You’re new to the stock investing game, and you don’t know where to begin. There are so many “experts” out there – all of them claiming to have the perfect formula for investing. What you need are basic principles, though, not hard and fast rules. And, for that, you can study the greats.
Always invest with a margin of safety
The margin of safety is a concept first pioneered by value investors Benjamin Graham and David Dodd. It’s the principle of buying a security at a significant discount to its intrinsic value. This is thought to minimize the downside risk of an investment while providing exceptional returns.
In other words, Graham’s approach was to find stocks that he thought were worth $1, but were selling for just $0.50. He was very good at finding those discounts in the market.
Know what kind of investor you are
One thing that online discount brokers can’t tell you is what type of investor you are. That’s something that requires a little bit of introspection. Do you scare easily when the market drops? What about when the market rises – are you overly excited about the companies you invest in?
Some investors don’t like to pour over financial statements or go on fishing expeditions in search of excellent management. If this describes you, you’re probably well-suited toward being a passive investor. In other words, you’re probably better off buying an index fund than you are researching a company.
But, even if you like analyzing stocks, it doesn’t mean you’re an investor. You could be a speculator. The famous Benjamin Graham believed that an investor looks at a stock as a part of a business. The stockholder is the owner of the business. The speculator looks at company stock as expensive pieces of paper with no real value. The speculator trades on price. The investor buys companies.
Consider a company’s products or services
Does the company you want to invest in have products or services that have sufficient market potential? In other words, is the company manufacturing goods, or providing services, that make sizable increases in sales possible for at least several years?
A company seeking long-term growth needs to have products that address a large and expanding market. Those products and services have to solve a problem for people, and people have to want to pay for it.
For example, a company like McDonalds seems like a sure thing. But, when it first opened its doors, it wasn’t. The McDonald brothers and, later, Ray Kroc, had to come up with an idea that would be both profitable and have staying power. Today, it’s almost unthinkable that McD’s would go out of business. But, as an investor, you had to have that vision when the company launched its IPO to realize the full profit potential of the company.
Consider the company’s sales organization
One of the things Philip Fisher focused on was the company’s sales organization. Fisher wrote that few products or services are worth buying in their own right – they needed exceptional merchandising and sales plans. Marketing is another aspect to look at. How does the company get its product to market?
Does it have a wide distribution chain? Does it have a competent sales force? Is it prepared for growth? Does it have the ability to scale on demand? These are all things to look for in a company.
Buy companies with good employee relations
This is something a lot of investors just plain don’t pay attention to, or they don’t know how to assess this. According to Fisher, a company with good labor relations tends to be a lot more profitable than one with mediocre relations. That’s because happy employees are likely to be more productive. There’s no single criteria to measure this, but there are a few things to look for.
First, how does management view its employees? A company with good labor relations tends to value its employees highly. Executives don’t hide in their office, and employee morale is usually high. How is the company’s profit margin? How about its employee pay? Companies with higher than average profits and higher than average employee pay tend to be more profitable, overall, than companies with high profits but average or below-average employee pay.
Companies with good employee relations will always try to settle employee grievances quickly, with a focus on making everyone involved happy. That way, everyone wins.
Jarryd Harden is a veteran in finance. He often writes about smart investing and money management on financial blogs.
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