How do I pick a stock to buy? How do I analyze a stock? What do I need to look for in a stock? Where do I start?
Ever asked yourself any of these questions? Through the years, I’ve learned a number of investing tips, tricks, and hacks I wish I would’ve known sooner. I hope this list gives you a head start on your investing journey.
If someone gave you a punch card and said you only get 10 stock picks for a lifetime, you'd be very selective in your choices. You'd want to make sure each one of your stocks was well researched and had a bright future. You'd want strong conviction in your picks. This should be your mindset.
A stock screener allows users to search for stocks based on specific attributes such as revenue growth, earnings growth, debt-to-equity ratios, dividend yield, and much more. This allows investors to narrow in on stocks meeting specific criteria. Most reputable brokerages offer a stock screener. There are also numerous free options available online such as Yahoo Finance. My favorite stock screener is Fidelity.
Generally, it's best to invest in companies you understand. This is referred to as your circle of competence, and each investors is different. For example, it's easy for me to understand Home Depot's (HD) business because I shop there, but it's not so easy for me to understand Palo Alto Networks (PANW) who specializes in cybersecurity.
Investing in companies of which you're a customer is personally gratifying and, many times, helps to ensure you don't sell prematurely in good times or bad. There's something mentally appealing about shopping at Starbucks (SBUX), for example, when you're a Starbucks shareholder.
Past performance is not indicative of future results, but it can certainly help establish expectations. Prior to investing in a stock, check the past 10 years' financial performance. Quickfs.com is an excellent resource. Did the company consistently grow revenue and earnings year after year? Or were revenue and earnings lumpy, with boom-and-bust years? Know what you're getting into before you're already in it.
When you buy a stock, you're buying an ownership stake in a real company. I recommend this be your investing mindset. There are those who argue a stock is nothing but a sheet of paper. Warren Buffett, arguably the greatest investor of all time, disagrees with them on this notion. I'd rather take advice from Mr. Buffett.
Nearly all publicly traded companies have an Investor Relation's website where you can find investor presentations, press releases, financials, SEC filings, and other important information. Prior to investing in a stock, be sure to read up on the company using their IR website.
When a company repurchases shares of its own stock, it often reduces total number of shares outstanding. This increases EPS which is positive for shareholders. For example, if ABC Inc. earned $100 million and had 100 million shares outstanding, their EPS would be $1. ABC Inc. launches a share repurchase program and begins repurchasing shares. Next year, the total number of shares outstanding is 80 million. If ABC Inc. again earned $100 million, their EPS would be $1.25 ($100 million / 80 million shares). Shareholders received a net benefit of $0.25 EPS from the share repurchase program.
The SEC requires publicly traded companies to report financials using Generally Accepted Accounting Principles (GAAP). However, many companies which are GAAP unprofitable report "adjusted" or "non-GAAP" profitability. These companies add or subtract various expenses and costs from the Income Statement, often resulting in their appearing to be highly profitable. Be sure you understand the difference between GAAP and non-GAAP and know what version of earnings your stock is reporting.
A company's financial statements are comprised of the Balance Sheet, Income Statement, and Cashflow Statement. US listed companies publish their financials quarterly with the SEC. There are a ton of educational resources online that cover financial statements. Be sure to do your homework before diving into a stock you don't understand.
If you do this, you'll have a leg up on about 90% of average Joe investors. Be sure to stay up to speed on the business performance of the companies you own. Doing so will either build confidence in your investment thesis or give you a warning sign things aren't playing out as expected.
There's a very small percentage of the population that is successful at trading (day trading, swing trading, etc...). You're more than likely not one of them. Save yourself the headache, stress, and cash and stay away from short-term trading.
Watching the stock market every day is a surefire way to stress yourself out. Keep a 5, 10, or 20+ year perspective and disregard the day to day noise. Doing so will give you peace of mind and, many times, prevent you from making an irrational decision.
Listen to your gut. If you find yourself stressing about one of your holdings or the fact they're reporting earnings tomorrow, you're probably too heavily invested in the stock or you shouldn't be in the stock at all. How well you sleep at night is a good gauge on the health of your portfolio.
