The world is experiencing an explosion in new companies with new products and services. It’s an exciting time for investors filled with opportunity.
The following is adapted from Financial Freedom Blueprint.
As technology has sped up, it is affecting virtually all sectors of the economy. This innovation will continue to lead to big winners and losers. But with so many opportunities for investment, how do you know which companies to invest in?
Investing successfully is like great cooking. It requires a recipe (a formula) that leads to tasty food in a consistent way. Your stock recipe is simply a checklist to help you stay on track.
If you follow the recipe, you will learn the odds in your favor to pick winners. Not every stock will be a winner, but if you combine the recipe with risk management and portfolio construction protocols, then you will have a long-term winning recipe.
I want to share a formula I developed for trading and investing in stocks. This formula gives you the tools to find the right stocks, where to focus your capital, and how to invest profitably. It is a further refinement of the stock that meets the ADP Criteria.
If you are like most people, you want to grow your money in stocks, but you’re worried about losing money. I developed this formula and have been successfully managing millions of dollars for clients and myself.
Over time, this philosophy has helped me avoid stocks that are too risky, and increase the probability that my stock investments will make money. This strategy, combined with smart diversification, can help you improve your growth and protect your money.
Here is the formula:
The 3 Cs and the 3 Ps give you the ammunition to find what stocks to focus on for investment. The “SA” part of the formula explains how to trade the stocks.
Let’s start with the 3 Cs.
The first “C” stands for customers.
Who are their customers? Are their customers stable? Are customers growing and doing well? Are they price-sensitive or are they willing to pay higher prices? Customers are the lifeblood of the business. That is the best starting point when selecting stocks. You are looking for customers that are growing in number and willing to pay higher prices. It’s better if they are repeat customers.
The second “C” stands for competitive advantage.
Does the company have a product or service that is truly better or more desirable than the competition? Is their business a game-changer or new product category? The competitive advantage is important because it will determine if customers will buy this company’s products over the competition now and in the future.
The third “C” stands for costs.
What is the cost of doing business for this company? Are their profit margins high, medium, or low? Are these costs likely to increase or decrease? Can this company face radically higher costs for some reason? Are the costs volatile and subject to sudden and large changes up or down? The costs are important because this affects the chance the company can withstand a sudden loss.
Now let us go over the 3 Ps.
The First “P” stands for people.
Who are the key people in the management team? Do they have a track record of doing a good job? Do they make sound decisions with capital or do they spend it unwisely?
The second “P” stands for position.
What is the company’s financial position? Do they have a lot of cash on the balance sheet, or do they have a little cash? You obviously want more cash on the balance sheet to protect your investment. Do they have a high amount of debt or a low amount? Although this is not an exhaustive list of the financial position, the two most important factors are the cash position and the debt amounts.
The last “P” stands for performance.
Is the stock being recognized in the marketplace for doing well? You should see the stock outperforming the market and trending higher. I have a simple acronym used to analyze the performance of a stock.
The acronym is TORQ. It stands for Trend, Overbought/Oversold, Relative Strength, and Quality Patterns. The TORQ analysis helps you determine if the stock price is acting healthy with good supply and demand characteristics.
In the last part of the stock selection formula, the “S” stands for safeguard.
Rule number one is to safeguard through position sizing and predefining your risk. You must pre-determine how much you’re going to risk before you invest or trade a stock.
This amount will help you determine how much of your capital to put into each stock. You must make sure that you give your stocks enough room to hold them through normal volatility. You also need to have a level for which, no matter what your view of the fundamentals, you will cut your losses short if the stock moves against you.
No matter how great your fundamental analysis is, you must cut your losses to mathematically allow your profits to outweigh your losses. Maybe the markets were not right, maybe the government is doing something to hurt your investment.
Next, the “A” stands for asymmetric.
That is just a fancy word for finding opportunities that have limited downside and a very large upside potential. You want to cut your losses short and let your profits run.
This approach will help you achieve an asymmetric payoff, where the upside is very big relative to how much you’re risking.
So that’s the formula: the 3 Cs, the 3 Ps, safeguarding, and asymmetry. If you follow these factors, you are likely to increase your profits and avoid big losses. And isn’t that the goal for any financial investment?
This easy-to-remember formula can direct you to the best stocks, determine where your capital should go, and increase the probability that your investments are profitable.
Knowing these things gives you a big edge in the stock market, and your goal to earn more than your cost of living can be a reality. Follow this successful formula and invest with more confidence.
For more advice on how to be successful in the stock market, you can find Financial Freedom Blueprint on Amazon.
Louis B. Llanes is the founder of Wealthnet Investments, LLC, a fiduciary registered investment advisory firm. Prior to founding Wealthnet, Louis held several investment management positions, including senior portfolio manager for the US Bank Private Client Reserve, a quantitative trader for a private fund, and investment consultant for Kemper Securities. Louis holds the Chartered Financial Analyst (CFA) and Chartered Market Technician (CMT) designations, an MBA from the University of Denver, and a BS in Finance from the University of Colorado. A contributing author of The Handbook of Risk, he wrote Financial Freedom Blueprint to help busy professionals enjoy the retirement they deserve as early as possible.