What I Look For When I am Choosing Stocks
I will go over a very brief and easy analysis of what I look for when looking to invest in individual stocks. I believe that the individual stock picker with the right methods has an advantage over fund managers, you can see how they pick stocks in a previous article. For anyone looking for more information, there are two books that I recommend, first is Rule 1 investing and Peter Lynch One up on wall street. This article will not be an in-depth look into stock-picking more a brief overview because there are many ways you can value stock and have written a short guide before about picking stocks.
If you want to see what I am choosing for 2021, please read this article. One stock is AstraZeneca
Why Do You Have an Advantage Over Fund Managers?
The funds are too large or too focused.
If a large fund want’s to buy a stock it is limited to what it can buy. Buying a small stock even if it grows 100% would do little to the fund’s price. Therefore, most large funds can only invest in large-cap stocks due to their size. The same goes for if they sell the stocks. If they sell, a large holding of stock due to the size they are holding it could negatively impact the stock price.
Also, I listen to a lot of fund managers, most are highly intelligent and give great reasoning about why they pick stocks. However, I see one key theme, the China equities fund manager is always bullish on China. The Japanese fund manager is always bullish on Japan. The same with bonds and gold managers. Why wouldn’t they be? At the end of the day, they need investors for the fund. It is very much like supporting a sports team. You are always backing them.
Why Do You Have One up on the Market?
Without going into too much detail, I would urge anyone that wants more information on this to read Peter Lynch’s book, I have put a link to it earlier in the article. However, in short you are an example of what you buy in the market. For example, I use Amazon I subscribe to their Prime service and buy books, from Amazon. As well as this I use Microsoft, and Facebook (WhatsApp) every day so a good point is to look at stocks that you (the customer use) know or have an interest in as will understand them better. If you do want to go into a stock that you like and don’t know try speaking to someone that does. For example, I wanted to know about a medical company so asked my friend who was a doctor and when looking at Coke-Cola I asked someone who worked a Coke about the share price and the company and what he thinks.
Some aspects that I look for and which I think are fundamentals is the management. Does it have experience or the owners of the company or just doing it for the bonus? How many shares are they buying of their own company? For example, Buffett’s personal and family portfolio holds 99% in Berkshire Hathaway, so is invested in the company with the investors (for any wanting a good book, I would read The essays on Warren Buffet).
One other point does it have a high moat. What I mean by this does the company have an advantage over its competition. For example, a company would be Ill-advised to compete with the like of U.S Rail as high costs with no guarantee of success, therefore, a high moat.
The term economic moat, popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.
One another important aspect, that a lot of people forget when they are buying a stock you are buying part of a company. If you were buying a house you would do the groundwork the same goes for a stock. Just think if you are going to buy the stock only do so if you would hold it for the next 5 years. Buffet uses the phrase the market in the short run is a slot machine but in the long run, weighing scales. All that market movements should do is give you the chance to buy a great company at a lower price.
In terms of metrics, I keep it quite simple:
- 10% ROE growth
- ROCE 10% +
- Future growth 10% +
- Low debt level
This is a very simple selection but look at this as some of the key aspects to look for in a stock.
This is very short and would urge anyone looking at stocks to read both Benjamin Graham’s book Intelligent Investor, Security Analysis, Peter Lynch One up on wall street, Warren Buffet’s book on him the essays.
One good site that I use is Simply wall street but other good sites for free are Bloomberg and Yahoo Finance.
I am an offshore financial advisor and wealth consultant, if you want to read more of my articles please visit my website: www.investmentsforexpats.com
