Simplifying the complex

There are two radically different approaches to equity investing. One says that choosing good stocks and making money off them is supposed to be a matter of innate skill, instinct and perhaps a little luck, too. The other emphasises process, research, principles, rules, etc. For the most part, individual investors seem to believe in the former approach, while institutions and professional investors profess a belief in the latter. Obviously, that's exactly what you'd expect. However, the path to investing success is a little more complex than that.

Does this mean that as an individual, you cannot be successful in investing? After all, you have to systematically research a large number of companies; apply some standardised, rigorous process on each; pay close attention to their business, finances, management, competition, technology and more; and then choose the ones worth investing in. After you invest in them, you have to keep a close eye on them and see that there are no unpleasant surprises. Can an individual investor do all this, especially when he or she is likely leading a whole other professional life?

There is likely no individual investor in the world who manages to do this. However, there are many who manage to do the equivalent by farming out a certain part of the work to professionals. The amount of work you farm out can be less or more depending on how much you want to learn and do yourself and what your skill set is, which is where Value Research Stock Advisor comes in.

Undoubtedly, the most hands-off equity investing experience that you can have is to go purely through the mutual fund route. A vast majority of those who visit our website and read our magazines do mostly that. However, long experience has shown me that over time, a certain proportion of mutual fund investors like to learn more and add some direct equity investing to their repertoire. Value Research's equity products - Wealth Insight and the premium Stock Advisor - are meant for this subset of investors. Both are designed to play a dual role - that of an advisor as well as a learning tool. Of course, because it's an online and interactive tool, Stock Advisor can go far beyond Wealth Insight magazine for those who are so inclined.

A service like Stock Advisor is actually half-way between a mutual fund and doing equity investing entirely by yourself. When you invest in an equity mutual fund, you are accepting the investment decisions of the fund manager in toto. When you invest by using Stock Advisor, you are given recommendations by us, but you are free to either follow them 100 per cent or understand them and then modify them if you have the time and the inclination.

Value Research may have launched Wealth Insight around 15 years ago, but equity research and evaluation of companies and stocks have been an inherent part of our research capability from the beginning. Evaluating the investment portfolios of equity mutual funds for decades has meant that we actually have a more thorough understanding of equity investing as well as a much deeper appreciation of what works and what doesn't work in equity investing on a sustained basis.

Through this experience, we have evolved our own framework for evaluating and selecting good stocks. It begins with the entire universe of listed companies and applies a series of conditions, filters and checks. Interestingly, because of the perspective we have, we understand that a framework for selecting good stocks is as much a framework for rejecting bad stocks. We have developed a set of conditions that are absolute no-gos for stocks. No matter how good a stock looks otherwise, if it qualifies on one of these negative factors, then we absolutely will not consider it. After that we have a set of qualitative and quantitative factors that we apply to further narrow this down to a list of investable companies that we recommend.

It goes without saying that this is only half the job, maybe even less. Monitoring the recommended companies is just as important and, in a way, the key part of the service we deliver to you. Lots of individual investors manage to select good stocks but then are unable to take the process further. In our process, we monitor each of our recommendations closely and indeed have downgraded a small set of our recommendations over the last four years. Far from being wedded to our choices and suffering from confirmation bias, we go out of our way to be sceptical of our own earlier decisions.

Value Research Stock Advisor is currently available at a considerable discount. You can read more about the service and become a member.