There are several ways to make money in equity markets. Under this umbrella, there is a broad range of investors, securities, and trading/investment styles. On one extreme, there are investors who buy and sell maybe once a year or even less while the other end is full of traders who earn their living buying and selling multiple times in a day. Somewhere in this range, we find a place for ourselves. Not active on a daily basis but I’m certainly not in the ‘buy and forget’ camp either.

I follow a 4-step process, deeply rooted in fundamental analysis, to arrive at a shortlist of investment options

1. Initial Screening

   • Market capitalization

   • Average return on equity

   • Increasing ROCE

   • Sales growth

   • Average Earnings Growth

   • Operating Cash Flows

   • Price to Earning – Industry PE < 0

   • Low free float

2. Industry Structure Overlay

   • This is done to weed out stocks in industries which are likely to face headwinds in the form of pricing deterioration, competition from deep-funded peers, technology disruption or policy changes.

3. Rank and Prune

   • This list of stocks is further ranked to highlight stocks trading at a discount to its peers. I achieve this through a combination of parameters like Market cap/Annual sales and the difference between the stock’s PE ratio vs industry PE ratio. Following this step, the number of stocks is reduced considerably.

4. Corporate Governance Scan

   • As a final step, this is absolutely crucial to understand management quality wherever possible. Part of it such as prudent asset allocation is captured in the first step but numbers often fail to governance aspects such as related party transactions, unrelated diversification etc. I use internet to understand management’s past decisions and tools like Valuepickr are very helpful in this regard.

Overall aim is to generate index-beating returns and make ample use of quantitative factors such as P/E ratio, ROCE, Debt profile, qualitative factors such as industry structure, runway for growth, and corporate governance.

If you have made it so far, you might also be interested in reading my investment philosophy.