This quick post wont touch on all the things that make an investment a good deal but I will do my best to at least help you find some good opportunities out there. When looking for an investment you should 1) look for value, 2) aim to take advantage of catalysts and 3) invest for growth.
Value exists when the market value is significantly less than the intrinsic value. For example, if you find a Ralph Lauren shirt at Ross for $30 you have found value because the market value for that same shirt is roughly $70. There is a $40 gain that accrues to you. Investors like Warren Buffet scour the market looking for value. This can happen in multiple ways but my favorite is when a company gets hammered by bad press because of a problem with their product, a law suit or something that ruins public perception. Often times the stock gets hit but if the company has significant assets and a strong core business they should be able to ride out the wave. See BP, Chase, Chipotle, Volskwagon.
The key is to buy at the bottom and buy it hard. Put all your money into this dip and when it pops back you will be sitting on a significant gain when it returns to the prior price point. (Be greedy when others are fearful and fearful when others are greedy). The key is to be read to sell that stock at the top even when things look great.
Another way to find value is looking for companies is much more technical. This is how Warren Buffet does it. Warren looks at a companies assets to find a company that has a book value greater than its current market value. The idea is that even if the company were to go bankrupt the liquidated assets (cash) that would accrue to shareholders would still make the trade profitable. While most companies DON’T go bankrupt and most of the time shareholders eat last the strategy still works because the market price usually corrects itself.
I personally think going all in on a hard hit company is the way to go. It is a quick way to make 20% gains. Don’t limit yourself to just one strategy though.
Look for Catalysts
Markets move, significantly, when there is a catalyst. Catalysts look like mergers, downsizing, positive earnings reports, new products, positive press and really anything that shines a positive light on the company. The key is to do your homework and really understand the fundamentals of the company. You also can’t be naive and blind by emotion. I have bought companies that I liked but that had poor financials and as a result poor performance because I was blinded by emotion. For example, I lost about 50% messing around with twitter stock because I liked the company but didn’t take into consideration that most of my friends can’t stand twitter.
Investing most of the times is really that simple. You have to look at what the market loves and that is usually the stock that the market loves too. For example, Starbucks always has lines out the door which usually means that the stock should do well because there is demand for their product. Macy’s is always having sales and discounts which indicates that sales are struggling. They won’t tell you that they are failing because that hurts the brand so you have to spot it for yourself. When they report that they are cutting jobs much later this is when their stock will take a hit. Had you noticed and been bold enough to take action on the signs you could have shorted the stock and been ahead of the play.
Look for Growth
Since most of us are aiming to gain wealth we have to look for growth in the market. For those that do not know there are multiple kinds of stocks. These are a) high growth, b) income and c) growth and income. Usually your growth stocks are companies that are brand new and not paying dividends (Facebook, Uber, Amazon, Netflix). Usually tech stocks fall into this category. These are the companies that are innovating and trying to make a dent in the market. Next, are growth and income stocks (Apple, Visa). These are companies that are established, have cash, pay dividends but also have some room to grow. Last are pure income companies where there isn’t much growth. These are usually your Dow companies like (Johnson and Johnson, Proctor and Gamble, Target, Coke). Income stocks are better when you are aiming to preserve your wealth and live off the dividends.
For growth companies I like to “skate where the puck is going”. This means that you cant invest in the here and now, you have to invest in what you think the world will look like 5-10 years from now. Be aware that when you do this there will be people who can’t see the vision or the value who will call you crazy. When I spotted Tesla, people called me crazy while I proceeded to double my money from $70/share to $130/share. Now you see them all over the road.
To be a good investor you have to be able to see what others don’t. This means that you will have to look into the future, buy low and hold on. The key is that you have to find a company with a strong WHY. You have to find a company that isn’t just trying to replace something but a company that is operating in their purpose and their purpose replaces something by happenstance. For Elon and Tesla he wanted to get people off oil because oil companies were gouging customers. Apple won because they were willing to take a risk others weren’t and they wanted to change the world by making technology simple and easier to use. Look for companies that are not aiming to compete but to dominate. That is where the money is.
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