I have always been fascinated by buying shares. Throughout my life, I have made a passion out of learning the art of finding good stocks to buy. As with any money making business, the journey has never been easy.
Since the day that I understood the importance of money, I always observed how people made money in the stock market. I recalled when I was doing my A-Levels, I managed to accumulate $ 1000 out of my dad’s allowance for my studies. Foolishly, I invested in a mutual fund recommended by my college friend. 10 years later, the mutual fund lost around $ 600 of my dad’s hard earned money.
However, as I entered the workforce and now, the share still amazes me. By learning to make some money via investing, I also learned about the fundamentals that make a good company. I picked up investing from reading and from my clients who also love investing in stocks. In fact, when I followed the “investing formula”, I was mostly making money. Things turned south when I become greedy and started speculating. Here are some of the traits I looked for when choosing good stocks:
1. Good Dividend
If you truly want to make money from the stock market, forget about speculation. We are not the big boys and looking at news happening around the world, even big hedge funds faced bankruptcies when they speculated.
Look for stocks that pay good dividends. Yes, earn money by collecting annual dividends. Put any stocks that give above 4% dividend yield into your radar. Did I hear you asking why 4 %? It’s because you might as well put your money into less risky money market if you plan to get less than this rate. Examples of companies that pay 4 % or more are Verizon Communications (VZ), ExxonMobil (XOM) and Duke Energy(DUK).
2. Debt Level
Companies grow when they are inept in using debt to grow. But only small minorities are skilled in leveraging. Therefore, when I choose stocks, I look for companies with low borrowings.
Yes, call me conservative if you like, but I don’t believe in entities that operate using debt. I recorded my best profit in stocks during my investment in companies with zero debt. Although I admit that these companies are somehow boring to most investors because of uninspiring movement in the daily chart.
Companies with zero debt are usually conservative by nature. However, sometimes I wonder the reasons they list their businesses in the stock market if they are so afraid of taking on debt. We can use a few metrics to measure the debt level of a company such as debt to equity ratio and total debt to EBITDA (Earnings before interest, tax, depreciation, and amortization).
Some companies with zero debt are Chipotle Mexican Grill, INC; F5 Networks, INC; and Garmin Ltd. In times of economic and market turbulence, these companies will usually come out stronger because of their financial resilience. Not very exciting but you won’t miss your sleep by investing in these guys.
3. Largest Shareholder Equity
If the major shareholder of a stock is currently doing a good job in getting new projects and making them fly, you want them to be the commanding shareholder. You don’t want to see somebody less inept in business came and rock the boat of these great companies.
Look at companies with good dividends, low debt and yes, a major shareholder who hold at least 40 % of the share equity. Here is the fucking logic. You want this awesome guy to call the shots. Some people may argue about the lack of check and balance but to me, this reason is irrelevant. We want a go-getter who is not held down by any dumb committee.
4. Companies That Focus On Their Core Business
It doesn’t really matter what the entity in mind does to make money. As long as they understand their business, I don’t really give a damn whether the company is in consumer goods or mining. Although I do keep track of the overall trend of the industry before I rush head first with my hard earned cash.
Sometimes, you hear of companies that love to diversify because they believe in putting their eggs in different baskets. Put yourself in the same situation. I understand the newest trend that is happening in the baking industry. But that doesn’t mean I know what is going on even in other food sectors. The beverage dynamics operate in a very much different mechanics from the bread industry.
So imagine a food company that suddenly announced their intention of going into another field like real estate purely for the sake of diversification. You should seriously reconsider this stock in your portfolio if the new venture does not bring about new synergy into the existing business.
4. Past Performance
Before you go all excited to buy a share, look at the performance of the company in the last three years. Do you see consistent growth or just flashes of brilliance?
Sometimes, a good company might experience some hiccups in their yearly performance due to reasons like
a. bad year from a trend that affects the whole market or to that particular industry
b. depreciation cost from a new capacity investment.
However, a good corporate captain will usually steer the company back into profitability. Therefore, look for consistent performance.
5. Check The Employees Comments
Go a step further to check what the employees think about the company. Use Glassdoor. A good employer will see many of their employees giving positive feedbacks and vibes.
The list here is just my own experience in investing in the stock market. Please be cautious when following the steps I recommended here though because what works for me may not work for you. However, with the proper discipline, anyone can safely make some good returns by investing in the stock market. Continue to pursue the right knowledge and really, investing in the stock market could very well be an easy way to make money for yourself.
God bless you!