The Holy Grail of my Common Sense Investment Strategy
I am an Elite Popular Investor on eToro (@gauravk_in) and currently manage over $1.6M from over 800 copiers. I have a really simple investment strategy that I call Common Sense Investing. I’ve always said that investment is not rocket science, but the key to success lies in the execution.
I’ve openly shared my strategy with copiers on eToro and my results speak for themselves. By sharing my strategy, I am able to gain trust of my copiers and even give them a sense of control because now they can understand, predict and challenge my trade decisions. I also hope they realize, that people who claim to have some secret strategy are probably lying.
I am happy to share my strategy with a wider audience here. Once again, I want to gain your trust and hope that some of you will consider copying me on eToro. I also hope to learn and improve from your input, so please feel free to share even contradictory opinion. I promise, I take criticism very constructively.
The best time to start investing is now.
It’s impossible to time the market. I will repeat this multiple times in this post. So if you haven’t started investing yet, there is no point in waiting because you can’t predict when the market will go down. Even recent experience shows me that bull and bear phases can be really long, the NASDAQ100 went down from 16000 to 11000 over the year 2022 steadily, and then climbed back to 16000 over 2023. But before you jump, read next point.
Start small and grow steadily.
Since it’s impossible to time the market, you should not put a lump sum amount of your savings in the market at one time. Instead, you should start small with say 20% of your savings, and add 10% every month. Develop a habit of adding new cash periodically to your portfolio. This way you can avoid to risk of bad timing. It also gives you the ability to take advantage of new opportunities that open up all the time.
Do not invest your lunch money.
Investments often take a long time to bear fruit, and you don’t want to invest money that you might need. You should ensure you have enough set aside for your commitments and then some more for unpredictable risks. Only invest from your savings.
Learn how to judge your performance.
Some investors create target gains for themselves, such as 20% gains per year. I think this is arbitrary. Stock investments carry risk, and you will not be able to achieve a stable return every year. Your returns will depend on the market conditions. To judge whether all your effort is worth the while, you must find an appropriate benchmark to compare your performance to. eg. if you invest in large and mid-cap US stocks, $SPX500 is a worthy benchmark to try to beat. However, $SPX500 might not be a good benchmark if you are investing in crypto-currencies.
Limit allocation to a single stock.
One approach is passive investing, where you periodically invest money in a set of ETFs which are a basket of stocks and often track a popular index. If you don’t have the time or the inclination to research about financial performance of companies, you should choose this simple way. Another way is to copy a PI like me, or if you want to be more hands-on you can try actively picking stocks. More on how to pick the stocks later, but regardless of how good you think you are, you are exposing yourself to the risks associated with the stocks you pick. Therefore it is important to diversify and limit allocation to single stocks. My limit is around 5% for each stock. More on diversification later too.
Diversify.
It’s clear why this is important but how to do it? Ideally, you want to diversify across markets (US, China, Europe …), sectors (Tech, Automotive, Infrastructure …) and even within those sectors among the large, mid and small caps. But most investors don’t have the capacity to manage such a wide range of investments. I personally set the upper limit for open positions in my portfolio around 25. It is better to pick areas of your expertise and knowledge and find diversification within these areas. In times of uncertainty, some sectors such as infrastructure, utility companies and healthcare might perform better than others such as tech and automotive. So you can regulate your allocation to sectors based on your reading of the market conditions.
Invest time to research, before investing your money.
Reading balance sheets and understanding all the numbers sounds tedious, but it is much easier than it seems. Here is a list of the key metrics I look at, and a brief hint on how to interpret them.
Revenue growth, quarter on quarter (QoQ) and year on year (YoY)
Profit and profit margin growth, QoQ and YoY. If profit margins are growing, it may be because of high product demand or improved efficiency. Falling profit margins can indicate low demand or growing competition.
Growth projections.
Contribution for various business verticals. As companies grow they explore growth potential in other business verticals and it is important to see where the revenue comes from. Sometimes overall revenue seems good, but a new business vertical may underperform, which would raise questions about future growth of the company.
Earnings per share (EPS) or Price to Earnings (PE) ratio is a widely used metric to judge if the stock is over-valued or under-valued by comparing it to competitors. In a fast growing company, a forward PE ratio is more useful which is calculated on the projected growth in profit.
Quick ratio and Current ratio is a measure of the companies assets to its liabilities. If these ratios are below 1, it means the company may not have assets to cover its short-term liabilities. These ratio shouldn’t be too high either, because that means the company is not fully applying its assets to grow for instance if the growth potential is limited by size of market.
Estimated valuations. There are different ways to valuate a company such as Discounted Cash Flow (DCF), which tries to take into consideration future growth potential to assign a value to a company. The projections used in this valuation may be wrong, so it is not wise to rely too much on these valuations but it can prove useful for a company with a high growth potential. You may find the valuations for most popular stocks, and may perhaps try to learn how to calculate it yourself.
You shouldn’t jump the gun, after looking at just one or few of these numbers that look good. Rather if any one of these numbers look bad, it should be considered as a red flag. It is important to consider these numbers in comparison to other similar companies.
Add to it, your subjective valuation of other factors that can affect performance of a company.
It would be so easy if numbers could tell the entire story, but that is hardly ever the case. Aside from numbers, it is important to look at a number of other factors. Depending on the company, I look for things like product reviews and evolution and brand loyalty from customers. Can the company maintain its market leadership with patents or innovation. I check if the company has particular moats such as a strong ecosystem or ease of repair due to availability of parts and service centers and so on. I also look at the leadership of the company and try to find out how they are hiring and retaining employees. It’s hard to quantify these factors, but you once you start looking at them you may be able to see why one company can outperform another.
Do not try to pick a winning horse.
Most often, when market disruption occurs, there are more than one winners. For instance when AI boom started, NVDA 0.00%↑ emerged as one of the biggest winners due to their monopoly in GPUs. At the same time though, INTC 0.00%↑ , AMD 0.00%↑ and QCOM 0.00%↑ also pledged effort in taking the profit margins of NVDA and they also grew. MSFT 0.00%↑ had the early mover advantage, but competitors GOOG 0.00%↑ and META 0.00%↑ also grew. Other software vendors who will develop solutions in their areas of niche such as ADBE 0.00%↑ also grew. So it is often better to invest in competitors, rather than betting on one over others.
Maintain a journal of your research.
Your portfolio won’t always move in the right direction and it might take a long time for your investments to bear fruit. It is going to be hard to keep your patience and avoid self-doubt. You should go back to your research to gain confidence in your decision.
Consider macro-economic factors.
Stocks tend to have a correlation among themselves and often move in similar trends governed by macro-economic conditions. Often the impact of these macro-economic conditions can be confounding.
For instance, when people were losing lives and livelihoods during COVID crisis, the markets were booming. When COVID was coming to an end and people were thrilled to go back to school, work and travel again, the markets crashed. I’ve explained how this was caused by the monetary policy of the government in the post below.It is very important to not just know the macro-economic conditions, but to be able to understand how they impact the markets.
Introspect.
Saving the best for the last. As an investor, your goal is not to get every trade decision right. Instead your goal is to get a majority of trade decisions right, so your profits make up for your losses. By that definition, you are bound to make some mistakes and it is important to accept mistakes and make amends. Many people believe that you only make a loss when you close a trade in a loss. This is a stupid idea. These investors accumulate bad investments in their portfolios while the give up on the good ones. It is very important to introspect your past decisions and see if you continue to believe in your thesis. Your journal of research may come handy once again.
I feel that none of the points I have mentioned in this post are surprising or particularly hard to do for most people. I repeat, the key to success lies in flawless execution of the strategy.
Over the last 5 years, I have been able to demonstrate my ability to keep emotions out of my trading decisions. I have been faithfully executing on this strategy and the results speak for themselves. If you agree with this strategy, but don’t want to execute it yourself, you should consider copying me on eToro (@gauravk_in) and let me manage your investments for you. If you are not yet on eToro, consider joining using my referral link.
I would truly appreciate if you choose to engage with me in comments. I’d love to know what you think about my investment approach and take your suggestions to improve as an investor. I also want to know what you think about my writing skills and how I can improve as a writer.
Thank you!