Whether you’re interested in becoming a stockbroker or you’d like to go a little deeper with your research before investing, adopting a practice that experts use instead of going with whatever’s popular at the moment is a good way to potentially improve your portfolio and self-esteem. It can be a good feeling building wealth, beyond the tangible reasons, when you do it intelligently as a wise investor.
First things first, it’s important to point that when it comes to picking the right stock, there’s no magic formula that’ll always guarantee successful results. Even individuals who do this for a living get it wrong sometimes, so don’t beat yourself up if you’ve made a bad investment even after performing good market research. Many times, estimating a company’s value can be extremely difficult and subjective. So unless you’re gifted in telepathy and are clairvoyant, there’s always that chance of investing in a stock that takes a nose-dive for some reason you haven’t considered.
Regardless, there are two important aspects to consider when it comes to market research:
- Quantifiable Aspects: The revenue a company receives, their historical profit growth year after year and anything else that can be expressed as a fact or statistic.
- Qualitative Aspects: This includes leadership, the company’s culture and philosophy and the quality of their product or service.
Incorporating these two factors into your research is a good way to discovering great investment opportunities. Financial analysts will pour over balance sheets and income statements to find the quantifiable aspects of a business. If you desire to delve that deep into your research, sites like Yahoo Finance, MorningStar and MarketWatch.com often have all that information and more. But the qualitative factor can be subjective and based on personal opinion of a business which makes it difficult to measure.
Therefore, combine these two factors by using the Value Investing method
This method is basically where you purchase shares of a company you believe is undervalued and so will go up in time. Value Investing requires you to find the intrinsic value of a business, which involves some analysis.
For example, say, in your research, you see a company that is normally profitable, has had no major defect or recalls in it’s product and also is established in its industry. Only thing is the CEO is involved in some scandal which most likely will cause the price of that stock to go down. If the company itself is great, but the leadership is not, it’s important to note that the CEO can always be replaced by a board and so the price of that company’s stock can go up as long as it continues on its path. This allows you to buy when the price is low (because of a temporary issue) and hold till they replace the CEO causing the price to return back to it’s intrinsic, or true, value.
This method of investing was created by David Dodd and Benjamin Graham, both patriarchs in the investing world, in 1934 with their book Security Analysis.
Other Scenarios of Value Investing
A bad CEO isn’t the only reason a company can be undervalued. The industry that company is in can be going through a rough patch (like the oil industry), which, once the industry rebounds, will reflect in its stock price. Or an abnormally warm winter for an energy company can result in a poor quarterly earnings report causing the stock price to drop for a season. Ultimately, this is a good strategy to hone when it comes to market research as it can boost your confidence and portfolio if your assumptions prove to be true time after time.
Investing like a pro
So deciding to spend more time in your research as if you were employed by a brokerage firm, minus the stock broker salary, can be very valuable and rewarding. And as with anything, practice and persistence will allow you to make better picks in the future earning you the Wise Investor title.