Be a smarter investor.
Investing is always a good idea, if it’s done wisely.
BUT, it’s important to note that each and every investment carries an element of risk, meaning that you could potentially lose your money.
Regardless of what you invest in, we think that if the risk element of investing is treated with respect, then you’ve already increased your chances of being rewarded. Simple!
In this article, we will be covering a basic, yet effective approach towards equity investing which we feel needs to be taken into consideration prior to pulling the trigger.
Research, Research and More…Research.
Before getting excited, we always try our best to take an educated approach to any investment. When we invest in companies we want to be smart and ensure that we feel comfortable in many areas, such as:
- The Management behind the company;
- The Financial health of the company;
- The Total Addressable Market (TAM) & Competitors; and
- Lastly the price you’re actually paying.
Although the above may seem like a lot of information to digest, we decided that it would be a good idea to just give you a brief overview of what you should be looking for (prior to releasing more detailed content in these areas).
Management Behind the Company
Every company is directed by a Management team who are tasked with the responsibility of maximising Company profits, whilst keeping the Company ahead of the curve.
We as investors are buying and selling shares in Companies through mobile applications, and therefore have absolutely no physical interaction with management.
So how can you trust somebody you’ve never met?
Well as stated before, you’re going to need to research.
Treat it as an investigation. The who’s, the what’s and the why’s.
Understand what previous experiences management have been exposed to, and whether or not they have a high success rate of execution. Without sound management in place, the chances of profit maximisation are significantly reduced.
Management are the equivalent to the captains on a ship, or the pilots on a plane, they decide how things go and you need to trust them! But unlike pilots or captains, their achievements or mishaps are under microscope and can easily be found on the internet. So research!
Today we live in a day and age where anything can be found on the internet and most people’s lives are on:
Twitter, LinkedIn, Instagram, Youtube and good-old Google!
The Financial Health of the Company
Undoubtedly, this is quite a technical area to get into when assessing an investment, but by no means do you need to be a certified accountant to decide whether or not the Company in question is in good financial health to execute on its targets or not.
Although Organisations cannot vocally communicate to us, they still can communicate to us through ‘the language of business’.
This is done through three sets of financial statements:
- The Statement of Profit or Loss (aka. Income Statement);
- The Statement of Financial Position (aka. Balance Sheet); and
- The Statement of Cash Flows.
Each quarter (3 month period) Companies registered on the stock exchange need to produce these statements, which can be found on the investor relations page under the following headings:
Take a look around and see what you can understand.
As always we are open to conversation so reach out, you can now!
This is an area that needs an element of dedication to understand, however, we’ve got your back! We’ll be releasing 101’s in the near future covering all this in a simplified manner.
Total Addressable Market & Competition
When investing we always want to ensure that the industry is up-trending and has a huge amount of growth potential in front of it. Investing is a forward looking motive and we need to keep our eyes on the future, that is 2–5 years, or sometimes even more. The more the addressable market grows, or has potential to grow, the better!
You should also take note of the competitors in the same industry, and assess how well positioned your Company is to accumulate market share.
As an example, if you’re interested/invested in Nike, make sure to also check out their competitors…Adidas and Puma.
Getting in at the right price
The markets can be a pretty hostile place, and the current market is no exception. Even though we do not agree with trying to time the market, we also don’t want to get into an investment when it’s too pricy. If you buy shares in a company that is overvalued then you may be setting yourself up for disappointment.
So how do I value shares in a company?
Well…there are many factors that go into this, and a couple of metrics too, like, the forward and trailing PE ratios.
Once again, because this is a technical area, we decided to cover this in a future article with the help of an expert in the field, who can basically breakdown valuations to the point where it becomes stupid-simple.
As a warning to all, historically the market has never been this expensive, potentially meaning that shares are being overbought, thus translating to an over valued market, which could lead to a correction.
The Market can sometimes be broken BUT not the Company
Yes, you’ve read that correctly.
The Market can sometimes down-trend more than expected, or even unexpectedly. This is in most times, when the opportunity arises to buy stock at a discounted price. For practicality sake, let’s look at the last quarter of 2018, and more recently the COVID-19 dip.
From the above chart of the S&P 500 index, it’s obvious to see that the stock market does not trend in straight-lines. If you’re patient enough, stocks can be acquired at a discounted prices. For example, at the end of 2018 and when the coronavirus pandemic occurred in March of 2020.
It is important to have a shopping list of quality companies that you wish to own, so that when the market does present itself with such opportunities, then you’re in a position to pounce and acquire shares at a discounted price.
Bargain, we say!
Believe What You Invest In
After conducting your own research and utilising your own intuition, you should be comfortable enough to believe in what you invest, so much so, that you’ll actually arrive to the point where you can leave your money in a stock, and not worry about it for a couple of years.
In fact, you should feel so confident in your research and knowledge gained, that if the share price goes down, you’ll actually consider increasing your position instead of arriving to the point of panic-selling.
To prove our point, let’s take one of the most famous companies in the world: Google.
If you did your research prior to the COVID-19 crash and believed in the company, you would quickly realised how cheap Google had become during March (due to panic selling).
We all knew Google wasn’t going anywhere, actually its usage is higher than ever before, and the graph shows it!
Companies do not remain static, and frequently come out with new products, and/or services. As part owner of the company you invest in, it is vitally important that you keep updated with the company and assess any new products or services provided. This can be done through viewing news article sites such as seeking alpha, the motley fool and yahoo finance (to name a few).
You’ll also need to keep informed on external factors such as industry trends and competition.
(Are they innovating
enough when compared to their competition or are they slacking/behind?)
Diversification of your portfolio
Ever heard of the famous saying ‘Never leave all your eggs in one basket’ … of course you have!
The same mentality needs to be adopted when investing. When you diversify your portfolio wisely you’ll reduce your risks of getting burned by the market.
Imagine this, It’s the early 2000’s and you’re heavily invested in companies that formed part of the early internet. All of sudden, the dot-com bubble bursts leading to a subsequent Market crash, and arguably leaving you in a worse position than before you started investing. With that being said, we think it’s important that you have a list of companies operating in different industries.
Be careful, think wisely and diversify your wealth!
Patience is the name of the game!
To Wrap It all Up
Equity investing requires a high-risk appetite that should not be taken lightly. Don’t invest in companies you don’t understand and don’t FOMO, just cause your friends are doing it, doesn’t necessarily mean its a good idea.
Do your research, reduce your risk and increase your likelihood of being rewarded.
Be fearful when everyone is greedy, and greedy when everyone is fearful. — Warren Buffet.
Or in other words, take advantage of panic selling and acquire shares in quality companies at a discounted price! 🙂
If you’re interested in joining us on our journey, join our Facebook group: The Investment Hub — Malta
Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.