My Investing Rubric

Posted: May 19th, 2016 | Author: | Filed under: Uncategorized | No Comments »

Dilbert-Future-Returns

WARNING – Shitty investment advice ahead. Proceed at your own risk!

It’s 2016 and all of the practical advice on investing is to sit back and invest in index funds, ETFs like $SPY. Maybe you’re even more savvy/lazy and use a service like Betterment. Yet here I am, still unable to resist the allure of picking a stock.

Maybe it’s the ego, maybe it’s the rush you get when a stock you pick doubles, maybe it’s more extrinsic — the exercise of evaluating these companies will (hopefully) make me a better Product Manager and a better entrepreneur someday. Either way, it’s a hobby of mine and it’s something I enjoy whether I make money or not (but def trying to make that $$$$). Don’t do what I do, stick to the ETFs. But…here is how I go about evaluating a stock.

As Product Managers tend to do I’ve developed a rubric. The criteria of the rubric are heavily influenced by the greats – Warren Buffett, Charlie Munger, Ben Graham and Peter Lynch.

Criteria

I invest on 10 year time frames. I’m not concerned about how well the stock will do tomorrow, or next year, but where will it be 10 years from now. Keeping that in mind, I break down each stock from six different perspectives.

How much Cash does the company have in the bank? If they hit a rough patch do they have the cash to get through it? Do they have cash for R&D, for acquisitions?

What’s the Macro View of the company? What trends in the world will affect this company both positively and negatively?

What’s the company’s Potential? They’re making money doing X but what other opportunities do they have to make money in other ways?

What’s the current Price/Earnings ratio? Is the stock, based on its price, already expected to grow like a weed? Is the price cheap compared to earnings and therefore the growth expectations modest?

How’s Leadership? Particularly the CEO. Have they shown the ability to delay gratification? Are they committed to building a long lasting company? Visionary?

My Love. The most important criteria of them all with my investing. How much do I love the product? And not just any product by the company, but the product that is making the lion share of their revenue and profit. This is where I hope to leverage any information asymmetry I may have. Picking individual stocks that will beat the S&P 500 is tough and a big reason for that is because Wall Street is very good at understanding many of the other criteria I listed above. My taste has to be the differentiator.

The Equation

My Love + (Leadership .8) +( PE.7) + (Cash .3) + (Potential *.7) + (Macro View .5)

My love for the product is the most important to me and therefore I give it the most weight within the rubric.

The Individual Stocks I Own and Their Rubric Score

Stock My Love Leadership PE Cash Potential Macro view Total
FB 8 10 4 8 8 9 31.3
AAPL 10 9 10 10 7 8 36.1
AMZN 7 9 1 3 8 10 26.4
TWTR 7 9 1 5 9 9 27.2
GOOG 8 8 8 8 7 8 31.3
BRK.B 5 10 8 8 5 7 28
CMG 10 8 5 3 7 7 29.2
UA 8 9 4 2 7 7 27
SIRI 7 6 6 2 5 5 22.6
TEAM 8 9 1 8 8 9 28.4

Each criteria is on a 1-10 scale. A perfect score, after the weights, would be a 40. A score of 25 and above is what I consider to invest in.

With $SIRI, the outlier, I only invested $500 and I did it because it was unbelievably cheap at the time and I’m a big Howard Stern fan. It’s my biggest percentage gain investment to date but I consider it to be a lucky investment.

In the next couple of weeks I’m going write a breakdown of how I came to the numbers in the rubric for $FB, $AAPL, $TWTR and $TEAM.