In my previous article, I wrote about my approach to portfolio risk management and the steps I take to reduce my risk profile and qualify potential opportunities. Underneath the hood of any investment engine is a financial model of factors which affect a company’s performance. My ideal portfolio is one which is high yield (compared to other opportunities such a cash or bonds), high growth (compared to inflation), and low risk (in that possible risk is identified and managed).
To build this, I seek out companies which are market leaders in what they do, that pay out strong dividends, reinvest in their continued performance, that are in growing markets, and acquire them at favourable valuations.
I hold a wide range of companies that do many different things; consumer goods, food, energy, telecoms, professional services, engineering, construction, financial services, insurance, manufacturing.
I directly hold a minimum of 15 individual companies and no more than 50.
I hold a range of international investment trusts and professionally managed funds in areas in which I have limited understanding (or time to research fully).
No more than 5% of my portfolio is in companies of less than three years as a listed company.
But what about the finances of each company? There are hundreds of opportunities in the market, so how do I go about selecting them? Fundamentally, I look at a range of things for each opportunity, including their 10 year growth rate, the consistency of their growth, their profitability over the last ten years, their PE ratio, their dividend history (and forecast).
In my upcoming series of articles, I’ll be exploring company fundamentals to look at how I choose between different companies. The series will include;
- Understanding company fundamentals – Turnover
- Understanding company fundamentals – Profitability
- Understanding company fundamentals – Leverage
- Understanding company fundamentals – Balance Sheet
Each article will be a short overview of the topic along with some examples to illustrate how I apply basic analysis to a company’s financial situation.