The Investment Process is a systematic approach to investing, which can be useful for private investors who want to succeed. It’s not only reserved for professionals. You cannot rely on intuition alone in investing. You need a logical reason for why you invest in certain ideas and not others, based on reasoning and facts. This is where the Investment Process comes in handy. It can help you understand why you are investing your hard-earned capital in a particular company.

TABLE OF CONTENTS:

What is an Investment Process?

Keeping everything in your head is not an effective way to invest. A well-documented process lets you establish a system of reflection and feedback loops, which can help you improve over time. The primary goal of the Investment Process is to maximize your returns while managing the potential downside. A structured framework that guides your investing decisions, asset allocation, portfolio management, and valuation can help you stay accountable to your investment goals.

The Investment Process can instil confidence in Investment decisions.

The Investment Process enables investors to analyse various investment ideas critically and logically, without being swayed by emotions. Making investment decisions based on in-depth research, knowledge of market trends, and historical information can lead to better results. Having a process and sticking to it can help minimise impulsive decisions. A disciplined and resilient investment mindset, backed by a powerful process, can help investors stay the course long-term.

Why is an Investment Process important?

The investment process must be replicable since it is quite repetitive. All ideas will run through the same funnel. It is not ad-hoc; you will filter, screen, value, narrow down ideas and make buy and sell decisions on every idea in the same way. It is not driven by emotions; you cannot buy, sell, value, or research anything unless it runs through a very methodical process. My overall Investment process flows like this.

There is no mindset of “buy now research later.” There are no shortcuts. You cannot buy without reasoning, and you cannot sell without logically explaining why. At every turn, you are checking your biases, ensuring your emotions are not swaying your decisions.

If you can’t describe what you are doing as a process, you don’t know what you’re doing.

W. Edwards Deming

The process is grounded in research and reinforced with due diligence. A healthy dose of scepticism goes a long way. It invokes a contrarian mindset, and when the herd rushes in, you can sit back and explain confidently why you think others are wrong. Most people make buy-and-sell decisions without the ability to explain why.

If you cannot explain why, you own something, then you have not done the groundwork.

How to build an Investment Process?

The overall investment process will summarise all the steps and layers you follow from the very first step of finding ideas, researching them, valuing them, and then finally owning them. A simple yet methodical process adds consistency and repetition to minimise mistakes and allocate your focus to the ideas that present the best opportunity to profit from.

To better understand the investment process, it is helpful to go through each stage individually of my own. I have written articles for every stage, and they can be found on the Investment Process Home Page. While the Valuation and Portfolio Management stages are crucial, they are also extensive topics that I have separated into separate pages.

Initially, the Investment Process may appear to be complex and time-consuming, and it was for me too. However, like any process, with practice and repetition, it becomes faster to work through ideas and focus on the most compelling ones.

Building your own Investment Process will be highly tailored around your Investment Strategy and the criteria you are looking for. The stages will also be dependent on whether you use a checklist, conduct in-depth valuation and analysis and whether you adopt the use of an Investment Thesis. It is not a must to implement these practices, but a sound process should be outlined for all investing decisions.

How do you determine what to invest in? Why do other companies make the cut and others don’t? What won’t you invest in? How will you determine the value of a company? Is there a reason behind why you are buying this business? I don’t think any investor should take a position without answering and writing down the logic behind the decision.  

A Guide through my Investing Process.

My Investment Process at the top is not focused on finding winners, it is focused on weeding out losers. If I can filter out all the poor-performing companies that don’t stand a chance at compounding capital, I am left with viable candidates (most of the time).

What you DON’T invest in is just as important as what you DO invest in.

The below Investment Process outlines the layers I work through on ideas. Starting at the very top is the idea generation section. I’ve outlined how I find ideas here. So we will skip this part.

In my Circle of Competence?

We can skip ahead from the Circle of Competence section as we have also worked through this. If an idea is not within my circle of competence I bin the idea immediately. It takes me about an hour at most to determine if something fits within my sphere of knowledge. I also trash ideas that I have no interest in learning about. Passion and curiosity drive a lot of my investing behaviour. If something interests me I am more prone to diving deeper, putting in the work and staying focused on expanding my knowledge.

Do I understand the Industry and the Business?

After something passes my circle of competence the next step is understanding the industry and business in depth. Although my competence indicates I have a general understanding it may not be sufficient and need further work.

If I am very familiar with the workings of an industry I proceed to the business component. I follow the same process if I am familiar with the business model and how it generates revenue, capital intensity, and market landscape then I move on. If I am not 100% confident, I begin the groundwork. This is a pre-work list of areas I work through. All ideas that pass my initial scan have a list of areas I go through. This takes a couple of days to become very familiar with the industry and business.

Preliminary Background Reading:

• Online search, look for negative PR, headlines, and any helpful information.
• Read all articles I find on the company. Blogs, analysis writings. Going back a couple of years.
• Set Google Alerts to get familiar with the idea of any latest news.
• Read about the competitors and the industry. Understand the growth prospects.
• Understand the industry this company sits in and the overall opportunity.
• I scan forums and chat rooms to see what others are saying.

All of this does not take long. You can become very familiar with a company and industry by reading and scanning through a variety of resources to create the big-picture view. This is the aim, to determine where the business sits among its peers and to get an understanding whether it shows potential.

Kill the idea fast!

This step is also another fast way to shortlist ideas. I kill the idea as fast as I can. Look to say no fast. I have over the years improved this process. I stick to my criteria and only allow the companies that align with my philosophy. Some of the things that turn me off when I initially scan an idea are listed below. I’m looking for quality and growth with a focus on small caps.

Idea Destroyers:

• Excessive dilution >> YoY share dilution from capital raising or SBC.
• Cash Conversion >> Revenue is high but little flow through to FCF.
• Poor PR, articles, and negative write-ups from multiple trusted sources.
• Too much debt >> Watch for high ROE fuelled by debt. Low to NO debt is what I want.
• Look for Consistency >> Too volatile, massive swings in earnings, lumpy.
• Poor Management based on Scuttlebutt and other reviews. Shareholder alignment.
• Companies with too many options, issuing Employee Stock Benefits.
• Companies with Poor fundamentals, poor business metrics, cyclical companies.
• Capital Intensive companies that have poor working capital metrics.
• Remove cash-burning companies not even earning revenue yet. Early stages.
• No earnings >> Not interested in companies that have no earnings as I can’t value them.
• ESG >> Poor industries, tobacco, gambling, lack of ESG and ethics.
• Companies trading for a penny. Avoid all forms of penny and nano stocks.
• Remove companies where the board earns more together than a large percentage of the MC.
• Companies that don’t serve a future industry or have a large total addressable market ahead.

If it fails these pre-check list areas, I scrap the idea. I am very stringent here, if an idea makes it past the filters, it means I have to put in serious Due diligence on the idea. It must warrant this energy.

Full Checklist Analysis.

This is where the real dirty work begins. I work to look beneath the hood of the engine and see what we are working with. This process can take up to a week. However, we’ve already shortlisted potential candidates and weeded out a lot of time wasters. Companies that make it to this stage show some signs of potential and my curiosity has brought it to this level. The first stage is pull up my Tikr account and look over all the metrics, financials, and get a picture of performance which then leads to the below.

The Deep Dive Dirty work to be able to conduct a checklist:

• Review the last 3 Annual reports.
• Read all the latest quarterly reports.
• Investigate the last year’s holdings updates, who is buying and selling.
• Read the footnotes, the reconciliation of accounts and working capital requirements.
• Read all management letters to look for consistency, transparency, and accountability.
• Look for management strategy from years before and whether delivering.
• Look for Management compensation alignment is it excessive or fair.
• Track record of the management team.
• Understand the competitive edge and where it sits among peers.

After this stage, you become very familiar with the business, the model, how it earns and the potential. If it passes the checklist then I proceed to the next stage. If it fails, in this section we add the idea to a watchlist as discussed in the Checklist blog. We ensure we have some notes about why it failed and what we want to see improve before investigating further.

Valuation and Modelling work.

Initially, I aim to understand how the company is priced. I look at how it currently trades compared to its historical averages, as well as how it stacks up against its peers and the overall industry. This doesn’t take long. I use simple financial metrics such as the Price-to-Earnings ratio, Price-to-Sales ratio, enterprise value, Gross margins, Return-on-Capital, cash conversion, and free cash flow yield to determine where this business stands.

This gives me a general idea of whether the potential is fully priced in, or whether the market is undervaluing it for some reason. Although I don’t investigate it too much during my valuation, it does provide me with an immediate big-picture view.

I don’t use complex modelling. My preferred valuation method is to look at the shareholder yield, conduct an Estimated Yearly Return percentage, a reverse DCF model and a basic multiples valuation. I aim to make at least a 10% CAGR on my investments, so if a company meets this minimum standard by looking at the cost of equity with a WACC estimation, then that’s what I want to see.

Valuation and Financial Statement Analysis:

• Investigate each of the line items. Cash receipt health.
• Are Intangible assets and goodwill weighing down the balance sheet?
• Enough cash to cover liabilities?
• Trades receivable and inventory turnover.
• Customer concentration?
• Cash flow statement is the core focus. Look at FCF.
• Opportunity is on the income statement, but warning signs are on the balance sheet.
• Look at the quality of the earnings.
• Working capital positive? Does it need a capital raise?
• Competitor comparison.
• Margin health? Gross and operating, are they efficient?
• Investigate the reconciliation of accounts.
• Reverse Discounted Cash Flow Analysis. What growth is priced in?
• Multiples valuation.
• Estimate my expected return and whether I believe it can achieve this.

Final Assessment and Investment Thesis.

This is the final piece of the puzzle that summarises the idea into an Investment Thesis. At this stage, it has passed all filters, the checklist, and the valuation and has proven to be investable. I try to ascertain he risks and the final inversion concept, why don’t I invest in this company?

The Thesis brings all the research together to reinforce my decision on why I am making this investment. Within this stage, I am also making portfolio positioning decisions based on my conviction in the idea. This is the area where I decide how much capital to allocate and the exit strategy. Even a buy-and-hold forever still needs an exit plan.

Final Decision and Thesis:

• Outline the key risks and the chances of them unfolding.
• Identify the areas that would trigger a sell decision.
• Where does my conviction level sit against my current holdings?
• Does it stack up against my other holdings and warrant a concentrated position?
• Outline my sell strategy, is there a price in mind or a valuation?
• What is the time horizon to hold this position?

Hesitancy and Emotional Check.

During the investment process, emotions can often get in the way. It’s important to recognize these emotions and put them aside at certain stages. I myself have made mistakes in the past due to these emotional factors. But I try to counteract these feelings with a sound investment process.

Accepting that mistakes are inevitable is the first step to avoiding them. I’ve let my ego drive decisions and overconfidence has led to permanent capital loss. I’ve also lost capital by skipping stages and allowing emotions to influence my decisions.

Therefore, during certain stages of the investment process, especially at the end when conducting my final thesis, I am mindful of these areas and try to address them. If I am hesitant about an investment, I sleep on the idea. If I am still hesitant, I add it to a watchlist. As a private investor, I don’t have any KPIs or anyone to report to, so I am on my own timeline.

Emotional Checklist of areas:

• Is the idea and capital allocation making me nervous?
• Am I being independent or swayed by other people’s analysis and assessment?
• Never buy now and research later. Have I skipped steps to avoid putting in the work?
• Am I looking for confirming evidence and ignoring confirmation bias?
• Social proof influence from the chat rooms and other influences?
• Is there an ego perspective that because I am researching it, it’s a multibagger?
• Am I overconfident in understanding the business model and how the company makes money?

Once I have mentally gone over these questions I wrap up everything with a BUY!

In Summary…

This is the investment process I follow. It outlines the stages required to invest in worthy ideas. Building this process takes time, but after staying committed for a while, you will develop a watchlist of investable ideas, filter out a large portion of the markets and narrow down your process to eliminate poor investments.

As you gain more experience, you will get better at identifying opportunities, valuing businesses more efficiently, and understanding your portfolio structuring. There is no one-size-fits-all approach, and you will evolve and adapt as an investor, fine-tuning your process over the years and many buy and sell decisions.

It does become easier over time. For me, focusing on removing companies with poor fundamentals that will never be investable means I won’t have to keep sifting through the same ideas. Once I created a database of companies and consolidated all my research, I could look back and within a few minutes see a company and whether I had already reviewed it and why I said no. This became valuable after hundreds of company reviews.

Start thinking about how your investment process can be systemised and work through each of the components of this section. Hopefully, it gives you enough to at least start developing the right framework that guides your stock selection.