Individual stocks selected via return triangle: Top criterion “history” at a glance

History as a Selection Criterion

We don’t concern ourselves with revenue, profit, price-to-earnings ratio, and all the other economic indicators. In fact, we’re initially not even interested in what the company actually does.

This puts our method in stark contrast to the common approach of freely speculating on trends (“Hydrogen!”, “Cannabis!”, “Weapons!”) and then looking for supposedly promising companies in these areas.

The problem with this “brainstorming method” is that it’s entirely unclear which companies in the respective areas will perform best, and even if we knew that, we still wouldn’t know how the market will value the stock.

Let’s say we’re correct in principle with “hydrogen is the future” and even choose the right companies. What if these stocks only rise by 5 percent per year because the market doesn’t expect faster growth in this sector?

Therefore, we consider the approach of starting with themes (which ones?) and then looking for companies (which ones?) to be misguided.

Ultimately, we’re only interested in one thing: the annualized return, and this over a long period. We select stocks strictly on this basis.

We are free to remove from our list those stocks whose company’s field of business we find unfavorable for ethical reasons or whose future we view critically.

Removing such stocks afterward, from a pool of historically strong stocks, is entirely different from starting with – however justified – the determination of business fields and trends, as is so often observed.

Return Triangle: Historical Returns at a Glance

We consider the return triangle to be the best method for private investors to reliably assess stocks at a glance.

Instead of the return triangle, stocks are almost always displayed with a line chart or bar chart, possibly enriched with “candlesticks.”

We find this type of display less suitable for private investors who want to buy and hold long-term (“Buy and Hold”) rather than actively trade, than a return triangle.

The usual charts with the characteristic zigzag line rising and falling from left to right already give a basic idea of whether and how much a stock is rising.

But it’s difficult to compare stocks with each other this way, as the displayed periods and the axis showing the price are usually different from stock to stock.

Not only is it easier to compare stocks with each other, but also to compare them with other asset classes using a return triangle.

The return triangle shows us the most important thing about a stock from an investor’s perspective, namely the annualized return, as a percentage, like “24.6%”, and for many investment periods at a glance.

In fact, the return triangle provides us not with a single number but a series of numbers with annualized returns up to today, depending on the stock purchase date (25, 24, 23 … 3, 2, 1 years ago).

We can also see from the return triangle how much the stock fell during times of crisis (“Maximum Drawdown”). We also receive this number, appropriately, as a percentage.

Thus, the return triangle provides not only the important annualized return but also the extent of the undesirable volatility.

The volatility of each individual stock is not very significant for us. The ups and downs of the individual stocks in our portfolio of up to 40 stocks in the areas of technology, pharmaceuticals, luxury, insurance, and industrial needs should balance each other out.

If the stock market as a whole goes down, this is usually due to external factors. In this case, ETF prices would also fall.

If prices fall in a sector-specific manner, for example in the technology sector, then the non-technology stocks are usually less affected.

Therefore, the maximum drawdown of each individual stock according to the return triangle is interesting to us in the selection process, but not decisive. Holding stocks from different sectors should smooth out our portfolio’s price movements enough so that it’s not significantly more volatile than the prices of popular ETFs.

The theoretical volatility of the portfolio could be further reduced by taking this into account in stock selection.

Here, one would compare the timing of the maximum drawdowns of each stock and ensure that there are also stocks in the portfolio that have been less sensitive to major events like the 2007-2008 global financial crisis.

Such a selection based on low volatility theoretically reduces long-term returns, as the criterion of “minimum volatility” slightly distorts the strict selection based on historical return.

Target Return: 20% or More per Year

Since we already achieve 10% or a bit more with S&P 500, Nasdaq 100, and – in good years – also with MSCI & Co., it would make little sense to aim for just “10 plus X” with the more labor-intensive and potentially riskier investment in individual stocks.

So our goal must be to achieve “20 plus X”; otherwise, we could simply take an ETF on the S&P 500.

On the other hand, we’re not speculating on triple-digit or even higher price increases per year. That would be the “luck-based method” of hitting the right sector and company.

Return Triangle: Example GOOG

Here is the return triangle for Google stock (ticker symbol GOOG). It reveals a lot, but the most interesting is the horizontal row at the bottom for 2024.

From left to right, you read this last row as follows:

If I held GOOG until today (more precisely: until 01.01.2024) and had bought it on 01.01 of year X, I would have achieved an average annual return of XX.XX percent from the purchase year to today.

The second column (blue) shows the price as of 01.01 of each year. Here, in the case of GOOG, in US dollars.

GOOG

GOOG over 19 years - from Dec 2004 until Dec 2023.

The “steps” on the right side of the triangle, from top to bottom, show the price increase in each year (year = see first column with years).

The purchase years are arranged horizontally, the sale years vertically. In the example of GOOG, we see:

If you’re now wondering how we’re supposed to reach an average of 20% plus X with our portfolio of individual stocks when Google is closer to around 20: Google is actually on the lower end of the stocks we want to consider in terms of return.

Due to its size, market dominance, size of its “moat” (hard for competitors to take market share from Google), and low volatility, Google is definitely included.

Approximately 40 stocks, historically ranging from about 20 to 40 percent price increase per year, will follow shortly in another article.