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Less is more: How limitations can increase your ROI
7 tips to increase your return on your portfolio
Investors are often likened to wizards or alchemists in certain books, as they appear to generate greater value with a smaller amount of investment. This is why some people equate investing with gambling, as they fail to recognize the value-adding actions taken by investors.

As investors, we exchange capital+time+analysis/understanding=return on investment. The primary challenge stems from the fact that ROI can be negative, putting our capital, time, and confidence in our analysis at risk. This can be an expensive and psychologically taxing experience for many investors. Considering the vast number of publicly traded options (16,000+ according to Börsdata), evaluating each one individually is impractical, and we must make strategic investment decisions to generate profits. Mitigate the issue of information overload.

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To do this, we need to establish effective criteria to streamline our selection process while avoiding the exclusion of potentially profitable investments. Although some significant winners may inevitably be missed, a thoughtful approach to limitations can lead to catching more promising opportunities.

We want to increase our odds of finding good investments, and these are a few ways to do it through limitations.

Start where you stand
Starting from your current position provides two advantages: your scope is limited, and you likely possess greater familiarity with the products and services you utilize than some abstract machine that converts used
tires into oil. Consider the products you enjoy using or those that people in your circle typically consume. Remain open to new opportunities, but don't overlook the products and services you've relied on for years. Above all, cultivate a sense of curiosity.

Keep yourself within your circle of competence
Like the notion of starting from your current position, beginning with what you know can be highly beneficial. Consider your educational background, the industry you work in, and your personal hobbies. By introspecting, you're likely to identify areas of interest and proficiency.

Employing stock screeners is a useful approach to winnowing down the vast number of companies to research, from over 16,000 to perhaps 30. If you're unfamiliar with screeners, I recommend perusing this post on financial tools and websites. Focusing on limitations, let's consider screening variables that eliminate the most unfavorable companies. First, ensure the company has revenue; otherwise, its business model is untested, and the risks are significant. Second, confirm the company is profitable and has positive cash flow. Steer clear of firms that must issue new shares to remain operational. Third, screen for a Net Debt to EBITDA ratio of 1.5 or
lower, meaning the debt can be repaid within 1.5 years. Fourth, look for growth in the last three years that doesn't stem from unique situations like a pandemic or similar events. By starting with these criteria,
you'll avoid buying the worst-performing companies in the world and get off to a solid start.

Investment checklist
With an investment checklist, you make sure to cover all the bases you want to cover and that you focus on the important points when researching a company. It can be just some simple steps in order to do everything in a specific order. I divide my analysis into People, Business, Market, and Numbers. Then I have questions I want to answer when I do my research.

Theme investing
Investing in themes can prove highly beneficial since structural trends foster growth among all companies in the same theme. Additionally, themes provide a rapid way to gain familiarity with the relevant industry.

Limit the number of positions in your portfolio
Establishing a predetermined number of positions in your portfolio compels you to assess one investment opportunity against another. This approach urges you to weigh the risks and rewards of each opportunity.
There's another advantage to this strategy as well: by limiting the number of positions, it's simpler to keep track of and stay informed about each company.

Avoid biotech
The biotech industry is intricate; by applying the earlier restrictions, you may even choose to avoid investing in this sector altogether. The chances of a favorable outcome are minimal, and the average odds are not in your favor. Furthermore, comprehending the specific disease or symptom in question would require significant time and effort if you delve into the industry. Even if you identify a promising company within biotech, it's crucial to consider that financing studies for each phase are costly, which could result in the issuance of multiple rounds of new shares.

Stay away from binary outcomes
Binary outcomes are never favorable; the result is either 100% positive or 0% negative. Even if you assume a 50/50 chance, it is essential to re-evaluate your assumptions. In reality, those binary outcomes tend to lean towards the negative outcome based on the number of times such situations have occurred.

Do you set any limitations on your investing strategy? That will increase your return on your portfolio, save time, or make it easier to understand a company.
Leon's avatar
Great post!
Investacus's avatar
@mavix Thanks! I really like your posts on less known companies.



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