selection method
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Over the years I have tried many investment styles and systems, I have followed press tipsters and subscribed to tip sheets that are abound in the world of investment which have at best produced average returns. I am trying to follow a method which has been practiced for many years by people like Warren Buffet and is known as Focus Investment. The method relies on waiting for the right opportunity to arise which offers an above average chance of success, knowing and understanding the business inside out, making a large percentage investment in it and having the patience to see it through.

The reasons this style appeals to me are that I enjoy researching companies, I am very poor at second guessing market movements, it offers better long term returns and it fits neatly with my slow approach to investing.   

 If I read or hear about a company this is only the beginning of a lengthy, in-depth study of that business, see the Watch & Wish List Page. I have missed the boat on many occasions, due to the market re-rating before I have finished researching, but there will always be another situation to investigate. What I am looking for is a company which for one reason or another has a temporary incorrect price attached to it by the market, temporary being anything from four weeks to eighteen months, this is where the research and patience will win the day.

Risk

I do take risks, no equity based investment is without it, but I don't like to gamble. I believe that by researching every aspect of the business in which I intend to invest is the best way of reducing risk rather than spreading my capital amongst a large amount of companies. The risk in my mind is in picking a company that will destroy my capital over a number of years rather than the volatility of the day to day share price movements. I do not run a stop loss system, but should the share price fall to much lower levels, with the fundamentals unchanged, then I see it as a chance to buy more at a more favorable price. I prefer not to buy in one move but rather build a holding over a period of time to gain an average price.

Income

I do not look for companies that are paying a dividend, I don't rule them out but that's not what I am interested in at this moment in time. I much prefer the company to reinvest profits unless they can't invest it wisely.

Research

These principles are not set in stone but I have found that if one or more of them are missing then the business is not the type I should invest in.

I must fully understand the business and the market in which it is operating.
I will identify the competition and understand the threats, internal and external, to the business.
I must be able to trust the management, the Chairman to have a realistic/positive view and like to see them hold a significant amount of the equity.
I don't like companies acquiring businesses or branching out into areas in which they don't have the expertise.
Every pound earned and retained should add at least a pound to the company value.
I want to see cash in the bank and a positive cash flow record, with an exception for investment programs.
Profit margins should be good with the business having a strong brand to achieve above average margins.
Accounts should be clear and concise with accountancy tricks to the minimum.

Structure of Research

Sources

The research leads are many and varied, they are not a secret and I don't subscribe to any publication that is not available in any good newsagent.

I read the newspapers: Daily Mail, Mail on Sunday, Sunday Times, Financial Times (Saturday) and the Sunday Business. Also the Investors Chronicle. I am looking for any stories about new products, management changes, new industries and successful business formulas.
I talk to people and friends about their work and listen out for snippets about their own company or competitors.
The internet is a gold mine of information when the hype is ignored. News stories, Bulletin Boards and Company sites are regularly checked.
I use the free annual report service via the Financial Times.

Filtering

It is impossible to follow every lead I find, so I have to filter out the dead stories to cut them down to a manageable quantity.

I check out the story with other sources to confirm its authenticity.
I bypass any companies with large debts.
I gauge to see if the industry in which the company is operating is within my realm of understanding.
I look to see that if I was to move into a company would I be able to secure a decent stake.

Primary Research

This is another form of filtering but where I start to take a deeper look at the business. At this stage each company is entered on my database so that any information is easy to look back on should I decide to research them further.

I check out the management. I am looking for past history, tenure at the present company, experience in the business, temperament  i.e. are they deal makers, administrators or both.
I look at the viability of the service or product they are supplying, I want to see a strong brand and growth potential.
I look for a focused business with easily identifiable profit engines.

In-Depth Research

Companies which have made it to this stage must have a good business but the task is now to eliminate the risk of losing money should I intend to invest fully.

I study the company report. I am looking for an honest appraisal by the Chairman, a commitment to reducing costs, maintaining efficiency and creating shareholder value, a realistic business plan, positive cash flow, increasing shareholder funds, cash balances if not then low short and long term borrowings, notes to the accounts to be clear, goodwill write offs kept to the minimum and substantial share holdings by the management. I compare the value of the business, since the last report, to its current valuation to see if money retained and invested has produced an increase.
At this stage I usually contact the company itself. I have found most management teams have someone who is willing to answer a few intelligent questions but I keep it brief and to the point.
I try to value the company using a very crude model, this I may add is about to change as a direct result of the latest review. I am no number cruncher so my aim is to put a rough figure on a growing business. I look at the current gross profit and pan forward ten years whilst adding 10% each year, I then add the current net asset value. The difference between this price and the current market price is what I see as the markets rating of the managements ability to increase the value of the business over that time. In cases where there is no profit record then I have to rely on gut feeling as to the value I put on a business.
I check out their products or services in the market, either myself or through the experience of people with knowledge of the company or its competitors.  I am looking for a product or service which has that something extra that makes it a must have and competition beating commodity.

Valuation

I am in the process of learning a better way of valuing a business which will help me better in the task of selecting companies. As soon as I fully understand the process myself then I will publish it here.

Exceptions to the Rule

There will always be the odd occasion when an opportunity arises which I know will be profitable but would not pass my research criteria. I like shell company situations, particularly when the company is a clean cash shell with good management and can be purchased at or about net cash value. I am sorry but I can't resist them.  

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