How to choose good stocks?

　　Step 1: Determine the scope of stock selection

I have always believed that A-shares are worth in-depth research. Companies with long-term investment rather than speculative value account for less than 5% of the total number of listed companies, and most of these stocks are concentrated in the Shanghai and Shenzhen 300 constituent stocks. Therefore, my stock selection range has been narrowed down to within 300 companies, and I will not take a second look at the CSI 500 constituent stocks ranked 301-800 on A-shares.

　　Step 2: Screening through ROE

Find companies from the Shanghai and Shenzhen 300 constituent stocks that have a significantly higher ROE than their peers in the long term. The term 'significantly higher' here refers to companies that are at least 3% higher than the industry average and need to be sustained for many years. This screening process is quite complex, requiring finding the average ROE data of various industries. After this round of screening, only about 100 companies will remain.

　　Step 3: Screening through operating cash flow

For companies that can be analyzed using operating cash flow, if their operating cash flow consistently exceeds net profit, then the company is likely to be a relatively excellent one. On the other hand, if the operating cash flow is significantly lower than the net profit all the year round, I will remove it from the stock options, such as Dong'e ass hide glue, Focus Media, Hengtong Optoelectronics, etc. At this time, there are about 70 companies left.

　　Step 4: Filter by dividend rate

Some companies have high ROE and good operating cash flow over the years, but their annual dividends are pitifully low, with dividend rates generally below 20% and around 1%. These companies often have a large amount of investment cash flow expenditures every year, and I am skeptical about their true profitability. A typical example is Dazu Laser. After this round of screening, there should still be around 50 companies left.

      Step 5: Screening through Valuation

The 50 companies selected through the above four steps meet all my definitions of high-quality stocks, but a good company must also have a good price. Among these 50 companies, there is a group of companies that can be seen as very excellent at a glance, but their valuations always make me hesitate, such as Haitian Flavor Industry, Aier Ophthalmology, Hengrui Pharmaceutical, etc. When encountering such stocks, my principle is to miss out rather than force myself into the market.

　Stock Swap Strategy

Derived from stock selection strategy, the two decisive factors that affect my stock swap strategy are performance and valuation. I will add or subtract points based on the valuation level of all held stocks on the basis of the performance score. The lower the valuation, the more points will be added, and the higher the valuation, the more points will be deducted. This will result in a comprehensive score for all held stocks, and finally, I will add or subtract positions according to the comprehensive score.