Why I am buying stocks right now.
You may be reluctant to invest in individual stocks. Perhaps you got burned by a dot.com or just don’t trust the market in general. The truth is, however, that the stock market is a great place to invest if you know what you are doing. Historically, stocks have returned an average of 11.5% per year over the last 100 years. No other investment can compare with this result. If you decide to give it a try, here are six strategies I recommend:
- Prospect – start a list of companies to research. I get ideas from magazine articles, cable television, and my daily life. Look for companies that are recommended by professional analysts or ones that having intriguing products. Perhaps there is a restaurant chain, retailer, or manufacturer that you especially like. Or maybe you think a certain industry is poised for rapid growth. Keep your eyes and ears open and keep adding to your list, even if you have no money to invest. Make prospecting a life-long activity. You never know when you are going to run across a fantastic opportunity.
- Screen – eliminate companies that don’t fit your investment goals. I avoid certain industries – like auto manufacturers, airlines, biotech, oil companies, and technology. I don’t believe these industries have enough profitability or stability for me to invest successfully. I also screen out companies that have a poor record of social responsibility, a recent record of financial or political roubles, or too much debt. You may have a different set of screens. I am basically looking for companies that I would like to personally own. Because, after all, that is exactly what I am doing when I invest in the company’s stock.
- Evaluate – determine what the stock’s shares are really worth. There are a number of methods for doing this. To gather information, I use free investment tools available on the Internet, for example: msn.com and other, similar services. For valuation methods, I use my own system patterned after the method used by Warren Buffet, perhaps the world’s most successful investor. There are a number of books available that provide valuation guidelines. A simplified method would be to take the company’s projected earnings per share and multiply it by their projected growth rate. The result is an approximate value
- Compare – look at all the companies in the same industry. I would never invest in a company unless I also looked at all its competitors. The MSN website has a Stock Research Wizard that lets you compare a stock with all the companies in the same industry. Sometimes I find a promising competitor that looks better than the one I’m evaluating. This is an invaluable step.
- Commit – make an action plan regarding the stock. This does not mean buy the stock. It means that you set a target buying and selling price for your selected stocks. I set the target buying price at 50% of the value. I set the target selling price at 110% of the value. This way I am buying the shares at a steep discount and I stand to make a handsome profit when I sell.
- Monitor – track your selections. Update your valuations continuously and compare them with market prices. Remember that both the market price and the valuation can change rapidly, especially when there is big news breaking. When stocks you are tracking reach a target buying price, buy them. When stocks you own reach a target selling price, sell them. Nothing could be simpler. I am not guaranteeing that you will make money by following these guidelines – you may not even find a suitable investment for months or years – but you certainly will maximize your chances of success. Warren Buffet started with a portfolio of about $105,000 and ended up with billions. I hope you have similar results.