When you start to invest, the huge number of opportunities can be overwhelming. Even if you’re only investing in stocks, it isn’t easy to decide which one to buy. But buying the right one is essential for your success.
The investment world is a fascinating one and when you’re at the beginning you may be overwhelmed by the huge number of investment possibilities. There are pros and cons for every single one, but this is another topic I will talking about in “Why I prefer to invest in Stocks!”.
Besides real estate I mostly invest my money in stocks or, as I’d rather like to say, in companies. I’m a private value investor and I’m searching for outstanding companies at a fair price.
How do you find a stock to invest in?
This is undoubtedly one of the main questions every beginner asks himself. Unfortunately, many of them answer this question the easy way. I’m a member of many forums and Facebook groups and it’s great to see how many people think about investing their money.
Investing isn’t just about becoming rich, it’s about preparing for the future – your own future or the future of your partner and your kids. But when making investment decisions, when deciding which stock to buy, it’s always the same. All to often I can read that beginners buy a stock because everyone is buying it. “Everyone is buying it” is mostly good enough for a buying decision. Because when everyone’s buying this stock, it must be a great one which will rise in the future. That’s one reason why many small private investors buy shares of popular companies like Amazon, Netflix, Google, Apple and so on. These are undoubtedly great companies, but not inevitably great investments.
If you ask some of these beginners why they invest in any company they tell you that they’re convinced of it and the “know” the share will increase in the future. This is the moment when I’m getting jealous, because I “don’t know” where the price will go. If I then ask why the stock will increase, they always answer, because it’s a great company. Unfortunately, they can’t really tell me why any of these companies is so great and still will be in the future. They just “know” it. The tragic about this is that these investors can be right in the short run and this success makes them self-assured regarding their decision making.
But I don’t want to be unfair. When you’re at the beginning of your investment career you probably don’t know how to find the right stock to invest in. There are so many publicly traded companies that it really isn’t easy to decide which one to buy. So,
how do I find the right company to invest in?
First of all, I have clear strategy which means that I have various criteria that must be fulfilled if a company will become an investment case. For instance, the company should have a net margin that is at least 10%, but rather 20%. I’m looking at the debt-to-equity ratio and the current ratio, because I don’t like companies with high debt. I also pay attention to the return on equity, the free cash flow and the intrinsic value. And I’m looking for consistency that’s why I’m looking at the financial statements of the last 10 years.
“But you can’t research every company just to see if they match your criteria”, you may say. And you’re absolutely right. I really can’t. But I haven’t to.
Because the internet is a great invention. When I started investing 1990, it really was difficult for me to get all the information I get today. Besides the fact that I didn’t know what to look for. Today I’m finding interesting companies in two ways.
First, I hear or read about it. Often they are mentioned only incidentally. Maybe in a documentary I’m watching. If I get the feeling this company could be interesting I’m starting my research. I’m going to finviz.com or to Morningstar. Both websites offer me the information I’m searching about.
You can see, for example, that ROE (Return on Equity) is about 36% and Profit Margin (or Net Margin) is about 20%. I’m searching these figures for every criteria a set in my strategy and if every criterion is fulfilled, I’m going on.
Here’s a little example:
As you can see, I screened, for instance, any company that has a P/E ratio under 20, a ROE above 15%, a Gross Margin above 40% and a Net Profit Margin over 10%. I have a some more figures that I’d like to see, but for our example these few will be enough. If you would like to have something at hand, you can download my Investors Checklist, surely for FREE. (You can find the sign in form at the bottom.)
The great thing is, the screener gives me every company that fulfills my criteria. So, I can concentrate on the companies the screener displays. Every other company can be ignored.
But what now? Do I buy stocks of every company listed?
Surely, not! Now the real work begins. I’m first looking through the list and eliminate every company I have no good feeling about. Sometimes I just know that I don’t want to invest in it. The next thing is that I eliminate every company in a field I know too little about. Warren Buffett calls it the “Circle of Competence“. Every company which is beyond that circle is not worth a research.
But you may miss a great chance, you may say and you’re again absolutely right. But that’s not the point. The point is, my time is limited and researching a company will take time. If I want to be successful over the long run, I have to take the time for research. The more I know about the company, the better my decision. And I’m better able to assess a company within my circle of competence.
You see where it ends. In the end, I have a number of companies which are worth a closer look. Some of them will be eliminated soon, but some will stand the test. And these are the ones I’m investing in.
Standing the test means going through the next steps successfully. The next steps will be:
- Reading as much about the company as possible. You can find everything important on the internet including the financial report. I’m visiting the website of the SEC to get the numbers of the 10-K of the last 10 years.
- Making sure that every criteria of your strategy is really fulfilled. Don’t make any exception. It’s absolutely important that you follow every point of your strategy.
- Calculating the intrinsic value of the company.
- Deciding if the price is right and that you have a sufficient margin of safety. Risk management is essential. There is no good investment regardless of the price. The better you buy, the less risky your investment and the better your return.
- If everything is just like it should be – you may buy some shares of the company.
Think about a strategy before your first investment. It’s essential. Stay to this strategy what ever comes, but don’t be a fool and never review your strategy from time to time. Make adjustments, if necessary, but always when the markets are closed and you have enough calmness to think about it rationally. Emotions are your enemy.
Research a company well. Don’t by on rumors or because of the popularity of the company. Also don’t buy because someone else has made a lot of money with the stock.
Don’t buy at any price. Always look at the value of the company and relate the price to the value.
If you would like to, you can use my Investors Checklist as a little help. You can download it for FREE. Just sign up here:
And if you would like to know how to get money for investing, be sure to read my next post coming soon.
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Disclosure: I do own Apple stocks. Mentioning Apple is for information and example only. I don’t recommend buying any. Mentioning Apple is no financial advice. Any investment is made to your own risk.