Beachman's investing approach & how to maximize your subscription - Part 2

HowTos: Making sure that you are getting the biggest bang for your buck

Mar 4

In Part 1, we discussed my intent and philosophy behind starting this publication. Since the main subject of my writings and the core reason for the very existence of this substack is investing, it is important for me to succinctly define and describe how I invest.

So lets take a closer look at…

Beachman's investing approach

I use a 7-step, top-down approach to investing:

Themes
Macro-mapping
Watchlist
Beachman's score
Earnings reports
Fundamentals and trend analysis
Buy points and trim points

Themes

Each year, I create a short list of themes or sectors that I want to invest in. This annual exercise forces me to scan the broader market for ideas and to understand sector dynamics playing out that year and over the next 3-5 years. Once the short list is ready, as stock ideas come across my desk, I can make sure that I am not putting money into a company that does not align with one of my interests. It also gives me an investing timeline for each sector as they go through their growth and normalization lifecycle. I might exit a sector before the growth and adoption slows down and vice versa, I might hold off on entering a sector until products mature a bit.

e.g. I think it is too early to invest in quantum computing, however I am getting increasingly interested in the internet of things. If you are wondering about AI, then I will tell you that I have been invested in AI for several years now…the recent hype is coming late to the party.

I want my investments "swimming" in the same direction as the secular market and sector tailwinds. I may not get everything right (e.g. I might pick the "wrong" stock), however, if I am generally in the ball park, I can take advantage of some or most of the sector momentum over that timeframe.

Macro-mapping

In order to improve our investing performance, it is important to understand what's coming up for the US and the global economy over the next 12 months. The best way to do this is to track the key macro-economic factors that measure the health of the economy, the consumer and businesses. As a long term investor, I have always preferred to look at 4-5 quarter trends and armed with that knowledge, I plan for broad quarterly investing portfolio actions.

My forward-looking 4-quarter macro map gives me a preview of where there might be pressure points and investing opportunities. It consists of about 45 macro-economic measures. These metrics ebb and flow each month, each quarter and based on their cycles, we can make informed "guesstimates" about sectors that will underperform or outperform through the rest of the year. The macro-map is a living forecast based on informed estimates, forecasts and historical trends applied to the future...meaning it will change with time and I publish regular updates to my readers.

Watchlist

Based on my preferred themes and the macro-map, I can now keep an eye out for companies that fit within my investing interests and timeline. At any time, I am tracking business performance and earnings of about 50 stocks. I try to keep up to date on business updates, industry developments and quarterly earnings for these stocks of interest. As companies make progress against their corporate roadmaps and start taking marketshare, they move up higher on my watchlist for a potential buy.

I am constantly adding and substracting to and from this watchlist. Several stocks on the list were, in fact, suggested by avid readers of this publication. Please keep those ideas coming.

Beachman's score

Every quarter, I score the watchlist stocks to track and compare their performance over multiple quarters. This exercise helps me identify the stronger companies where I might want to put my money to work. It allows me to sift through dozens of potential candidates to short list the ones that have the best potential to perform well in 2022-2023. It helps me put a numerical score to each of the key metrics that I believe demonstrate:

current business health
future business potential

I also use this quantitative method to quickly compare two stocks in the same industry. Last year and this year, especially, I want to ensure that my money is in the strongest stocks that are performing well amidst all the market volatility.

Consistently, each quarter, I find that the higher-Beachman-scoring stocks perform better than the lower scoring stocks.

Earnings reports

Every quarter, public companies give us an update on how their business is performing. We get quantitative insight into their sales, their costs to operate the business and their profitability. We get a report on the assets they hold and the liabilities they owe. We get visibility into how much cash is coming into the company and how much cash is exiting the doors. We get a much deeper sense of whether our share of the business (as a shareholder) is increasing in value or not.

Quarterly reports are the most important documents we receive from the company. However, they can sometimes be intimidating (too much detail), confusing (management fudge included) and FOMO-generative (after hours stock price reaction).

As investors, it is incumbent on us to review and understand them and to decide whether to stay invested in the company or not. I try to make that process easier for my readers.

I evaluate each earnings report using a consistent set of questions and criteria.

Additionally, each quarter, I identify some timely granular specifics that I believe are important and pertinent to that particular quarter depending on what is going on in the broader macro-economy and that sector. This is where things tie back to the annual macro-map I described above.

Fundamentals and trend analysis

As I measure the performance of each company using their latest earnings report, I look for trends in their business fundamentals. As an example, take a look at my brief on AYX's recent Q4 earnings report.

For top line growth (revenues), I track forward 4-5 quarter growth. For most other metrics I plot the past 5-quarter trends for their key business performance measures. I am looking for consistency in trends. I am looking for turnarounds and pivots. I am trying to identify stocks that are undergoing inflection points in their business cycle and who's stocks have the potential to rise over the next 12 months. Every time I find such a gem, I inform my paid subscribers about it. In fact, I just added a new position to my portfolio on the basis of this kind of trend and pivot analysis.

Buy points and trim points

When I find a stock that I want to add to my portfolio, I identify a preferred buypoint for my purchase of the first tranche of shares. I decide how much I want to allocate to the stock in my portfolio and I then buy in 3-4 tranches to build up the position over time.

For each stock already in my portfolio, I also identify a trim point at which I will likely sell a portion of the stock to take gains and raise cash. While I am long term investor, I have come to realize that stocks vascillate between being under-valued and being over-valued, depending on market condition and industry trends. And there is nothing wrong with taking profits on a portion of a stock holding if their price gets too much out of whack with reality.

I track valuation levels for all the stocks on my watchlist and this helps me identify both preferred buy points and trim points for them. I also look at their stock charts to identify areas of price support and resistance. While valuations provide numerical inputs into this process, the technical chart analysis makes it a bit of an art form.

So there you have it...Beachman's investing approach in a nutshell:

Themes
Macro-mapping
Watchlist
Beachman's score
Earnings reports
Fundamentals and trend analysis
Buy points and trim points

I have been using the core elements of this investment process for years now. Since retiring in early 2022 and starting this substack, I have been able to clearly document how my methods work. I now have time to write about them and more importantly I am able to report on them each week, each month, each quarter.

I do not actively hedge or short stocks. In 2021 and 2022, I used a barbell hedging approach. I do not believe it applies well to this year, 2023. I do a little trading on the side, mostly as a hobby and for “scotch money”. And a new feature coming soon to this substack will be “Beachman’s covered call strategy”.

In the final Part 3 of this series, we will take a closer look at all the sections and components of this substack, Beachman’s Newsletter, so that you know where to find all my important content to maximize your subscription.

Cheers!