |
36 | Supplies software and services to the transport industry | 5 | |
37 | Manuf's rugged computers, battery packs, radios. Distributes electronics | 5 | |
38 | Supplies schools with equipment and IT, and exam boards with e-marking | 5 | |
39 | Chocolate maker and retailer | 5 | |
40 | Flies holidaymakers to Europe, sells package holidays | 4 |
- Scores and stats: Richard Beddard. Data: SharePad and annual reports
- Shares marked with an asterisk* are more speculative. They score less than 5 out of 6 for profitability, risks and strategy
- Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
Richard owns shares in most of the shares in the Decision Engine.
For more information about Richard’s scoring and ranking system (the Decision Engine) and the Share Sleuth portfolio powered by this research, please read the FAQ.
Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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