Hey guys it's sasha, there are 9752 companies listed on the new york stock exchange, nasdaq and toronto stock exchange. Another 2 000 companies on the london stock exchange, including the llc alternative investment market and another 30 000 odd companies that you can invest in on stock markets. Around the world, so when you're deciding which company you should invest in, how exactly do you decide which of these tens of thousands of companies to put your money in? Because if you spend just five minutes looking at each publicly listed company in the world, it would take you two years of full-time work to go and look at all of them. Now i want to share with you the way that i cut that list down by eliminating 99 of the companies from the total.

For my consideration before i even bother looking at them in more depth because the truth is only a minority of companies in the stock market are responsible for the vast bulk of that market's growth. The majority of publicly listed companies just act as dead weight, and i don't know about you, but i don't want to waste my time on analyzing dead weight. So let me go through how i cut the stock market down to size. There are 10 steps, i'm gon na go through them as quickly as possible, so apologies for not going into a huge amount of detail on each one, but i'm going to put timestamps into the description for each one so feel free to jump around or come back To ones if you want to listen again, the first one that i want to talk about is companies whose product or service suffers from commonerization one of the most common problems.

I see with this style of investing is when people invest in a company, because they feel that the industry within which the company operates is the future. There are lots of examples of this. A lot of people, for example, think that vegetarian and vegan food is the future eating more healthily and caring about what you eat is going to become even more important than it already is, and that probably is true. Naturally, the world is already moving in that direction.

So people want to invest in this industry and they go and find companies like oatley or tattoo chef or beyond meat or whatever the flavor of the week is you probably heard some of these companies talked about extensively by finance, youtubers and all over social media and The argument for these companies goes something like this. Well, the vegan food healthy food, whatever it is, industry, is going to explode over the next 10 years. So that means that the company that is operating within an industry is naturally going to explode with it. No, that just isn't how it works.

It doesn't mean that at all, especially in highly commoditized spaces, the problem with creating oat milk or healthy frozen food or any of those similar things is that it is a highly commoditized sort of product the industry within which that product sits, can go and explode massively And at the same time, the company that you are invested in can go and die a horrible death that happens all the time and especially in highly commoditized industries. This happens all the time look at the dot-com crash and what happened to the internet in the last 20 years compared to many of the big.com companies that went bankrupt. The problem with highly commoditized spaces is that it is incredibly difficult to accurately assess long-term optics today. The freezer aisle in your local supermarket has to to chef, but tomorrow it might have something else, and that brings me to the second point which cuts out a lot of companies that i invest in and that is having a low barrier to entry.

If an industry has a particularly low barrier to entry, it just paves the way for endless attempts at disruption and the more attempts at disruption that are allowed to happen. The more likely it is that the company you are invested in is going to get hit. The same health food industry suffers from this issue as well, because it is very easy to get started. You can start very locally.

You don't need to conquer the entire global grocery market. There isn't really very much stopping you from getting going. You can start with your local town, your local state begin with winning the fight literally one store at a time. This is also the case with some of the more basic technology companies, where the specific technology that they offer is a relatively speaking basic and doesn't come with a big enough mode based on either proliferation or user size.

For example, there is a new productivity management and company organization company. Turning up seemingly every week, one day it's asana next day, it's monday.com or it's jira or rike or trello or click up or whatever sure they all have their own cool, unique features. Their own cool, unique ways of working and they all continue developing the products, but the core offering has a relatively low barrier to entry. It is a user-based platform that works in a somewhat basic way for managing and assigning work tasks tomorrow there will be another one of these, with even more funding and even more engineers hired to go and build it, and then the next day there's going to be Another i much prefer to invest in companies that have protection with a relatively high barrier to entry.

Now that barrier to entry could be one of many different things. It could be the development cost and time required. The ev industry is one great example. There are a lot of people out there trying and failing to win in the ev industry, because it is incredibly difficult, extremely expensive and very time consuming to start producing high quality electric cars at scale.

You can't just go and do it with a few hundred thousand dollars and 20 employees it's impossible. The barrier can also be the cost of building trust because you have to do a crazy amount of marketing. This is a combination. Industries, where trust is a very big part of the decision making process, especially when there are multiple providers offering similar types of services travel, is one example when a new travel company goes and turns up to disrupt like trivago, for example, they better have a huge and Insanely massive marketing budget of tens of millions per year to go and build sufficient awareness for them to become the provider of choice or the barrier to entry could be the network effect.

This is the sort of effect that builds when user volume breaks through a critical barrier where it becomes exponentially more difficult to displace the leader by competing from starting from scratch. You can go and build a new facebook, for example, and maybe your social network will be better than facebook in every single way. It will look nicer and more modern. It will work in a better way.

You'll have features that facebook doesn't have whatever, but everybody is already on facebook, so the problem you're going to come across is why should somebody go and sign up to your platform when it has none of their friends on it, when it doesn't have anybody else on It that barrier to entry can be incredibly difficult to overcome, but even if an industry has high barriers to entry in place, i also avoid any company that operates in an industry which is engaging in a race to the bottom. This one is actually one of the best ways that i cut the list of companies down, but it's also a one that can get people's backs up when i explained it, because many people invest heavily in companies that are busy racing to the bottom. Most industries, in which a race to the bottom happens are to some degree commoditized as well, but don't necessarily have low barriers to entry and the big problem with industries that are busy racing to the bottom. Is that as a long-term investor, i just don't like the optics of a company that i am invested in where the natural order of things is for the revenues for that company to be aiming at zero? One good example of this is the consumer finance industry.

Now i have worked very extensively for most of my career in that industry and consulted retail banks and financial services companies around the world. So i feel i understand it somewhat well, but as an investor, the problem with industries that provide payment solutions, banking solutions or credit, is that there is an endless race to reduce margins, a pressure from the customers, a pressure from the regulators, a pressure from every single Direction a customer is not going to go and choose bank of america over wells fargo because they just like the brand they just like the product more with most of these products and services, the overwhelming driver of customer acquisition and retention is price. There's almost no space for anything else. Somebody might go and look at a tesla and another car that maybe cost one third of the price and still choose tesla.

They just prefer the way it looks or they prefer the technology inside or whatever same thing, with the iphone same thing with many many other products by leading companies, but literally no serious customer is going to consider two roughly equivalent payment processing solutions and pick the one That costs three times as much and we are still in the early stages of development of this industry in some ways of online payments, international transfers, cryptocurrency and much more so there are still margins to be had today, and these companies are making money and new customers Are there to be won, but when i take a step back and look at time, scales like 10 years or 20 years or longer, this is the reason why i generally have very little interest in companies like paypal or square or coinbase. I do get why they are popular. I do understand it, but i'm also not keen to sit there watching how this race to the bottom pans out. The next big reason i exclude a lot of companies from consideration is by cutting out anyone operating in an industry that is highly cyclical or with a fast replace rate.

Now that is not to say that you can't make money on these cyclicals actually can be a great way to make money by rotating in and out. If that is your sort of strategy, but i am much more interested in robust long-term growth rather than trying to figure out exactly when the bottom or the top of various cycles happens. The replace rate is probably one of the most overlooked factors in investing decision making. A company can look great when you look at it right now and even based on your projections in the short and medium term, but there can be fundamental macro reasons why that company is unlikely to still be at the top of the game in 20 years time.

One area where there is this is a particularly big problem is in the cutting edge technology. If you go and look at what the leading companies in any of that kind of space where 20 years ago, i can pretty much guarantee that they are going to be absolutely not the same as the companies that are leading the way today and the companies that Were dominating that space 40 years ago were categorically not the same companies as 20 years ago, and so on. The problem with the fast replace rate is that it can kill companies even if they operate in a low, commoditization and high barrier to entry environment, because fast evolving technology has a habit of making best-in-class technology today completely obsolete. Tomorrow it has step changes and the company can navigate through this by constantly staying ahead of the curve and moving on to the next tangent and winning on the next step change.

But there will usually come a time when they fail to do so. Maybe they pick the wrong horse or they just fail to adapt, maybe they're too late, maybe they're. Just too ignorant the imaging and photo video industry is rife with examples of companies that were absolutely killing it and totally dominating the space, but then dying very quickly because of step changes in technology. Just go.

Look at fuji, kodak rico, who are in the pentax brand. The list just goes on and on and on one company i'm invested in that definitely carries this. Risk is palantir, they operate in a space of data, aggregation processing and analysis, and that space is definitely going to evolve extremely fast, and there is a major risk that during one of the state changes that will come, they will choose their own path. So just be very acutely aware of this risk, if you're like investing in companies at the cutting edge of technology or other companies that have the same sort of risk now, the next set of companies that i completely ignore in my analysis, are ones where i cannot Get a reasonable amount of insight on the product or service that the company offers.

It is incredibly important to understand the business model of the company that you are investing in. If you do not understand at a fairly deep level what the company does and how it does it then you're not really investing, in my opinion, you're just gambling and picking companies out of a hat and a big part of the analysis that i feel you really Have to do involves understanding the product or service that the company offers understanding it well, and there are some industries where i find it pretty much impossible to accurately assess the product. Now it might just be me, but sometimes there just isn't any data or insight on which i can base a robust analysis. The biotech industry is one of those examples.

People often like to invest in companies in this space because they heard that biotech is the future or because the company ceo throws a lot of buzzwords around or whatever it is very, very popular. But the highly competitive nature of their work means that they leak. Absolutely nothing about their product development, the specifics of how the products work and even if you did get your hands on some of the information, the likelihood is, you probably wouldn't understand it. I don't, and so for me any investment in that sort of company.

It's just an investment in a black box. I have no idea what will come out of that black box. The thing is, some of them will have some amazing things come out and they will come with massive growth. No doubt about that, but without the data or insight, i, as an investor, do not have any reasonable way of knowing which of those black boxes might do it and which ones will not.

I don't have any good way of assessing what the risks of those products are, what the risks for the company, and so the long and short of it is that i simply don't know enough about those companies. I have no reasonable way of being able to increase. My knowledge either and when there are tens of thousands of other companies that i can look at, i am very happy to not bother gambling and ignore everything that acts as a black box. Now.

The next big reason why i cut out a lot of companies is the presence of major qualitative red flags. This especially applies to grow stocks or earlier stage smaller companies. Often these companies are loss, making, maybe they're a few years away from even breaking even and you're. Investing in the long-term future of those companies, the path to that long-term future is almost guaranteed to be rocky.

There are going to be huge ups and downs, it happens all the time and many of those companies just simply won't make it. Some of them will die slowly. Others will go bust spectacularly by going bankrupt or whatever. So if you go and see major red flags in your qualitative assessment, these can make that rocky path ahead even more perilous, and i see a lot of people talking about stocks on youtube that really suffer from this.

In my opinion, this is probably the most common reason why i ignore most of the stocks that seem to be really really popular. The vast majority of ev stocks, for example, out there, suffer from really significant major red flags when i go and look at them and do my assessment and yet the likes of lost and motors nicola workhorse arrival and many others were the most popular topics of conversation. All over youtube for the last two years, including the biggest financial channels out there, that is not to say that each of them is guaranteed to be doomed. There is every chance that maybe one of them will do remarkably well, but the road ahead is already really really hard.

I just don't see the need to put my money into a company where i already see major major reasons, to avoid major reasons why that road is going to be getting a heck of a lot harder from here now. Next up, i have another way where i cut out a huge number of companies from consideration. Investing in stocks is hard enough as it is, you will win on some stocks and you're going to lose on other stocks. It happens to me it'll happen to you.

It happens to everyone, but sometimes there are macro exogenous reasons that can lead to a stock going to zero. Now these reasons are often called fudd by staunch defenders of the stock, who maybe bought a few shares and do not want to hear anything that sounds negative about their chosen investment. But i personally really do not like carrying known non-negligible exogenous risks of my investment going to zero. Some of these risks might be small, but they are not zero, and that is really important.

For example, in china there is a law that prohibits foreigners from being able to legally own shares in chinese companies, and today there are two ways that you can go around: that law. You can either buy shares on the hong kong stock exchange if they trade there or you can buy american depository receipts in the us or other countries which are contractual arrangements which are not shares but kind of have some of the features of being like shares and Whether you like it or not, there is an existential risk that has nothing to do with the company that you're invested in whether they are a good company, whether they're going to succeed or not, and your investment could one morning when you wake up suddenly be worth Nothing now one day, the chinese communist party might just turn around and decide that adrs and chinese companies are illegal because they are essentially circumnavigating the law on ownership of chinese stocks, or they may decide to continue the path of alignment of hong kong with mainland china And ban foreigners from being able to own shares trading on that exchange could be a million reasons why that happens. It may never happen. The overwhelming likelihood is that it probably will not happen, but china could easily go and get dragged in through some sanctions related to the ongoing russia conflict in ukraine and they could go and retaliate.

China could at some point, have their own conflict with taiwan or in tibet, or on the south, china, sea islands or somewhere else. I don't really care for the specifics of how the situation could play out. I just know that there is a non-negligible risk that something that nothing to do with the company that i'm invested in nothing to do with whether that company performs well one morning my entire investment in a company could become no, and i just don't like that kind Of risk, so i like to avoid it altogether. There are plenty of risks of my investments going to zero that i do not know about in advance.

So why add to those risks by carrying ones that i do know about now. I also don't like investing in industries that are dying. That might sound incredibly obvious, but there are a lot of value investors or dividend investors who advocate these industries because they will claim that companies are underpriced or they can get a great dividend yield or something else. Tobacco is one of those industries, and oil now is another.

Now, can you make money by investing in the right companies at the right time in those industries absolutely, but the overall trajectory in the next few decades for those companies in that industry is to the graveyard and when i'm looking at my investments from a long-term perspective, I don't want to invest in industries that are heading for the scrap heap, the overall trajectory, whether you like it or not, is down. Now i'm sure there will be some upward bumps along the way and maybe you can go and catch it, but i don't have a crystal ball. I don't want to waste my time trying to guess at how g political events will play out or how quickly the whole tobacco industry will die. So i just ignore all the companies in those spaces full stop.

Sometimes companies need spaces can transition to the replacement or another auxiliary or adjacent industry. Many oil companies, for example at the moment, are making a lot of noise about renewables or electric car charging or things like that. But when 99 of the company's resources, technology experience, networks, locations and people are based around the core dying industry, that level of baggage is often incredibly difficult to overcome. We're seeing this effect play out in a big way within the car industry.

Today, all of the biggest car manufacturers are massively hamstrung by unions of workers who do not want to change by supply chains and factories being set up for internal combustion vehicles and absolutely not suitable for making electric cars. Sometimes the baggage can massively outweigh the relative experience. Brand awareness and prominence - and this is why, in most major technology replacement events, the majority of the incumbents just die, it happened when the car replaced the horse-drawn carriage. It happened when the smartphone arrives.

It will happen again and again. Now i have a feeling that some of you watching will take issue with this next one, because i also do not invest in any company where there is no theoretical potential for that company to grow by a factor of 10.. Now hear me out on this one. If a company cannot grow to 10 times the size, if it cannot be a 10 bag over the next few decades, it is completely out of consideration for me, and there is a good reason why, when i invest in a company i invest because i feel that The current valuation of the business is much lower than my assessment of that company's future cash flows, and no, i do not think that the companies i invest in will definitely go and increase in value by 10 times.

That's not what i'm saying. I don't expect that at all, but i also know that there is a range of possible outcomes when i invest in the company. It could be that my forecast, the numbers that i have put down and my models as the average could play out perfectly. It could be that the company does a bit better than i expect, or maybe a lot worse than i expect all of those are possible.

There is a range of possible outcomes, but if the ceiling on the potential is too low, then the distribution of those possible outcomes will mean that the return might never be enough to warrant the investment. Now i don't know how the market will move after i make an investment. It could take a few months for my upside to materialize and i could make a big profit quickly. That has happened before or it could take several years, maybe 10 plus years there could be a recession or a multi-year bear market that i have to wait through, because i've invested my money at the wrong point in the cycle.

So i might have to wait five or even 10 years or longer to go and collect that upside, and i am targeting an annual return of 20 to 25, because if i'm not targeting that, i might just as well go and invest in s. P. 500 and not bother picking stocks now i know it is extremely difficult and the likelihood of me getting to my 20 to 25 return is probably zero. I'm sure a lot of people are going to point out that that in the comments - but that is what i am targeting.

So if i want to hit at least 20 a year, then my investments need to grow by 150 percent over five years or five hundred and twenty percent over ten years, because five hundred twenty percent over ten years is twenty percent a year. If i want to hit twenty five percent per year, that means eight hundred and thirty percent return over a ten 10-year period. That's almost at 10x, and even for that 20 return. I know for sure that some of my investments will simply not work out.

Some of them, maybe will stay flat i'll have to sell out without turning a profit on some of them. I will lose money on sometime i'll, probably lose a lot of money. That will also happen, so the winners need to get a lot more than the average that i am targeting. So if the average for 20 return per year is 520 over a 10-year period, i will need some of my winners to be hitting 900 or higher to offset the losers.

So, however, ridiculous it sounds if i am not targeting companies that have a theoretical capability of growing by a factor of 10, then they can't be one of my winners, even if everything goes perfectly. So there isn't a good reason for me to invest if, from the outset, i don't think that they are capable of doing it. One popular example here is coca-cola. The company has covered the entire world.

They dominate that space, they own the global world market in the spaces in which they work, and they are extremely successful. They even pay a 2.9 dividend yield, but do i think it is possible for coca-cola to increase in value by 10 times over the next decade? Well, i would say it is extremely improbable. There is just isn't room for them to expand or increase revenue to that magnitude of growth. In my opinion, now sure they could expand into auxiliary fields, they could go and increase their profit margins.

They could do many things but 10 times from where they are today is going to be really hard. They've already done it they've already achieved it in the 80s and the 90s so yeah. I will probably miss out on many many stable, robust companies as a result of this strategy that pocket consistent revenues, every single quarter and payout dividends, but those companies do not help me in my investing objective and so for that reason they are off the menu and The next reason i avoid investing in companies is where the value of the investment is based on consensus instead of fundamentals. This is a very polite version of saying i don't invest in hype now before the obvious commons happen.

Yes, some of the companies i invest in are popular. Tesla is one example of a massively hyped company, but i don't invest in tesla because of the hype or because some guy online said so, in fact, i just ignore the hype factor altogether. I invest based on the fundamentals and the fundamentals alone. I go and build a model.

I assess the risk profile extensively. I study the company, i do qualitative analysis and even after that i will still be wrong often, but there are a lot of investments out there that are genuinely valued on speculation alone, and sometimes you can make a lot of money on that stuff. It's a bit like gambling. The problem is that it is just pure gambling and i am not in the gambling game.

Sometimes i even like the technology behind the thing that is being priced on hype or the investment or the company or the product whatever. But if the fundamentals are just not there, i will never invest. The problem with hype. Is that it might seem all the rage today, but it might be gone tomorrow.

The sentiment might shift or a new fad will come out to replace the existing fad or the economy will take a turn or whatever, and everyone will very quickly jump off. The bandwagon, crypto and nfts are squarely in that bracket. For me, the valuation of everything in the crypto nft space, unfortunately today, is entirely based on speculation and hey. I actually am extremely interested in some elements of that, but there are no future cash flows that you're investing in.

There are no future cash flows that you anticipate you're going to be a part owner of there is no bank account associated with a pile of cash that you own. A small fraction of the only thing that is there is the hope that tomorrow, a bigger fool is going to turn up to buy the thing that you bought yesterday at a higher price, but without any rational data-driven explanation of why the price should be higher other Than hype, so after i apply all 10 of these cuts, i tend to get rid of 99 of all the potential investment opportunities out there and focus then, on the very small remainder for my analysis, and i will probably lose out on a massive bunch of big Wins and fast money, but i am perfectly okay with that. That is not what i'm investing for. I am here for the long game.

If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching. I really really appreciate it and, as always i'll see you guys later, you.