Stock Picking Methodology

To provide context around the stock picks that I share on brethathaway.com, I have decided to share the general thought process and methodology that I use when picking stocks. 

Like everything else in life, this methodology is not set in stone and is more of a set of guiding principles. When it comes down to it picking stocks, like everything else in life, is not black and white. There are occasionally times when I will buy or post about a stock that doesn’t meet all of the criteria below. That’s ok. Ultimately, we are all looking for opportunity in the companies we invest in. If I find opportunities that exist outside of my normal criteria I will still consider making those investments.

My Thought Approach

The approach that I take to portfolio building and investing is one that I have built over the past few years. It was mainly developed through a mix of research and trial and error, but I have found it to be successful so far. 

First, I am not a day trader and you shouldn’t be either. Day trading is incredibly difficult. Making a consistent profit through this approach is something that most people are not able to achieve. 

I am also not a buy-it-and-forget-it investor and you shouldnt be either. Buy-it-and-forget-it investors tend to hold positions for too long, or do not watch their positions the way they should. 

There is a happy middle ground that I like to operate in.

The general timeframe for my portfolio investments is 2 to 5 years. Why 2 to 5 years? Well, I have found that much longer than that and the business and/or market can fundamentally change, which could cause your investment thesis to change. Anything shorter than that and you are subject to market volatility that may not reflect the true fundamentals of the company. 

Methodology

When I am picking stocks I usually sort them into two different categories based on the expectation of future performance. Once the categories are set I then begin looking at the fundamentals of the company and the marketplace in which they operate. Doing so allows me to (theoretically) get a good sense of how the stocks will perform over time and which ones may be worthy of an investment.

Growth Portfolio Picks: 

Growth Portfolio Picks, as I call them, are companies that I feel have a great runway to outperform the broader market. Usually, I look for my Growth Picks in a 24 to 36 month timeframe and try to evaluate the business for factors that I think may add fuel, or water, to their fire. In general, I am looking for companies that:

  • Have a dominance in their respective industry
  • Have a rockstar leadership team
  • Sell a product or service that is differentiated in some way
  • Have strong free cash flow
  • Are able to efficiently manage their working capital
  • Have long term revenues that are growing in excess of 5% a year
  • Do not have a burdensome amount of debt

Keep in mind that while Growth Picks tend to have the ability to outperform the market with eye popping returns, they also have the ability to underperform the market with the same eye popping loses. These stocks tend to be more volatile than the market, making it important to remember your time horizon and forget the short term price swings.

Value Portfolio Picks:

Value Portfolio Picks, as I call them, are companies that I feel have some room for appreciation, but may not necessarily outperform the broader market. These stocks are ones that are the backbone of a portfolio. When I look at Value Picks, I usually look for companies that I think are going to offer great sources of income and some growth over the next 48 to 60 months. These companies may not see eye popping returns, but they also don’t see eye popping losses. In general with Value Picks I am looking for companies that:

  • Operate in a large, developed, market
  • Have an established leadership team
  • Have some form of barrier to entry in their market such a government regulation
  • Offer a very stable growth trajectory
  • Have a credit rating of B+ or better
  • Reward investors with a healthy dividend and a track record of dividend growth

Other Trading Considerations

The above approach is the one that I use to build portfolios and the one that I will use to make recommendations on brethathaway.com. That is not the only type of trading available though, and is not the only type of trades that I make.

Below are a few different types of trades/trading that I will occasionally enter into. Why? Because trading is supposed to be fun! Building portfolios can get boring after a while, so I will occasionally enter into shorter term trades and deploy the strategies that we use in my job to try to make a profit in the equities market (I still NEVER day trade though!)

I occasionally swing trade based on technical market factors like moving averages, the RSI, stochastics, and various other trend and momentum following techniques. I will not recommend swing trading positions on this website, however. Due to the shorter term nature of the trades, it becomes very hard to make a position recommendation that can be followed. 

I also occasionally trade options to either hedge my other positions, generate some income, or make a profit without a large capital outlay. I will be putting together a tutorial on How to Trade Options overtime, but will not be recommending options trades on brethathaway.com. Options trading can get very complicated, and can result in costly errors if you are not 100% sure of what you are doing, so it is not something you should trade without previous knowledge.

As a reminder: You should remember to consider every piece of investment information you receive, here or elsewhere, as an idea for further consideration and not a set in stone recommendation. There are no guarantees of profit associated with anything on this website and investing contains risk. Before making any investment you should consider the risks associated and make a decision based on your personal objectives.

Additional Resources:

LEAVE A REPLY

Please enter your comment!
Please enter your name here