freebirdcapitalA buy list is not a list of stocks I like. It is the result of a procedure that filters, out of several thousand companies, the few that are good and reasonably priced — with a price at which I buy and a written rationale. The six steps to get there require no paid services.
1 · Set the profile
Before any filter is set comes the question of what the portfolio should deliver: current income, capital growth or both. That determines the profile — dividend, value, growth or neutral — and with it the weighting of all later metrics. My own portfolio follows the dividend profile, focused on US companies with a long dividend history.
2 · Filter roughly with a screener
Free online stock screeners filter the universe in seconds. For the dividend profile I set a few hard filters: market cap above $2bn, a dividend yield not far below the risk-free rate, a payout ratio below 75 % of earnings, positive earnings growth over five years and manageable debt. The pre-filter is deliberately coarse: whether free cash flow also covers the dividend is only checked in the full rating. Nothing more is needed at this stage — every additional filter also removes good candidates.
3 · Quick test
The remaining names go through the quick test of the Freebird Rating: seven metrics on growth, return, payout and debt, a maximum of 35 points. From 25 points a stock moves on, between 20 and 24 only with good reason, below that it is out. It takes a few minutes per stock and saves the time for the candidates that deserve it.
4 · Full rating
The full rating measures eleven metrics against thresholds for the respective sector and against the current interest-rate level. From 70 % of the maximum, the real analysis begins: business model, competitive position and return on capital. This is where I decide whether I want to own the company — price does not yet play a role.
5 · Determine fair value and the buy zone
Only now does price come in. With the fair value calculator I derive a fair value from earnings, growth and an appropriate P/E and deduct a margin of safety. Why this step decides success is shown in The two keys to investment success: the same company returns 8 % a year at a fair price and less than 1 % at twice the price.
A rule of thumb makes return differences tangible: 72 divided by the annual return gives roughly the number of years in which an amount doubles. At 8 % it is 9 years, at 4 % already 18. Too high an entry price therefore costs not a few percentage points, but years.
6 · Keep the buy list
Every stock on the buy list gets three entries: the price at which I buy, an investment thesis in three sentences and a review date — at the latest with the next quarterly report. The list is short, and that is intended. When a price enters the buy zone, I do not decide anew but only check whether the thesis still holds. How to measure the result later is explained in Measuring portfolio returns.
The six steps are the practical side of the process on the method page: steps 1 to 3 are screening, step 4 analysis, step 5 the decision, step 6 monitoring.
Own procedure. The rule of 72 approximates compound interest and is sufficiently accurate for returns between about 4 and 12 %.
