A little while back I did a guest post on the Wolf of Harcourt Street’s blog on ETF investing. WOHS is an Irish based investor who is building his way to financial independence with growth and value stocks rather than ETFs. This post goes through his:

• Investing strategy
• Tax considerations
• Due diligence when picking stocks
• Tips for someone trying to follow this strategy

As well as how you can follow along his journey and get access to his newsletter.

Thanks WOHS for this insightful post. I hope it gives readers some food for thought on other investment strategies and considerations here in Ireland.

My Investing Strategy

My investing strategy revolves around investing in a combination of growth and value stocks. First off, what is the difference between a growth and value stock?

Growth stocks are companies that come with a significantly higher growth rate compared to the average growth rate in the market. This means that the stock grows at a faster rate than the average stock in the market, consequently generating earnings at a faster rate. Growth stocks have the potential to achieve high earnings growth but have not established a history of strong earnings growth. Growth stocks concentrate on growing their revenue often at the cost of delaying profitability. Examples include Amazon, Facebook, Tesla.

Value stocks are companies that are being traded at a value lower than their intrinsic value. This means that value stocks are being traded at a price lower than their true value and are therefore undervalued. Value stocks are usually larger, more well-known companies that are trading below the price that analysts feel the stock is worth, depending on the financial metrics that it is being compared to. Examples include Coca-Cola, McDonald and Procter & Gamble.

If you are interested in learning more about the difference between growth and value stocks check out Growth vs Value.

Tax Consequences of Investing

My investing strategy is designed to minimise the amount of tax that I pay over the long-term so that I can maximise the effects of compounding. As a result of this, I do not invest in any ETFs and I try to limit my exposure to dividends. Investing related tax can be summarised as follows:

• Individual stocks – CGT of 33% – €1,270 annual exemption
• ETF/Index funds – Exit tax of 41% on gains – no annual exemption
• Dividends – Marginal rate of up to 52% – no annual exemption

I am a full time PAYE employee taxed at the marginal rate of 52% on any additional income I earn such as dividends. As an example, €100 worth of dividends results in only €48 in my pocket. Looking at ETFs, €1,000 worth of gains results in only €590 in my pocket. With ETFs you also have the added headache of calculating the deemed disposal. For comparison, €1,000 worth of capital gains in a tax year results in €1,000 in my pocket based on the current tax rules. If you want to know more about the tax consequences of investing check out the Let’s Tax About Tax Series.

Due Diligence

Investing in individual stocks means that I have committed to spending a lot of time on research and analysis. This strategy is not for everyone. I have chosen the active investing route because I have a passion for studying and researching individual stocks, I am willing to put the time in because I view it as a hobby and I like being in full control of my own finances. Additionally, I can see the tax benefits compared to other strategies. Decide what works best for you. If you are not interested in individual stocks or do not have the time to spend on research then passive investing in ETFs might be more suitable for you.

When performing stock research I follow a Due Diligence Checklist. The idea behind this checklist is to ensure that I do not skip over or miss any important areas of focus. Below is a summary of the items included:

My due diligence process can take days or weeks depending on how familiar I am with the company already and of course balancing a full time job. Check out the most recent investment thesis I published on Square, Inc for an example of this process put into practice.

Implementing a Similar Strategy

Are you someone who is looking to move from a passive investing strategy to an active investing strategy? Establishing your investing goals and an emergency fund are two other really important aspects to investing. This is something every investor should do regardless of whether you invest in ETFs or individual stocks. This 5 Point Framework can help you to get started investing. For current investors, it can also serve a role in validating whether your actions to date are consistent with your long term goals or if changes are required.

Defining your risk tolerance is what ultimately separates growth from value investors. Growth stocks are more volatile than value stocks by their nature. I personally adopt a 70/30 split between growth and value stocks. I am a long-term investor with time on my side so I am prepared to buy and hold quality high growth businesses through volatility in the hope of achieving outsized investing returns. If you would not be comfortable seeing your portfolio decline 10% or 20% in the short term then it might be best gearing more towards value stocks. You can view the current stocks I hold under My Portfolio.

Skin in the game will massively accelerate your learning when it comes to individual stock picking. By having a small amount of money on the table you will pay far more attention to the stock without often without realising. Start small and build your positions up over time as you become more familiar.

Lastly, but most importantly, always do your own due diligence. Advances in modern technology mean that it has never been easier to be a retail investor. The most accurate and up-to-date information is at our fingertips and is just as accessible to you and I as it is to the largest investment bank. There are a lot of really useful websites and accounts that share investing information for free. However, never follow another individual blindly. Every investor is operating under a different set of circumstances and with different goals to you. The only person that is responsible for your investment decisions, is you.

My Newsletter

I write a free weekly newsletter with the mission of making investing knowledge accessible to all. Whilst I am far from an expert, I was inspired to start the newsletter because I found that many people with less financial literacy than myself really struggle to know what to do with their hard earned cash.

By documenting my portfolio insights, stock analysis and learnings I hope to inspire others to start investing and take control of your financial future. I would estimate that I spent about 10 hours a week writing content for the newsletter and twitter account @wolfofharcourt

Sharing information in the public domain can have its drawbacks too. Everyone has got an opinion and that can differ from your own. Ultimately, this is what investing is all about – every time you buy, somebody else is selling and both parties think that they are going to profit from the transaction. I try to be as transparent as I can with my readers. If you like what you have read you can sign up to my free weekly newsletter here.