My Investing Methodology
19th February 2024
In this post I want to share with you how my investing methodology works. I have slowly fine-tuned my strategy across several years of avid reading, research, and of course, investing. You will notice how simple and flexible my methodology is, you can adapt it depending on your risk factor, time availability, and personal preferences.
As an initial disclaimer, the following methodology is especially suited for people in their 20s. It’s also ideal for those who are less risk-averse. Nevertheless, I will dedicate a section on the adaptation I would make to my methodology for individuals who are more risk averse, and for those who have no time to actively manage a portfolio. But don’t expect a big deviation from my core methodology, as for me, risk should always be present in your investing journey. It’s all about percentages; not quantity.
That said, I want to share one key lesson I learnt the hard way: Do not invest money if you don’t have a sustainable income. If you have no recurring income, invest in yourself, not the markets. Learn a skill, become a professional, earn an income, and only then, think about investing.
Think about it for a second. Why would you invest a mere 1000 euros into an asset that in the best case (timing the market, with a 50% return for example) you’ll earn a thrilling 500 euros, when you can use that money to buy yourself books, courses, or to make businesses. I was like this too, I did not realise how unnecessary it was to invest at this level until I saw my profits. You need more capital for investing to be a productive activity to generate wealth. In my opinion, if you don’t have at least 10000 euros saved up, there’s no reason for you to divide your attention and start investing. The best strategy is to focus on increasing your income, that is your priority.
As for crypto investing – go for it, it’s your responsibility, but make sure you do not need that money. You can get lucky, but trust me, it’s not sustainable in the long-run. Like mentioned in the book, ‘A Random Walk Down Wall Street’: “What is hard to avoid is the alluring temptation to throw all your money on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.”
Having established the importance of a stable income, let’s dive into the core of my investment methodology.
My investing methodology is very simple. Index the core of your portfolio with low-cost, tax-efficient, broad-based index funds, and allocate a small percentage to riskier investments. Index funds should be treated like a savings account. Allocate money to it on a monthly basis, and benefit from the effect of compounding. The rest of your portfolio should be left for speculative investments in assets such as stocks, and at a smaller scale, alternative assets such as crypto, or to play with special market situations such as Spin-offs, Mergers, or Acquisitions. Read the book “Become a Stock Market Genius” for more information on trading special market situations.
I like to manage my portfolio in percentages, not amounts. The core of your portfolio should be a minimum of 60%. I believe that if an investor is to buy only one U.S. index fund, the best general US index to emulate is one of the broader indexes such as the Russell 3000, the Wilshire Total Market Index, the CRSP Index, or the MSCI US Broad Market Index; not the S&P 500. There are however other great options outside the US like the MSCI World Index.
The remaining 40% should be divided into a chunk of 25% stocks, and 15% for risky investments. I found this allocation to be the most profitable in the long-term. You can go even further and allocate 5% of your portfolio to very risky investments. This is what I call, calculated gambling. If you are mature, and have a steady hand, I see no reason to not invest in highly risky assets or opportunities that could make you lose everything, or have unheard-of returns of many one-hundred percents. Since you have a strong, established portfolio strategy, if you lose your 5% allocation, you still have another 95% to counter that potential poor investment. But if you are lucky, you will have an extra bonus to allocate into your core holdings, or cash out for your own benefit. That said, make the following rule your mantra for investing, whether it’s safe or risky – Know what you own and don’t invest in things you do not understand.
A very useful technique I recommend you use. If you really like a certain company, but after carrying out your analysis, found it was too expensive, make a small commitment to track its progress, and deploy your desired amount when it’s at a reasonable price. Another strategy I recommend is to always have capital in your broker account, uninvested. You never know when a once in a life time opportunity can arise. When this happens, you want to have immediate liquidity, to take full advantage of it. I cannot stress this enough. I lost on potential incredible profits because I had to wait for my bank to complete the transfer to my broker.
On another note, I want to talk about the power of Dollar Cost Averaging, which is mandatory when investing in the long-term. A rational investor finds the strength to continue buying cheap stocks even in the darkest days, instead of hiding ‘like a turtle under the shell’. Personally, I remember in 2020 when the market dropped a staggering 30%. Everyone was panicking, and I was like a kid in a candy store. Dollar cost averaging is how I suggest individuals to buy assets. For example, if you want to invest 50000 Euros into Apple, don’t put it all in at once. Divide the investment into different chunks, perhaps 1500 per week until your assigned capital is filled. This way, you won’t have to think about timing the market, because this has been proved to be impossible for a common investor, which is 99% of us. This strategy is not only safer, but also more profitable, since you will lower your average buying price. The latter may not always be true, but in any case, you will drastically reduce risk. Same thing when investing in Index Funds – the best strategy is to allocate a fixed amount of capital on a monthly basis. Wait for compound interest to do its magic, and forget about it.
You may be thinking – I don’t have time to buy several stocks/index funds with different amounts every single day/week/month. True, this can get too repetitive. This is why most if not all brokers allow customers to automate their capital allocations in a given timeframe. Discuss this with your broker of choice, it is very worthwhile.
Essentially, no matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic-pilot nature of the program. Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low prices. Dollar-cost averaging will give you this bargain: Your average price per share will be lower than the average price at which you bought shares.
As for technical advice when valuing assets, I have been part of an investment fund called EDEN for the past 2 years, in which I learnt a lot about stock valuation – producing Discounted Cash Flows, Comparable Analyses, Sensitivity Analyses, etc. I also participated in various stock pitch competitions, winning one of them in front of judges like the Vice-President of BlackRock Spain, the Ex-CEO of Deutsche Bank Spain, or the COO of Goldman Sachs Spain. All in all, after all this professional and personal experience, I can sadly confirm you the following – “Financial Forecasting appears to be a science that makes astrology look respectable”.
At the end of the day, we all wish that we had a little genie who could reliably tell us to “buy low and sell high.” Systematic rebalancing is the closest analogue we have. I would suggest you to have a thorough look at your portfolio once every 3 months. Evaluate your positions, cash out if necessary, rebalance your percentages to maintain your strategy, make plans, invest in new positions, etc.
In conclusion, this is how my methodology works. I encourage you to compare your current methodology with mine, reflect on the differences, and perfect your system. A healthy investing methodology should change from time to time. Markets change a lot more than we expect. We saw this during Covid, or in the Ukraine war, or over the Israeli war … you get the idea. A rational investor is flexible, open to new ideas, and able to adapt during market turmoils. That said, I wish you luck in your investing journey, and I hope you learned something new.
