Investment Fundamentals Are the Key
For all Investors, whether retail or institutional, fundamentals should be driving the bulk of your decisions when it comes to stock picking. The goal is to buy stocks whose potential for growth is greater than the broader market, otherwise you should just invest in a broad market index like the S&P 500. Our goal here at Investoristics is to outperform the market over time and do it with less risk. To do that it is important to understand what fundamental characteristics are influential in driving portfolio performance. Those fundamentals are things like, Price to Sales ratio, Earnings Per Share, Price to Earnings ratio, as examples. At Investoristics we have already identified those characteristics that drive performance and have written and shared articles on our portfolio’s historical performance based on back- tested data which reflects our actual experience.
Those familiar with our concept already know that our process is both forward looking as well as backward looking as we believe that a stock’s price should follow earnings and earnings expectations and when that is not the case then there is opportunity. Although you might conclude that our approach is quantitative, we would argue that it is more of an automated stock picking process grounded in fundamental research where computers do the heavy lifting making the stock picking process more efficient. Also, qualitative measures are in place as we do not blindly pick stocks from a list provided by a computer program.
So, using screening programs to easily find the stocks with the fundamental characteristics that we like to see is a logical and efficient approach given that there are thousands of stocks to choose from in our database of available stocks. As we have shown in previous writings, choosing a focused portfolio of around 10 stocks, you can accomplish about anything you want from significantly outperforming the S&P 500 to tracking it with a much better risk profile. For institutions requiring more than10 stocks, could they benefit? Yes, significant outperformance with lower risk is still achievable while utilizing fewer staff resources at significantly lower costs.
So, why is this important? As an investor, particularly a retail investor, it gives you a tremendous advantage over other investors who do not have the time or competence to build a winning portfolio based on being knowledgeable about the fundamental drivers of a portfolio’s potential to outperform the broad market. Most, if not all, professional investors understand this concept or at least we are counting on the fact that they do. For the retail investor who is willing to focus on stocks with the right fundamental characteristics, they will outperform the market over time.
As retail investors, you have the advantage of liquidity, flexibility, a focused portfolio and, at times, competence. So, armed with the same knowledge as institutional investors, you can go all in on a small group of stocks with any amount of money (most retail investors are not investing billions or millions) you would like to invest and then wait for institutional investors to invest in those stocks that you already own.
Keep in mind that it takes super large institutional investors days, weeks or even months to build positions in those stocks that you have already identified as having value. As institutions build their positions in stocks that you already own, your portfolio will rise in value faster than the broader market. Staying consistent and disciplined with your approach is the key. Stick with the fundamentals and you will experience outperformance over time. Now is the time to use your retail investor advantages. As for institutional investors, keep it simple and stick to the fundamentals and you too will outperform. As always, if you do not have the time or energy to build your own portfolio then join “The Collective” and we will do the work for you.
