Finding and Buying Stock

Finding Stocks To Analyze

We are finally ready to start looking for some interesting investment opportunities. This lesson will explain several ways to perform the first crucial step in finding attractive investment opportunities: the idea generation phase.

Summary:

  • The internet has given us access to amazing tools and resources which make it easier for you to generate investment ideas

  • There are thousands of stocks available, but only a handful of them will meet all your criteria, so you need a way to filter out the garbage

  • The goal of the initial filtering process is to identify financially strong businesses with above average profitability and low debt levels who have enough cash to pay their short term obligations

  • A stock screener is an online filtering tool which allows you to input some criteria and then shows you which stocks meet these criteria

  • Filter on return on equity > 15% to return companies with above average profitability

  • Filter on debt-to-equity < 0.5 to return companies with low debt levels

  • Filter on current ratio > 2 to return companies which can easily pay their short term obligations

  • There are many other criteria you can filter on, like market cap to show only small cap stocks or dividend yield to only show companies which are paying a dividend

  • I do not recomm end filtering on P/E ratio or earnings growth, because this might exclude perfectly sound investment ideas, since a financially healthy company with 0% growth can still be an attractive investment if the price is right

  • Besides stock screeners there are many other ways of generating investment ideas, like newsletters and 52 week low lists

How To Analyze Stocks Like The Pros

In the previous lesson we generated a list of investment ideas. These are stocks we need to analyze a bit further in order to see if any of them are interesting companies to invest our hard earned savings in. That's what we'll do in this lesson.

Summary:

  • You have to put in some serious effort in order to make the best possible investment decisions

  • Fundamental analysis is assessing a company’s performance and financial health based on several years of historical financial statement data

  • Gurufocus provides you with 10 years of financial statement data for free

  • Look for patterns, trends, and consistency in the historical performance of the company by checking out how things like EPS, FCF, Book Value, Net margin and ROE developed over time

  • Charts can help you visualize this data to make it easier to spot anomalies whicTEMh require some further analysis

  • Find out if yo u are dealing with a temporary setback or fundamental problems which are more permanent in nature

  • Qualitative analysis is assessing a company’s non-quantifiable aspects, like the quality of its management and the nature of its business

  • Stick to businesses you understand, and drop the rest from the list

  • Look for companies with a sustainable competitive advantage, with the emphasis on sustainable

  • Think about risk factors and things that could negatively affect the company’s profitability in the future

  • Finally, find out if management is honest, able, and shareholder friendly

When To Buy & When To Sell

Today’s lesson will answer two of the most fundamental questions of investing: when to buy and when to sell? As we shall see in this lesson, the optimal moment to purchase or sell a stock has little to do with timing and more to do with the stock price in relation to value.

Summary:

  • Timing the market is impossible, because short term prices are irrational & unpredictable

  • You don’t have to know when a stock has hit its bottom, you can simply “average-down”

  • You should never purchase a full position in one go, but instead Nadd more and more stocks to your portfolio as prices decline

  • Buy when you find a good company selling at a significant discount to intrinsic value, this is the secret recipe of value investing

  • Holding on to stocks for the long term has many benefits. That’s why Warren Buffett’s favorite holding period is forever

  • There are only three good reasons to sell a stock

  • Sell when a stock reaches its intrinsic value

  • Sell when you made a mistake

  • And sell when a better investment opportunity presents itself

Managing Your Portfolio

In this final lesson we will cover some important portfolio management tips to help you build and maintain a healthy stock portfolio.

Summary:

  • There are several important factors you should consider when it comes to managing your portfolio

  • Diversify by buying a mix of companies which operate in different industries to spread the risk of your portfolio

  • Always keep some liquidity so you can act when new opportunities arise

  • Regularly re-evaluate your current holdings to see if it is still a good idea to keep them in your portfolio

  • Minimize the amount of trades you make to minimize the amount of transaction costs you have to pay

  • Don’t buy a full position at once, but instead average down by buying more stocks as prices decline

  • Keep adding money to your portfolio by automatically transferring a percentage of your monthly income to your investment account at the beginning of each month

  • Don’t give up too quickly, the returns will come in time if you just stick to the strategy

  • Finally, be patient, because time is a friend of the value investor, because it unleashes the incredible power of compounding

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