How to Become an Incredible InvestorMay 30, 2018
Any one can buy a stock.
Though, it takes strategy to find a great stock.
Often, Jack Dreyfus would do what others were too afraid to do. And repeat.
Between 1953 and 1964, his Dreyfus Fund posted 604% gains. Not only did it crush the competition, it just about doubled the 364% gains of the Dow. His secret was simple. He was a momentum investor, chasing stocks making 52-week highs.
That’s all he bought. And he made a fortune.
Others have taken a “safer” approach.
Sir John Templeton’s Growth Fund averaged a 14.5% return for 38 years, trouncing the major indices.
He would wait for a point of “maximum pessimism,” buy and hold.
In 1939, for example, as Europe was in disarray, Templeton bought shares of every European stock that traded below $1.
He made a fortune.
But unless you like living on the edge of your seat, many of today’s investors choose to be safer, seeking income and value, rather than chase momentum in hopes all will work out.
For these investors it’s essential they do their homework.
To many new investors don’t look before they jump. The smart ones ask themselves a series of questions, though, in an attempt to identify risk.
First, are you aware of what the company you’re investing in even does? As Warren Buffett will tell you, never invest in what you don’t understand. Second, is the company profitable? If not, when do they plan on profitability. Or, will they continue to bleed cash for the long-term. No one likes a dying company. Read over key earnings material released quarterly to identify net earnings, revenue flow, and outlook.
Third, how rich is the stock valuation? Is there a history of growth? What do the metrics tell you as far as earnings (P/E), sales (P/S), and growth (PEG)? Fourth, what is this company competing with? Is it facing heavy industry headwinds that’ll sheer earnings for a few quarters? Or is it operating in a strong growth trend?
Fifth, who is running the show at this company? A good guy with a track record of success, or some one without a clue and a history of running companies straight into the ground? The last thing we want is a CEO more concerned about padding his or her pockets.
Sixth, is the balance sheet clean? Is the company being pummeled with debt, unable to climb out? Or is it thriving with cash? Earnings aren’t always the most important to identify here. Also review its cash burn rate on spending with research and development (R&D).
Seventh, are there red flags? Identify in the 10-Q and 10-K filings. Review risk factors that may hurt the company down the line.
And finally, know if its stands a chance in its competitive environment. Or, is it swimming against the current?
Starting out as a long-term investor, these are some of the things you must be aware of. Or, you’re doing nothing more than investing blind.
Remember, any one can buy a stock.
But it takes strategy – and essential research — to find a great stock.