Short-term market movements are driven by supply and demand, which is, in-turn, based on several factors, news, greed, euphoria, etc. a mix of rational (economic) and irrational (behavioral) processed of the brain.
Mid-long term valuation will have more basis on stock fundamentals (your view) but market rewarding a particular sector (market's view on that sector) - Valuation comparables and chart movements (technical) are also important.
My investment philosophy:
Stock Selection:
Bluechip: Are the stocks part of an index? (This could be a Valuation factor as well) - I generally go for index companies as they are well researched and are in the eye of public scrutiny, less chances of fraud.
Macro:
What sectors stand to benefit from the structural trends?
What sectors don't look interesting from structural aspects?
What sectors stand to face a temporary dislocation?
Sectors: Sector -> Industry -> Sub-industry
e.g. Energy -> Oil & Gas -> Oil & Gas Midstream
Energy -> Renewables -> Solar
Energy -> Oil & Gas -> Oil & Gas Integrated
Energy -> Oil & Gas -> Oil & Gas Refining & Marketing
Structural aspects: demography, regulation, cultural and religion, geography, economy, history, politics
With-in a sector, to select a security, one can look at fundamental, valuation and technical aspects. If it is difficult to select a particular stock/ security in a sector (not convinced on a particular security), then go for ETF (passive investing) in that sector. If you believe that the best stocks can keep changing but there could be clear winners which you are not able to find (due to time constraints or lack of understanding of the sector) then invest in a mutual fund (active investing) in that sector.
Fundamental:
ROE, ROA (what's the true return/income generating capacity of the assets) and Leverage (A/E) (to see if there is margin to increase ROE through leverage or leverage is at a concerning level), 3 or 5 yr Dividend yield (buy and hold, if low dividend then buy and sell after appreciation), 36 or 60 months beta (market risk - comovement of the stock with market and broader economy - I have always preferred stock with low correlation with market movement, you want scripts that move because of their own fundamentals not by market euphoria), ownership - state owned vs privately owned or part of a large conglomerate
Lesser important: EPS
Valuation: Size (market cap - for comparing different companies), P/E,
Lesser important P/B
Technical: CMP/ 52 Wk High, CMP/ 52 Wk Low
Question is, how an individual stock is doing on above parameters compared to its cohort (sub-industry or industry, whatever comparison is relevant)
Note: This approach was used to build a equal weighted portfolio in Q2 2020 for investing Toronto Stock Exchange after market dislocation due to Corona Virus pandemic. It performed well, generating returns upwards of 40% in 6-8 months as the markets rebounded during the course of the year. Of course, there are some laggards in that portfolio.
Mutual Fund (Fund Manager) Selection:
Asset Allocation:
Balanced, Large Cap, Mid Cap, Small Cap, Sector Focused
Sector Focused: Follow same approach as Macro section of stock selection to identify stock.
...to be completed based on fund selection in Q1 2020.
Note: An earlier version of this approach (relying on visual inspection of alpha, beta and Sharpe ratio of top 2-3 funds based on ValueResearchOnline rating as compared to doing a deep analysis comparing the entire category) was first used to build mutual fund portfolios in India from 2018 onwards. This approach stabilized after seeing results of initial approach.
A full blown approach comparing fund with the entire category was taken in Q1 2020 after market dislocation due to Corona Virus pandemic. That yielded excellent results upwards of 40% at portfolio level and almost all the funds yielding 25% return as the markets rebounded during the course of the year (in contrast to the stock investing in Canada where there were some laggards).
