Basically investment return is future value over historical cost over time. So how do we maximize this equation?
You will need the greatest future value over the smallest cost over the least amount of time.
Now, how do we choose investments whose inherent characteristics will automatically morph into a maximisation of the above equation?
Well you need to make sure you will end up with a large future value in the first place. The following comments and check-list will help you get there.
First, a health warning. Finding growth stocks is not easy. It will certainly consume a great deal of your time. If you are not fairly experienced, do not invest a large amount of your capital. The markets can be dangerous and are totally impersonal and a stock doesn’t know you own it. There is no easy way to find bonanza stocks and a lot of advisors make a pile of money out of selling advice and not nearly so much out of investing for themselves. Having made this point, however, it should be noted that nowhere else, but in the stock market, can great wealth be accumulated quickly by the careful selection of growth shares. With patience and discipline significance success can be achieved.
Here is the list :
- Is the management team innovation and creative? Are they honest and respected? Would the business community classify them as excellent? Management must display a high level of trusteeship for shareholders and if this is not the case any investment must be avoided.
- Do they have the resources, processes and vision to succeed?
- Do they complete on performance and not price?
- Is the top line – revenue – turnover growing year by year? No hoof, no horse – no revenue, no company! The company must have a product or services that has sufficient potential to lead to ever increasing sales. The company does not need to show increasing revenue every year, although it is better if it does, but the revenue line must be on a growth trajectory. The revenue growth can be lumpy as new products are developed and marketed but the sales line must then show a step like increase. Therefore this growth should be measured over several years – I like to see at least five years! It is important to realise that unless a company continues to enjoy the benefits of excellent management there is no way its revenue line will grow dramatically.
- Is the compound growth rate in earnings per share in excess of 20% per annum?
- Does the company dominate the market and are there barriers to entry.
- Is there a huge market for the product? The bigger the market the greater the probability for success.
- Back to earnings. A fantastic indicator for an investment winner is a great historical track record (as mentioned above a compound growth in earnings per share in excess of 20% per annum) and current accelerating earnings growth. This combination can result in an explosive winner. In the investment industry this indicator is known as momentum.
- Is the business highly cash generative and not capital hungry? Can the company increase a dividend payout ratio year on year, have enough capital to fund itself and engage in share buy backs if it wanted to?
If you can answer yes to most of these questions you have probably found a winner!
If you are not happy with your portfolio performance or would like a second opinion, please do not hesitate to contact Fenestra for a confidential consultation.
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