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The Elimination Method: A Swift and Risk-Averse Approach to Stock Investing

Updated: Feb 17

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

After conducting exercises from previous the previous article:


You should have an idea of the industry you will be interested in,

and compiled a list of companies with the best-rated products within the industry.


With a list that looks similar to this:

Companies with top-rated products in Cybersolutions industry

Fortinet

Okta

IBM

Crowdstrike

Trendmicro

Palo Alto Networks

Checkpoint

Zscaler

Instead of choosing to add them all into your portfolio, it will be a good strategy to implement the elimination method to sieve out the companies which are less robust and only invest in the few best ones out of the bunch.


For most investors, particularly those with limited time and resources, a more prudent approach is often far more successful. This is where the "elimination method" comes into play.




The elimination method is a simple yet effective strategy that focuses on identifying and removing potential losers from your investment universe rather than actively seeking out winners.


Elimination method : focus more on "finding faults" with the companies, rather than on the good things about them.

This approach aligns perfectly with the investing philosophy of Warren Buffett, who famously stated, "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."


For most individuals, particularly those with full-time jobs and family obligations, investing time and effort into researching and evaluating a vast number of companies can be a daunting task.


The elimination method helps to streamline this process by narrowing down your focus to a select group of companies that meet your predetermined criteria.


By implementing a system that emphasizes risk mitigation over risk-seeking, you can significantly reduce the chances of making costly investment mistakes.


This approach is particularly valuable for those with limited financial resources, as each investment decision carries a greater weight.


Implement a system that focus on Risk Mitigation over Risk-seeking.

Key principles of the elimination method:

  1. Establish clear investment criteria: Define the specific qualities you seek in potential investments, such as strong financial performance, consistent growth, and experienced management.

  2. Conduct thorough research: Gather information from reliable sources, including company filings, financial reports, and industry analysis, to evaluate each company against your criteria.

  3. Apply a strict elimination process: Be ruthless in eliminating companies that fail to meet your criteria. Don't let emotions or market hype cloud your judgment.

  4. Focus on a smaller, higher-quality watchlist: By eliminating the majority of companies, you can concentrate your efforts on a select group of companies that have a greater likelihood of success.

  5. Continuously monitor and reevaluate: As market conditions and company fundamentals change, revisit your watchlist and make adjustments as needed.


Remember, investing is a marathon, not a sprint. By adopting a risk-averse approach and employing the elimination method, you can increase your chances of achieving long-term investment success.


Here are some all of the criteria to apply the elimination method when looking to add new companies into your portfolio.

  • Try to avoid companies with:

  • If any of the companies show any of these red flags, but other aspects of the business's fundamentals still seem sound,

    • you can consider adding them to your watchlist, so you can reevaluate them again in the future if these red flags are still present.



 

Looking for a set of checklists to identify great companies for your portfolio?


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