Framework for buying stocks

here is a program i use to buy a stock and i strongly suggest that you follow it:

a. Select the way you choose a stock that meets your criteria
what is the reason you are buying a stock? Is it for capital appreciation? is it for dividend gains? Are you buying the stock because it is a consistent performer in the past with a low PE? or are you buying it because of future growth prospect? Select your investment criteria and you will be able to zoom in on the stocks that would capture your eye.

Once you determine your investment criteria, do NOT break it in any way, do not break it because your investment criteria is your circle of competence and you ought to be good within your circle of competence to make a buy/sell call. Anything that is outside your circle of competence i would strongly advise you not to buy at all,

b. Write down why are you buying it.
I normally write down in a piece of paper why i am buying the stock that i am buying, only on a piece of paper. anything more than one piece will be a waste of time, and i never use sentences that most analysts do to make them look smart. " Due to the economic uncertainty, the yield between the US treasury and the KLSE is expected to bla bla bla". NO. Just write down in really simple words ( of course if you ask your broker, he would tell you so many financial jargon that would make you feel stupid.) Im buying it because their PE is low, their profit is increasing and their main competitor just went out of business etc etc.


c. Write down why you are selling it.
Many people would buy stocks not knowing when to sell. selling is an afterthought, the result of market movements and factor in which they cannot control. Don't be like a deer caught in the headlights of a car. Prepare yourself. Remember the market is inefficient, everyday it will go topsy turvy like a freaking roller coaster. Will you sell because it dropped 20% yesterday? Well, you freaking should not if you know the reason to sell. You should only sell of the company's fundamentals deteriorate as what you expect and nothing less will make you liquidate it.

Me? I normally sell when the profit is starting to decrease, the company is mired in an industry where profit margin is shrinking and management do not know what they are doing.that is my cardinal sin.


d. Write down how it would happen.
You can write down what will happen if your company performs as you expect. Would the stock price increase? if it does not, is there a reason?

write down any other things that may happen that could affect your stock price? Is there a financial storm coming? if there is what will you do? what i normally do is that i always keep at least 20% of my portfolio as cash, this is to ensure that i have a security net to profit from any panic selling. I cannot predict what will happen tomorrow or next week, but i can safely predict that if the company increases their profit by x% this quarter, the stock price will eventually follow. thus the 20% cash is to ensure that any panic that causes a price decrease i can profit from it.