As a boutique financial consulting firm that guides hedge funds, family offices and high-net worth individuals globally, we often receive questions around how to evaluate a stock/investment portfolio and this blog post touches on some of the key things we look for.
On the surface, capital allocation and the construction of an investment portfolio should be a multifaceted decision for every investor based on their specific goals, needs, and risk tolerance with a core focus on safety of principle and favorable risk adjusted returns.
Portfolio management for high-net worth individuals should be thought of in terms of a group operation where capital is spread across undervalued securities of different asset classes that have low correlation or are inversely correlated in a diversified way that in aggregate minimize the risk of being wrong, while also maximizing the potential of being right, thereby creating a favorable risk adjusted return profile based on the average result of the portfolio of securities.
The exact proportion of capital allocated should consider 5 factors:
1) The securities selected for investment
2) The market price of securities
3) The intrinsic value of securities
4) The time when securities are selected
5) The financial position and character of the investor
First and foremost, investors should make investment decisions based on the intrinsic value of the business/stock with a prime emphasis on the facts and what has been accomplished in the past. The central focus for the investor is on guarding against the future, with the facts from the past being used only as a rough index for the future. Strong emphasis on book values, working capital, debt to equity ratios, current and coverage ratios and those undervalued investments that are predictable, durable and inherently stable with a proven track record of being able to withstand adversity while generating reliable increases in free cash flow over long periods of time.
At The Practical Contrarian, we are governed by robust and granular fundamental research along with minimum standards of safety to identify those securities that possess the most favorable asymmetric reward to risk profiles and the best risk adjusted investment opportunities based on a top down and bottoms up approach of the quantitative and qualitative factors in combination with the application of proprietary technical analysis to capture first principles of mean reversion to help navigate the wide range of potential market outcomes for securities of various asset classes.
Furthermore, applying our fundamental principle of “quality over quantity/certainty over frequency” to the selection of undervalued securities which means to sacrifice the more frequent, less certain, higher risk, less probable favorable outcomes in favor of the less frequent, more certain, lower risk, highly probable favorable outcomes. By applying the scientific method with an analytic, data-driven operationalized approach to portfolio management/asset allocation based on well-specified investment criteria we strive to select an exclusive group of only the best quality undervalued securities with the rejection of securities of inferior grade that do not meet our proprietary minimum standards of safety.
If you have questions about additional ways to evaluate stock/investment portfolios we’re here to help!