What is the most important thing in an investment strategy?

The most important thing is to understand our client’s risk profile. These are not only psychological factors, his experience in the operating business, the timing and horizons of his investment. An investment strategy is a multifactor model that studies the psychotype of our client, studies his attitude to geopolitical risks, his experience, his experience in real business.

These factors are the main ones in building the client’s investment strategy and the structure of the investment portfolio.We pay great attention to macroeconomic analysis and analysis of the geopolitical state in the world. It is these factors that greatly influence the level of capitalization of both individual companies and the market as a whole.

Considering the investment terms and the fact that we invest for a long time, fundamental analysis of exactly those companies that we include in our investment portfolios is key for us.
Experience shows that investing in the stock market is not a game at all, but a very thorough work not only on the selection and analysis of a company, but also on the formation of a long-term investment strategy, where great attention is paid to psychological aspects.

We also take into account that most aspiring stock market specialists have the wrong impression about the challenges that await them. Working in the stock market involves making a large number of decisions in an environment with a large number of unknowns. You can spend a lot of time analyzing the company, studying the risks and growth drivers of the company, and then a situation happens that goes beyond the forecast. At this point, investor psychology plays a key role. There are situations when you need to overcome your own ego, admit your mistake and fix minor damage in order to prevent large losses. There are also opposite situations, when you need to stick to the initial decision, despite losses, that is, think not about fixing a position, but, on the contrary, about increasing it.

Consider geopolitics and the global economy

In the financial world, a wide range of factors affect the prices of certain assets. Although the trend of de-globalization is accelerating against the backdrop of the coronavirus and the escalation of trade conflicts, it is impossible to bypass a number of macro factors when analyzing and choosing a company for investment. Each company conducts business in a specific industry and its development depends on the macroclimate in the country and the world. The level of interest rates, inflation, employment, unemployment – all this is taken into account when determining the directions of investment.

The global COVID-19 pandemic has caused significant economic loss and human suffering. The global economy contracted in the second quarter of 2020. However, this year has not been bad for investors. If we compare the total value of the global stock market in September 2020 and before the coronavirus, it has hardly changed. There are many factors behind this: the production of goods and services is gradually increasing, employment is recovering, progress in the creation of a vaccine against COVID-19, etc. The recovery is becoming more real and does not provide for a further decline.

Although both fiscal and credit policies were aggressive, the other driver was the megatrend of low inflation expectations, low nominal and negative real interest rates. If you ask the question – why the ten-year rate on Treasury bonds today is about 50 basis points, but in reality everything is 100, we must remember the fact that in the period from March to June 2020, the balance of the US Federal Reserve System increased by $ 3.6 trillion, which is equivalent to 16% of the country’s annual GDP. For comparison, the same amount was used during the 2008 FED crisis, but for four separate support programs that lasted for 2.5 years. In this example, we see how you can use macroanalysis to establish important relationships, as well as draw conclusions about what is happening in the country and the world.

Understanding how the economy is recovering makes it possible to recommend certain investment strategies to the investor. More aggressive if the economy is recovering, or more conservative if a recession is expected.

Company analysis is the key to the success of an investment strategy

To include or not to include shares in a particular company? A large portfolio investor makes such a decision only on the basis of a thorough analysis of the issuer of the stock. The investment analysis of a company can be divided into 6 stages, depending on the industry in which the company operates.

Analysis of the company’s business model
Identify the sources of the company’s income.

Pay attention to the geography of the company. Does the company have regulatory prohibitions and restrictions on its activities in the country? It is also worth exploring the microenvironment in the country.
Analyze who the company’s customers are. Understanding the target audience of a company constitutes an understanding of how the business operates.
Determine the value of the company’s product. The company’s products must create value for the customer and solve his problems.
Study how the company attracts customers. Is it direct selling or a referral system? How many customers are coming from organic and non-organic traffic? Have you created a partner ecosystem that helps to attract customers? At this stage, it is important to investigate the following metrics: the level of churn and customer retention, the cost of attracting customers to the company.

Analysis of the company’s industry.

It is important to understand in which sector and in which industry the company operates (for example, the technology sector, the software industry). It is necessary to determine the size of the market and the rate of growth of the industry. The AI software industry is set to grow at 41% CAGR through 2025. It is possible to draw conclusions about the company’s behavior in the market in the next 3-5 years.

The next step is to determine the company’s competitive advantages in the market. Does the company have patents, licenses, regulatory approvals, and has access to valuable assets.

And what if you compare with your competitors? It is necessary to determine what business models they have, what products are selling, what are the growth rates of income, and whether these competitors are a threat to the business of the target company.

Operating and financial condition of the company.
First of all, you need to investigate the general trend of the company’s income – growth or decline. Next, divide the income into permanent and non-recurring ones. Determine what kind of permanent income the company receives. Then you need to make an analysis of cash flows: how the company’s money is generated and how it is spent over a certain period of time: a quarter or a year.

A very important point is the analysis of the debt burden. Usually companies with a Net Debt / EBITDA ratio higher than 3 are not taken for analysis, because this indicates that the company cannot effectively manage its debt.

To understand whether a company will generate revenue, you need to look at the following metrics. For tech companies, look at average customer growth, average customer revenue, and calculate the ratio of customer acquisition cost to customer lifetime value. Usually companies that operate on a subscription basis aim for this ratio at the level of 3: 1. In fact, the ratio can differ depending on the sectors, then it is worth looking at this ratio along with other indicators: the average annual growth of customers and the growth of the company’s billing.

Company management.
A strong leader is essential to the success of a company. It is worth analyzing information about previous experience, in which industries he worked, he was successful in previous positions, the management of the company buys shares of his company, that is, he believes in the success of his business.

Opportunities for company growth.
It is worth paying attention to the strategic goals of the company, which the company sets and gives forecasts. For example, semiconductor industry company Korver predicts revenue growth based on increased demand for 4G and 5G phones.

Mergers and acquisitions of the company.
It is important to analyze the historical mergers and acquisitions of the company, whether they were successful or an open company for new acquisitions, one or another deal for the company brought revenues. Based on this analysis, it is possible to form specific investment ideas for the company and determine what will become the trigger for future growth.

By analyzing these factors, you can rank the client on a scale from conservative to aggressive. Conservative – has a low investment horizon, a high need for liquidity and a low risk tolerance. Aggressive – on the contrary, invests for a long time, reinvests in his savings and has a high risk-taking ability.
Only on the basis of this information it is possible to form an investment strategy that will correspond to the investment goals of clients.

This article is not advertisement and a call to invest. The content that we write and publish have only information character and is the subjective opinion of the author.

Editorial – The ESG-zation of the asset management industry

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