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Method Investing – the Quentinvest Way

June 20, 2023

Many people regard the stock market with great suspicion. They see it as a quicksand where gullible innocents are parted from their money, usually in the direction of unscrupulous professionals.

A famous book about the stock market was entitled ‘Where are the customers’ yachts’ which implied that stock brokers made a fortune but none of their customers did. Apparently the author was inspired to write the book when he was told that all the biggest boats in the harbour belonged to stock brokers.

For many years all the gains on unit trusts and other collective investments were absorbed by fees and commissions by managers who were mostly closet index trackers. This realisation gave birth to so-called passive (unmanaged) funds and the whole ETF movement.

Even if you could avoid all these pitfalls the stockmarket was still a quicksand for the unwary because of the collective tendency to take investment decisions based on emotions, which quickly translates into buy at the top, sell at the bottom and buy shares in all the worst companies because they look cheap and avoid the good ones because they look expensive.

Nobody was exempt. Even the supposed clever clogs who buy CFDs and make spread bets mostly lose money (75pc according to IG), very much like the clients of bookmakers. My step father was an eager client of the bookmaking fraternity and realised all might not be well when his bookmaker gave him a silver cutlery set for Christmas.

And yet amid all this carnage one man with plenty of common sense, Warren Buffett, has been investing since the last war and has piled up one of the world’s great fortunes. And how has he done it. According to him by buying shares in excellent growth companies and hanging on to them.

Surely we can do that which brings me to the Quentinvest method.

The Quentinvest method starts in the same place as Warren Buffett with high quality growth shares. In my entire investing career spanning almost 60 years I have never looked at any other kind of share. Well, I may have broken ranks during the Poseidon Australian mining boom in the late 1960s but that was the exception that proves the rule.

It Has To Be Growth Shares

Why do I like growth shares so much? The main reason is the common sense one that if a business is not growing why should it become more valuable. The second reason is based on observation. When companies do sustain growth for many years at a time the effect on their share prices can be incredibly positive.

Let us look at an example.

Since the IPO in April 2012, which was at $18, the shares have risen to $565 roughly a decade later, which is an impressive performance, especially since it takes into account a fierce price correction in 2022. ServiceNow is classic 3G and has been almost since the off, which might seem to make it too obvious a choice as a growth share investment. This has not stopped it from being an extremely rewarding investment.

ServiceNow is a Fantastic Example of a Great Growth Stock

I have to say, just for the avoidance of doubt, that ServiceNow is a fantastic company. If you only had one share in your portfolio this would be an excellent choice, one which passes the Nvidia rule (which says, could this share be as exciting as Nvidia).

I love the ambition of this company.

And these guys totally walk the talk.

As with other technology giants AI and generative AI are rapidly moving to centre stage in their operations.

Finally, the company is just such a class act.

In closing, I’ll simply reiterate things we’ve said consistently. First, businesses need ServiceNow. Enterprise software is mission-critical, the demand environment is robust. Second, ServiceNow is a unique company performing at a very high level. We are delivering strong growth, aggressively managing costs and creating immense shareholder value. The company has momentum everywhere. We’re performing very well across the best places to work scorecards including Glassdoor. Our brand recognition is increasing as we rise on lists like Fortune’s Most Admired Companies, our market opportunity is expanding, and this is the early days of a truly generational growth story.

Bill McDermott, CEO, ServiceNow, Q1 2023, 26 April 2023

We’re delivering great experiences that drive powerful employee engagement, fierce customer loyalty and significant productivity gains. ServiceNow’s intelligent automation is a deflationary force that helps enterprises retool their business to get more done with less. And since we use the Now Platform ourselves extensively, we continue to see the benefit from those efficiencies, generating incremental opportunities for further operational leverage. That’s why ServiceNow is so well positioned to become the defining enterprise software company of the 21st century.

Gina Mastantuano, CFO, ServiceNow, Q1 2023, 26 April 2023

So now let’s go back to that chart. There are four golden smileys when the moving averages make a golden cross. On three of those occasions we have a Coppock buy signal to create the double whammy buy signal. The missing one is the first one when the shares are too newly quoted to make the Coppock calculations.

There are also two red frownies. We might lose money selling on those signals, particularly the first one which was quickly reversed but we can look on that as the cost of insurance.

If the business is so wonderful, which it is, why do the shares ever fall. There are two reasons. They just become so overbought that they need to let off steam. The second reason is macroeconomic. Much of the value for companies like ServiceNow lies in the future and we use interest rates to determine the rate at which we should discount this future value to arrive at a present value. A higher interest rate means that the present value of this future is correspondingly less. It is no reflection on the quality of the business or its attractiveness as an investment.

We take the hit and then we move on and that is exactly what is happening.

So, the second element of the Quentinvest method is timing. We buy/ hold on golden smileys and sell/ stay out on red frownies. If you love the company you can do what the CEO does and just hang in there come what may.

This is not an option for me because I use so much leverage so I have to step aside when the going gets rough to keep my powder dry for the return of better times.

The third element in the Quentinvest method, which is also discretionary, is the use of leverage. I buy CFDs, I make spread bets and I buy ETFs with built in leverage. I do all this so that I can start small and still win big. It also gets the adrenaline going and that is something I like. No question, I am a gambler. I like big risks, big rewards. You choose what you are and I have noticed that in investment the tortoises often beat the hares so a more prudent approach can easily make sense.

Strategy – selection, timing, leverage

That is what I do and when I get all three right I do very well, many people would say incredibly well. The Holy Grail for me is to refine my tactics so that I hit a bullseye every time. I think I am getting better.

Share Recommendations

ServiceNow. NOW. Buy @ $569

The missing bit in the Quentinvest method is any mention of valuation. This is because (a) it invariably turns out to be a calculation on the lines of how long is a piece of string and (b) because I don’t need it. I use my 3G criteria for share selection and charts for timing which means everything is covered. Valuation would just be a confusing complication.

Something Magic, Something New

The one thing I like to fine tune share selection is ‘something magic’, ‘something new’ and ideally a really classic chart breakout. When I find all of those things I become very excited, even more excited than usual.

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