Close this search box.
Close this search box.

How To Invest

How To Invest?
See the source image

How To Invest? Different investors have different risk tolerance and appetite so we have to evaluate each individual case with diligence. 

 Given that Jack is a successful young entrepreneur who has a net worth of over 1 million dollars after he sold his company, an effective investment strategy will make him even more well-positioned financially in the future.


Youngsters have bigger risk tolerance than seniors, so Jack should at least allocate 80% of his investment portfolio into stocks. In fact, stocks are the best performing asset class in the long-term, compared to other asset classes such as real estates, bonds, cash and commodities according to the empirical data, though they can be volatile sometimes.


Risk-return tradeoff is the most important concept in portfolio management. The more return is sought. And the more risk will be undertaken. Given that Jack already had a significant amount of money at a young stage. Then there is no need to heavily speculate and take risk aggressively with his portfolio. What works best for him is a portfolio that delivers high quality return consistently. Never underestimate the power of compounding. And with a substantial amount of initial capital, his net worth will grow considerably over time even with a moderate risk exposure.

Therefore, our tailored investment strategy for Jack assumes that he is willing to take moderate risk. And his investment objective is to achieve capital appreciation gradually.

Investment Strategy

To meet the stated investment objective, we have developed an investment approach which is 80% qualitative and 20% quantitative, combining both bottom-up and top-down analysis. We start by studying the company’s business model and its competitive landscape. We emphasize on analyzing a company’s “moat” and its industry’s potential growth prospects. We prefer industries with stable growth rates and companies with good leadership, strong monopoly power, less cyclical earnings, and high ethical standards.

By diversifying our portfolio with less-correlated stocks in different sectors, we reduce the portfolio’s correlation coefficient and therefore to some extent mitigate the idiosyncratic risk. However, we do not want to over-diversify to a level where it compromises our return. So, we decided to strategically outweigh the positions in which we have a high conviction. Since U.S stock market has been in a bull run for years, we have decided to include Chinese, Indian, and British stocks in our portfolio as a geographical diversification. Also, we reserved a portion of cash as the buffer for a possible downside.

Aside from our top-down analysis, we have developed a quantitative scoring system based purely on the company’s financials to rate stocks in 4 metrics: Quality, Value, Growth and Competitiveness. The system is designed to screen stocks quantitatively and testify to our qualitative judgement. 

Here comes a detailed breakdown of our scoring system, each stock is rated accordingly. 


FCF/Sales (TTM): Represents cash generation ability and efficiency. Used to find “cash cow” stocks. A FCF/Sales > 5% is often a sign of a high quality company.

CROIC (TTM): Measures how much cash a company can generate based on each dollar it invests into its operations. 

ROE: Reflects the quality of a company’s operation and management. (excluding the companies with high leverage.)


P/FCF: The stock will be considered as cheap if it is less than 10.

P/B: Another valuation metrics, acting as a filter to remove unqualified stocks.


Sales % Change: Refers to the latest growth rate, reflects what stage the company is in.

Sales 5 Yr +TTM CAGR %: Reflects the level of growth over the last 5 years.


Gross Margin: The gross profit margin reflects the competitiveness of the company within an industry.

Net Profit Margin: Evaluates the competitiveness and effectiveness of a company’s management.

It is worth noting that our system highly emphasizes on the usage of FCF, a highly useful measure which reflects the net cash flow that the firm generates from its operating activities.

Score Table:



After a stock has passed both our qualitative and quantitative criteria, we make trading plans and optimize the buying point by referring to technical signals such as Bollinger Bands and MACD. 

We used our strategy throughout the 10 weeks of trading, and the result is gratifying. With an initial capital of $100,000 US dollars, the net liquidation value of our portfolio has totaled $108,075.80 on the last trading day, representing a return of 8.075%. Within the same period, the S&P 500 and Nasdaq index rose 4.24% and 4.81% respectively. Our portfolio has successfully beaten the major benchmarks and delivered alpha returns. 

 In a snapshot, our market value of long positions is $107,842.36. Cash Balance is $233.44. Trading Costs is $1,150.00, representing 1.06% of portfolio value and 14.2% of the return. In addition to stock returns, there are some other incomes, including a cash interest of $114.13 and a dividend payment of $31.90 (DLPH stock split).

How To Invest?

What differentiates our decision making process is that we believe in believability-weighted decision making. After the discussion of a company’s revenue model, management expertise, core competency, the company will be rated based on our scoring system. Companies made into our portfolio are the ones that not only survived multiple rounds of qualitative debate. But, also passed our scoring system. The discussion is open format and the ultimate goal is to evaluate each investment idea in a more comprehensive and unbiased manner.

To further enhance our risk management practice, we divide our team members into Investment Committee and Risk Management Committee, apart from their individual research responsibility. While the Investment Committee focuses on portfolio management and generating new investing ideas, the Risk Management Committee is responsible for tracking the ongoing events for our current positions and identifying potential risk factors that are likely omitted by previous analysis.  

Investment Process Flow Chart:

Although SWOT and Porter’s Five Forces model are the common tools when it comes to the company analysis. And we did find limitations in these tools. Porter’s Five Forces model is more about analyzing the competition landscape a company faces. However, the companies in our holding tend to be the ones that have strong monopoly power. So the model became less important to our analysis. What we care more about is the nature of a company’s “moat,” and whether it is sustainable or not. As for SWOT analysis, we found that sometimes it is hard to clearly define what the strength and weakness is. And the four criteria are relatively vague and subjective. When discussing SWOT, we found that team consensus was hard to be met. Instead of using theoretical frames for company analysis. We like to ask more specific questions and find more unique insights from various angles.

What should I invest my money in?

Our decision-making process can be divided into two parts. The first part is stock selection: every member is asked to propose stock ideas and use our scoring system as the secondary screening system. Stocks that meet all the standards enter into the next step. The second part is voting, we have 7 votes in total (6 team members, 1 advisor). A stock will enter into our trading list if it gets more than 4 votes. Even after a stock has passed the voting, the members in the risk management committee (under advisor’s supervision) still reserve the right to raise opposite opinions and halt the trading.


During the process, the biggest problem we encountered is the lack of knowledge and expertise in the field of finance. And few team members have had experience with stocks. As first-year students in our high school, our courses are mainly centered around mathematics and economics. And they barely touch upon the topic of investment. As a result, our decision-making process is relatively slow and inefficient in the beginning of the competition. And nobody is confident enough to make investment suggestions and decisions.

How To Invest?

To solve this problem, we first focused on the companies that are around us. In the first half of the competition, our investment is mainly focused on the companies that we have real-life experience with. And for example, one of our first stock holding is $TAL. $TAL is a leading K-12 after-school tutoring services provider in China.

As we all studied at this school, we knew how good its service is. And we have witnessed the expansion of the business. Also, in order to learn more about investing, we arranged extra after-school study sessions to study the concepts together. By relying on the online resources KWHS provides and the help of our advisors, our learning process becomes more efficient. As we knew more about stock investing, our interests in the subjects grew. And as a result, our team had shown a stronger engagement and the decision making process became much more efficient in the second half of the competition. 

Another problem we encountered is that our believability-weighted decision making process. This process depends on the solid understanding of each member’s strength and capability. And yet we found that the self-assessment is hard and subjective. So we developed a third-party evaluation system. And with which we allowed our team members to evaluate one another. After we reached an objective consensus of each one’s strength. Specialization became easier and our teamwork became more efficient. 

Ethical considerations

Keeping the highest ethical standards is absolutely crucial. And for the professionals working in the asset management industry its essential. Investment managers’ ethical standards are more important than their performance.

All the management and trading practices have to be in compliance with local laws and regulatory standards. Company wrongdoings will not only harm the interests of clients. But also the whole asset management industry. As a well-functioning and efficient capital market system is dependent on trust of the participants.

Trading on inside information must be prohibited.

We will never trade on material nonpublic information. And we will report it to authorities or help facilitate the disclosure of the information if necessary.


The positive impact of this competition on our personal development far outweighs the technical skills we gained. We have gained more understanding of teamwork, communication, leadership, followership, time management, as well as codes of ethics. We feel accomplished about this unprecedented, professional team project.   

In general, the KWHS competition is more challenging than we expected. One big hurdle we were facing was effective communication and team work. Coordinating meeting schedules was not easy since each of us have different schedules. In order to work better together, we build a specialized group chat on “WeChat,” so team members can share thoughts about the project in their down time. We also improved our time management skills by learning how to set priorities for different tasks.

How To Invest?

And, we realized the importance of tools, as we found that some websites are extremely handy when it comes to collecting data. Also, we realized that the source and quality of information have to be legit. Through the competition, we developed our preference of primary information over secondary information, and the habit of checking source’s reliability. 

That being said, we could have done better. We should have started by arranging more time to do the background study, be more familiar with technical concepts. And we could have also been more calm and less influenced by the market emotions which let us hold our stocks for long term and reduce the trading costs. Most importantly, using only 30% of our funds to invest, we were a bit too conservative in the first half of the competition. Had we been more confident with our picks, our final returns would have been even higher.

To sum up, that was a 10-week quality time we spent together as a team on a meaningful project. As a team, we were devoted, committed, and passionate. Besides our self-improvement, we are pleased to see the smooth, up-trending curve of our portfolio. 

In the end, we would like to take the chance to thank Wharton for providing us with such a valuable opportunity. And for inspiring us to become a better version of ourselves in both academic and personal life.

How To Invest? Written by Runlai Xu

Physics Nobel Prize Winner MIT Prof Frank Wilczek on String Theory, Gravitation, Newton

How To Invest?

AI Financial Planning

How To Invest?

AI Investing

How To Invest?