A Part Time Investor’s Investment Process

For the past few years, I have been doing value investing practice on an ad hoc basis. I read news & investment message board, follow the ones I deem interesting, do some my own researches & make decisions on building positions. So far, overall I have more hits than misses and my personal investment fund’s performance has been in line with S&P 500, even though I usually keep 30-50% cash at hand due to lack of opportunities (except for 2013 during which year the index ran up 30% and the cash drag bit me badly). Clearly, the cash drag was my problem. I also know that it is mainly because of the ineffectiveness of sourcing potential opportunities, given that my spare time resources are limited. To solve this issue, I have to have a formal investment process.

Based on my current knowledge, a typical value investing process would look like this:

  1. Screening: It is to filter the universe to narrow down to a small and workable subset for which I can further dig in more deeply. From there, I will pick out interesting opportunities from the subset based on investment style (either catalyst, or specific financial ratios, or sector, etc.)
  2. Business and Management Evaluation: It is the qualitative analysis of the security to determine whether the underlying firm has competitive advantage, good management team and potentials.
  3. Financial Analysis: It is the quantitative analysis of the security. Based on investment style, one should have a set of financial metrics to focus on.
  4. Construct Portfolio: it is to determine the weighting of the positions based on how good the ideas are. Also it is the process to set diversification and risk preference.
  5. Exiting: It is to make decision on when close the position. Catalyst realization, price target or strategic exit.

Here are some more detailed thoughts of each step:


The idea can come from 2 ways, systematic and ah-hoc. The systematic way is basically applying financial ratios filters to a stock universe, finding out the ones with specific financial patterns (PE ratio below X, Return on Equity over Y, etc.), which could be mostly done by computer models. On the other hand, the ad-hoc way will involve more reading on news, corporate announcements, investment community message board and other investors’ filing etc. and pick out the ones worth further research.

Business and Management Evaluation

This is the step of qualitatively analyzing a company. I think qualitative comes first is an important step to find good companies (which implies I am more inclined to “good company at a OK price” philosophy than to “OK company at a cheap price”). I find the best way for this process is to have a thorough checklist. However, as a part time individual investors, I find some of the information regarding management, suppliers & consumers are hard to obtain because sourcing these information usually need interviews. This is something I want to further explore when I able to scale up and have more resources.

Financial Analysis

This is actually the simplest part of the whole process, which any finance/accounting textbook can teach you. All you need is to find a set of metrics fit the best to your investment philosophy though some practices, either EV/EBITA or DCF value, or anything else. One thing I think worth mentioning here is that, it is beneficial to list out all the assumptions you make through the valuation process and give them a probabilistic review after getting the results. I personally think it’s quite helpful in gauging the downside risks.

Construction Portfolio

This is the part for which I am lacking a process. Currently I am allocating a fix percentage of my equity to each position, unless I feel very strong about an idea. And I don’t put over 10% to a single position to avoid concentration risk. I am aware of the modern portfolio theories (like mean variance, efficient frontier, etc.) since I came from a finance background, however I am not sure how relevant they could be for a value investor. I’m yet to reach a conclusion on this topic and will keep it on my to-do list for now.


This is also the part I don’t have a good process, but I think this is one I need to tackle immediately next. I can see 4 ways in determining exiting.

  1. target price is reached
  2. catalyst is realized
  3. you have a better opportunity and you don’t have enough cash, or
  4. you realized you were wrong

For all these reasons, one has to keep an close eye on the holdings about industry updates, business developments, corporate announcements & new filings. Potentially, I’d like to create a simple weight (combining both qualitative and quantitative information) to indicate how close one position is to the exit point.

Lastly, I need fine tune the frequency of repeating these process. Ideally, I would like to do Screening on monthly and Exiting review quarterly starting from this year. The Business & Management Evaluation and Financial Analysis will obviously go with the available potential opportunities from Screening process. All been said, this post is just my effort to put things on paper so I can stick to them more closely, albeit things are still not perfect. A not-perfect process is better than no process at all.

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