In: Categories » Legal and finance » Investing » Turning Your Hunches into Investment Strategies
| Every online investor has his or her own research system for investigating investment candidates. What makes any system work is that it’s repeatable, and it ensures that you don’t make investment decisions based on emotional factors. The following guidelines can assist you in turning your hunches into investment strategies. You begin by gathering all the facts: 1. Find the candidates that you want to research. Match your hunches about stocks that are positioned to be top performers to your investor profile. 2. Trim your list of candidates. Use a stock screen or some other method to identify investment candidates. Locate the online annual reports for your short list of stock candidates. Conduct your analysis to reduce the list to between six and ten companies. 3. Find out more about each company. Use resources to delve into the background of the companies on your short list. You may want to use the following outline to organize your advanced analysis of investment candidates. Divide your analysis into the following four sections. The good news is that the Internet has tons of this type of information, and most of it is free. Economic Analysis: Take a look at the economic environment of the nation (gross national product [GNP], inflation, interest rates, and other economic variables). Look at the company’s current and past profits. • News: Read the company’s press releases and keep current with breaking news. Try to connect isolated news articles to spot trends. • Economics: Note how changes in the national, regional, and local economies affect the company. Will a rising dollar lower corporate returns? What are the Wall Street economists saying? • Market: What’s happening in the stock market? Are prices and trading volume increasing? Are insiders purchasing stock? Industry Analysis: Analyze the company’s current ratios and the ratios from the last three years. Compare the company’s performance to its industry. Note the company’s chief competitors and the relative power of suppliers and customers. Determine whether the industry is undergoing any structural changes or is changing due to general economic trends. • Industry breaking news: Read news articles and industry trade journals to spot patterns that may indicate technological breakthroughs or new products. Does the industry have problems with oversupply, and if so, how does this situation affect the profits of the company you’re researching? • Industry research: Look for any regulatory concerns, international aspects, potential for entry by competitors, and the likelihood of customers using substitute products. Company Analysis: Using online resources , evaluate the demand for the company’s products or services. Gauge management’s ability to accurately forecast sales and profits. Include analyst’s forecasts for future earnings and determine whether the sales forecast is reasonable in relationship to the industry and economic environment. • Analysts’ evaluations: Most publicly traded companies have Wall Street analysts who often provide opinions about the firm. Study what the analysts are saying about the company. What they say may provide you with leads for additional research. • Management analysis: Perform background checks of corporate officers by using online resources Valuation Analysis: Discover the company’s forecast of future earnings. Determine the right price for the company’s stock. • Earnings estimates: Keep current with the earnings estimates of professionals. Are the estimates going up or down? • Historical prices: Sometimes you can tell where a company is going by seeing where it has been. Evaluating a company’s past stock prices may provide you with new insights. 4. Decide whether the company is a low-priced, high-quality stock or a loser. When you put all the facts together, you gain a good understanding of what causes the company’s stock price to rise or fall. Additionally, you know what’s normal for the company. 5. Ask yourself, “What if?” For example, what if sales drop by 10 percent? What if the material the company uses to manufacture its product becomes scarce — would this scarcity cause the cost of goods to increase? Would such a change reduce profits so much that the company couldn’t pay its interest expense? Would the company be forced into bankruptcy? 6. To complete your investment strategy, determine how risky the stock is. Could you lose your entire investment? If so, you need to add a risk premium to your required rate of return. This risk premium compensates you for the additional risk of your investment. Should the return be 10 times your investment, or maybe even 50 times your initial investment? Making this decision can be difficult because everyone defines risk differently, and everyone has a different risk-tolerance level.
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