First share screener

“A great company is not a great investment if you pay too much for the stock.” – Benjamin Graham

I love cheap stocks, and if the company is also good, that’s even better. Once I finished valuing Berkshire Hathaway, I needed to find companies to research next, so I decided to use a share screener to search for companies that fulfill my three main biases:

  1. I hate debt;
  2. I like dividends;
  3. I love discounts.

The Financial Times has a great equity screener available on their website which lets you use dozens of criteria such as country, sector & industry, and equity attributes like valuation multiples, growth rates, management effectiveness, financial strength, margins, growth, price and others (you can even use predefined Warren Buffett and Benjamin Graham screens):

https://markets.ft.com/data/equities?expandedScreener=true

I selected only the following three equity attributes (to match my biases):

  1. Total debt to capital: less than 25%;
  2. Dividend yield: greater than 5%;
  3. Price to cash flow: less than 5 (for a cash flow yield of 20% per year).

Besides the above criteria, I also selected specific countries to invest in, simply because my Investment ISA is with TD Direct and their platform only allows me to buy shares from the following:

  • Europe: Belgium, France, Germany, Ireland, Italy, Netherlands, Spain, United Kingdom;
  • Americas: Canada, United States;
  • Asia-Pacific: Australia, Hong Kong, Singapore.

This screen returned a list of 50 companies, and I will be posting my thoughts on each company’s latest annual report for the next few months.

Stay tuned.

My Investment Criteria

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Before I start writing about the annual reports I read I want to let you guys know about my personal biases (because you might not share them) and about what kind of companies I look for…

To put it simply, my personal biases are:

  1. I hate debt;
  2. I like dividends;
  3. I love discounts.

I hate debt because it’s the main reason companies go bankrupt. I am well aware that, if used conservatively and efficiently, debt can be used to increase returns on equity, but if the company runs into trouble (even if it is temporary) and is unable to meet its loan payments it will go bankrupt, the creditors will claim the assets, and the shareholders will be lucky if they retain a small sliver of their investment. If a company has no loans, I’m much more confident that it will be able to survive any bad periods it may have, and that I will not suffer a permanent capital loss.

I like dividends because, even if you find a company you think is undervalued, it may take years for the market to fully recognise its value. If I am to wait patiently for this to happen, I want to at least have the satisfaction of seeing some money coming into my account. Having said that, I would not insist upon this if I’m fairly confident that management is using the retained earnings rationally and getting a good rate of return on capital.

I love discounts (aka margin of safety) because you make your money when you buy, not when you sell. Most people buy shares in the expectation that their price will rise, without having any clue as to how much they are really worth. Safe to say this sometimes doesn’t work out so well. I feel it’s much better to do the opposite. Know the value, and buy it for much less (money in the bank, basically). Don’t you like going to the supermarket and seeing a promotion to buy 2 for 1 (a 50% discount!) of one of your favorite items?

So, what kind of companies do I want to invest in? In Berkshire Hathaway’s Shareholder Letters and annual reports, Warren Buffett has mentioned several acquisition criteria throughout the years. I think the most important ones are:

  1. Demonstrated consistent earning power with favorable long-term prospects;
  2. Good returns on equity with little or no debt;
  3. Honest management that makes rational capital allocation decisions;
  4. Simple business selling for a significant discount to its value.

Easier said than done! The great majority of public companies do not fulfill these criteria. Many of them are cyclical (meaning they do well in good economic times but struggle when the tide turns), or complex (you couldn’t figure them out even if you had years to do it), or are selling for an expensive price, or have poor returns because their managers just keep plowing money into bad investments or buying companies for more than they are worth just to make their company bigger (when they should just return that money to shareholders).

Hence, I do not expect to make new investments every week, or every month for that matter. If I can find a good investment or two per year, I will be happy. One of my favorite Buffett quotes is:

“An investor should act as though he had a lifetime decision card with just twenty punches on it.”

Instead of buying shares like you’re buying candy or a six-pack (like most retail traders), buy shares with the same care as you would when buying a house.

Welcome to Investing: Move by Move

When asked how he became so successful in investing, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

When I was a teenager I liked to play chess, but no matter how many books I read, my level of play didn’t seem to improve. They were either for beginners, or too advanced for me to understand the concepts that would take me from beginner to intermediate, and then to advanced level. And then I found a book called “Logical Chess: Move by Move” by Irving Chernev. I had never seen or read anything like it. Instead of just writing down moves and annotating a few variants whenever a mistake was made, this book explained every single move in 33 master games of chess. It made me much more aware of the reasons why a certain move was good or bad, either tactically or positionally, and greatly improved my understanding of the game, helping me break through that plateau.

Hence, the name for this blog.

My name is Rui Rodrigues. I moved from Portugal to London almost two years ago looking for employment opportunities in the financial sector, since I love finance, financial markets, and am a huge fan of value investing and Warren Buffett, considered to be the most successful investor of all time. I have a degree in Business Management from a portuguese university, passed the CFA Level 1 Exam but failed the Level 2 Exam (more times than I care to admit), and I recently achieved the Investment Management Certificate (IMC). My career has been built mostly in sales and customer service, however.

Like most millennials, I’m still not in the property ladder and my retirement planning leaves much to be desired. Aside from some personal savings and my company’s pension savings plan, I have nothing else in place. Safe to say this will never be enough to provide me with a comfortable life when I’m old, so I knew that decisive action was necessary. Better late than never, so…

A couple of months ago I won an equity trading challenge with a performance of 45% in one month, and the prize was a £2000 travel voucher, which I sold with a little discount. I decided to put some of that money into an Investment ISA (Individual Savings Account, for those of you who don’t live in the UK) and start investing in shares without paying capital gains tax or dividend tax (huge advantage over people who live in countries that don’t have something like this!). I have tried trading forex and CFD’s in the past (not with much success) but like to think that I have become wiser since then, hopefully.

I want to invest using Warren Buffett’s and Benjamin Graham’s principles and buy good companies when they are trading at a discount to their intrinsic value. The question is: how do we determine that value? As the quote at the beginning of this article suggests, we start by reading annual reports.

The purpose of this blog is for me to record my journey and share with you every move I make when investing (or when deciding not to invest, which will probably happen most of the time) by analyzing every annual report I read, as well as the best books I like about this subject, so that you learn from my experience (and probable mistakes). I hope I can help you prepare for your retirement, or improve your financial situation, or simply improve your knowledge about personal finance and investing, and add value to your life. Also, it would not hurt if I could make some extra income from this blog (although, at this time, I have no idea how that might happen) so I can put a bit more money towards my retirement (and buy a house and start a family, eventually…).

Warren Buffett says that he has three trays where he puts reports after reading them: Yes (companies that he would invest in); No (companies that he doesn’t like); Too Hard (companies that are outside his circle of competence and that he feels he can’t analyse competently). I propose to do the same with every annual report I read. And if one ends up on the Yes tray, I will start researching the company and try to value it. When the value of the company is greater than the price for what it is selling in the stock market, we have a margin of safety (aka discount), and it might be the right time to invest.

Now the question is: where to start?