As a young investor, research is something that should be a regular part of your life. If you’re not ready to do this then you should rethink this whole investing thing twice or even three times over. Research is a crucial part of picking stocks. Without it, expect to spend more on brokers since you are going to rely on them to do the research for you. If you don’t want to do the research yourself nor do you want to pay others to do it for you then perhaps you’re not ready to become an investor.
You must never underestimate the value of thorough and relevant research in increasing your earnings. The reason why there are scouts in professional sports is because they are paid to research potentially great players who can lead their team to victory. And their research on a possible candidate’s history starts as far back as high school or even college.
That should also be your attitude about investments. When you are contemplating about buying stock in a company, your decision should be based on a large part on a company’s performance in the past. If you don’t know how a company has performed or feel that your knowledge about it is lacking then you should not invest in it.
In one of his rare interviews, Peter Lynch who headed Fidelity’s Magellan Fund for 13 years and was largely credited for transforming the fund’s $18 million to $14 billion during that time period, said complacency is one of the worst traits that investors can cultivate. However, he said that this can be avoided if you’re working hard. (www.businessinsider.com/peter-lynch-charlie-rose-investing-2013-12) That’s sage advice coming from someone who is considered a mutual fund legend. When he headed Fidelity, he beat the benchmark S&P 500 Index for 11 years!
You can’t be complacent when it comes to research. So what exactly are you looking for when you conduct your research?
Basically, you want to check the company’s financial ratios to see if it is viable and can give you the returns you expect. First, you should check out the price-to-earnings ratio or P/E ratio. If you’re researching large cap stocks, the P/E should generally be lower than 20. For all other types of stocks, such as growth, small cap and speculative stocks, the P/E ratio should not be more than 40.
Second, you should also look at the price-to-sales ratio or PSR ratio. It should be near 1 as much as possible. Third, check out the return on equity or ROE. The figure should rise by at least 10 percent annually. The same goes for the growth of earnings, which should be at least 10 percent higher compared to the previous year and this kind of consistency should be maintained for a period of several years.
Finally, you want to make sure that the company is not saddled with debt. If it is, it can be detrimental to its returns. The debt-to-asset ratio should show that the company’s debt is only half or less of the assets it holds.
Of course, the numbers will tell you a lot of things about the potentially of a company. However, you should not also forget to check out the leaders at the helm of the firm. Since they are the ones who steer the day-to-day operations of a company, the performance will greatly depend on the members of the board of directors and the management team as well. Do a research on the experience and qualifications of these individuals so you can decide if you trust them enough to handle your money.
In your research, you will also encounter charts with all the little numbers and little figures. For the regular individual who has always found math and anything related to numbers intimidating in high school, the thought of chart reading may bring some kind of fear. However, it is a skill that you can learn with time and effort. All that you need to do is master the figures and see what they stand for and you’re going to be on your way. One rule of thumb that’s very easy to follow is to see where the chart is heading. If the graph starts at the lower left and stays on the upper right then the company is pretty much succeeding. If it’s the other way around—starting high on left and going downwards to the right—don’t bother checking out the rest of the statistics and stay away from that stock.
Where can you find these types of information? Your first source of information is the company’s annual reports which are generally available online. You can also get 10K and 10Q reports from the Securities and Exchange Commission since firms file these reports there. You can also find a lot of information about a company by checking out stock reports from credit rating company Standard & Poor’s. There are also company news that you can get from Bloomberg, the Wall Street Journal and other stock investing websites.
It’s also a good idea to acquaint yourself with analysts’ projections about a particular stock. Since it is their job to see if companies are good investments for their clients, they do exhaustive research on them more than you ever could. If most analysts have similar forecasts about a particular stock, then it’s pretty much a good indication about how that stock will perform. Still, you should gauge the company by the other metrics mentioned above before deciding whether it is a good investment or not.
When you seriously begin to invest, you will most likely receive invitations to subscribe in a newsletter that will tell you how to make millions with just a few hundred dollars. These scam artists will present a very persuasive picture of the promise that their so-called no-fail strategy will give to you. They will even have testimonials from supposedly real people attesting to the success of such a method.
You should guard yourself against such claims from those who call themselves financial advisors because in truth, they are nothing more than just scam artists who want to make a quick buck by fooling other people. You have to use your common sense here. If a newsletter claims that you can make a million dollars from a mere $500 investment, you should wonder why this individual is still selling newsletters instead of using the strategy to make himself very wealthy. Something fishy is going on somewhere. Stay away from it.
You might wonder where these “gurus” get your name and mailing addresses from. Well, they’re very creative and can easily get your information from mailing lists. Instead of paying attention to junk mail, use your time to read and research on the stock yourself. This way, you won’t waste money and effort.
One more thing: These newsletters will sell you promises of growing your money with very little work on your part. They will claim that all that you need to do is follow their investment strategy and you are all set to get amazing returns with very little work on your part. If you’ve been reading this report, you know that this claim can never be true. Earning money entails hard work. As far as stock investing is concerned, the work is not physical. However, it will require your time, patience and research.
Nothing beats good research. Leverage on your youth to take an in-depth look at a company before putting your hard-earned money on it. Since you are younger, you have the energy to stay up late and pore through more records than older investors will have. You are not also saddled with family responsibilities yet so that’s also one plus in your ability to conduct exhaustive research. Older investors cannot anymore devote their full time and attention to research because they have to take the kids to school or read them a bedtime story. The young investor, however, is not yet burdened by these responsibilities.
If you are already busy with work and school and can’t do thorough research, try to find stocks that have proven to deliver good returns over the years and stick with them. There may be promising companies that you might want to put your money on. But until you have the time to thoroughly look into their metrics and finances, it’s prudent not to rush. Riskier investments do offer higher rates of returns but until your research tells you that a particular firm has the potential to really conquer the market, don’t rush to your investments.
To drive this point home, we go back to mutual fund legend Peter Lynch. In his Bloomberg interview, he stresses the important of not rushing. He urges investors to get their facts straight before investing in a company. He cited Wal-Mart as an example where he said investors could have bought Wal-Mart ten years after they went public and still their investment would have done very well.
Research. It’s a must for every investor.
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