Monday, June 15, 2020

Thought Process On Picking Your First Stock

I've had countless queries in the past and a couple of emails recently from readers who are interested to start investing and one of the commonly asked questions is ways to pick the correct stock to invest.

The first stock purchase for an investor is always intriguing. 

The emotions when you first purchase your stock are filled with mystery, excitement, fear and then there's always the risk and reward. Many will soon get addicted to it and then will proceed with the next second and third purchase and so on.

It's incredibly difficult to answer this short question to any investors who are asking as there's legitimately no right or wrong answer. Nevertheless, I'll try to provide some framework guidance which hopefully can be productive and useful to any investors who's starting to venture out on their own.



Step 1: Organize a list of companies in your respective region that are big market cap

Your very first step as a beginner should always be looking at the bigger market cap in your respective region.

This means looking at the likes of blue chip companies such as Singtel, DBS, OCBC, Sembcorp and SIA in your STI index if you are looking at the Singapore market. In the US market, you will get a list of acquainted well-known companies such as Apple, Boeing, Facebook, Starbucks, Visa and many more.

Don't buy them yet at this point because there's many rotten apples hidden in the fundamental of these companies, even for blue chips.

At this point, all you want to do is to get a grasp understanding of:

  • What is their business model?
  • What products do they sell?
  • What competitive advantage do they have over their competitors?
  • How much market share have they acquired?
  • Management capability and their historical financial performance

Most, if not all of these information, are easily available in the annual reports or financial statement of the company where typically management would provide operational quantitative updates on how they are doing or coping with the situation.

All you really need to do at this point is just to spend some time gathering the information and writing some notes down and that's it. No action should be taken yet at this point because the information you have is public, which means anyone else will have the same information as you do so that's not really helping you to gain any advantage.

You may also want to segregate the list of companies that are appearing in your newsfeed or newspaper because not all the time they are good. The fact that you read in the newspapers that people are queueing up at McDonald's does not immediately qualify them to be a good stock. 

Always be selective when reading and takes information with a pinch of salt. This way, you will have more questions than answers which is good because it leads you to explore more on your questions.

Step 2: Areas of Competency

Your areas of competency is your competitive advantage over the next other person that you have a lead on.

This lead can be achieved through years of working in the industry and getting to know-how the inside operations of how certain things might work in detail. For example, if you are in procurement, you would know how aggressive your competitors are pricing in their bids for the tender or if you are working in supply chain logistics company, you would better understand the details on transit times, delivery performance, freight claims and customs requirement.

Thus, when you select companies that are in your areas of competency, you are able to value-add your experience to the companies you are prospecting and make better informed decisions from there.

Step 3: Consistently Strong Gross Margins

We haven't really looked at the financials of the company until this point.

Once you select the ideal companies of your choice after step 2, you have to start looking at the financials of the company.

One of the financial metrics that I usually pay close attention to is the company's gross profit margins.

Companies that are able to consistently generate strong gross margins are usually indication that the products or services the company provides are superior and highly valued by its end user which allows the company to scale up for more market share.

Consumers pay a premium for company's products and services because they are superior in many senses which may include design, quality, reliability and uniqueness. Some firms may have also competitive advantage in its supply chain and thus are able to drive increasing gross profit margins over time.

There are certain industries such as consumer staples or constructions that will be struggling with low margins because of the evolving nature of the industry itself. I would want to avoid these companies for now because the industry may be in the transition phase and may take a while to see fruition.

Step 4: Companies Are Not Loaded With Too Much Cash or Debt

While it is quite obvious that companies with too much debts are not natural selection, companies that are hoarding too much cash are not an ideal choice either because it means the company is not allocating enough to grow the business It may also be the case that the company is at saturation point thus management has no options to grow the business any further and sit on the cash.

On this, a quick dirty way of checking is through analysing the company's profitability using the Dupont analysis.

The Dupont analysis is a financial ratio based on the return on equity ratio that is used to analyse a company's ability to increase its return on equity. From this breakdown, not only does an investor is able to recognize the company's profit margins, but he is also able to deduce if that profit margins are coming in from an effective way of using leverage to boost its margins.

The Dupont expression is a function of the profit margin, total asset turnover and equity multiplier.

Step 5: Valuation

The last step is probably the hardest to deduce because it is an art to be able to deduce the right valuation of the company.

The most commonly used method to value a typical company is through a price to earnings ratio, which is simply taking the share price divided by the earnings (excluding any one-off). It is usually very seldom that you see a company trading at below 10x PE ratio and if it does it is usually in an industry where it is in a very competitive space. Don't get into the trap thinking that it is a value buy just because it is trading very cheap on the market.

The higher the company's moat, the higher the market tends to price in the valuation so a good overall benchmark is to look at their historical and competitor's valuation and see where they stand at.

Conclusion

This is not a hard proof and only way of looking at companies.

There are probably a thousand and one ways one could have select companies that they decide to ultimately purchase into the portfolio. For example, the cashflow is another important aspect of a company's financial statement but I figured this would be a little intermediate for beginners.

Nevertheless, I hope these framework will provide the very basic guidelines that as beginners you are able to start the ball rolling.

As always, the market is and will always be there so there is no need to FOMO on companies that you think you might have missed. It is always better to err on the caution and miss the gain than having put your hard earned money and earn that loss in the long run.

Thanks for reading.

If you like our articles, you may follow our Facebook Page here

11 comments:

  1. CONTRACT HACKERS: WE CONNECT YOU WITH PROFESSIONAL HACKERS FOR HIRE!!

    We are a growing hacking company that connects you with well known professional hackers for hire. We have worked with different well known companies like Yahoo, Snapchat, Binance, YouTube, Google and so many more to mention. We do this as a side hustle and not for fun.

    The purpose of this team is to manage clients queries by using the RIGHT TOOLS we need to delight our clients without compromising on quality in order not to make them feel challenged to gain our assistance!

    Our team doesn't stop at asking mere questions. We take your feedback, and work on every detailed complaints you may have.
    Be it;

    SMARTPHONE HACKING
    LOST ID OR PASSWORD
    DELETED MESSAGES
    CLEARING OF CRIMINAL RECORDS
    LOST EMAIL ACCOUNTS
    LOST FACEBOOK ACCOUNTS
    HACKED ACCOUNT RECOVERY
    STOLEN BITCOINS
    PHISHING OF BITCOIN ACCOUNT
    LOGIN ERRORS
    SCAM DURING BITCOIN TRADINGS

    And any other issue can be resolved by us without stress. Chat with us. The amazing thing is that hundreds of clients' issues are resolved within hours every single day! TRY US TODAY! WE PROOF OURSELVES BEYOND EVERY DOUBTS.

    For the fastest resolution to any issue, please contact our Support Center prior to submitting a request. We remain anonymous to you for risk reasons.

    Contracthacks@gmail.com

    ReplyDelete
  2. Hi Brian

    Thanks so much for sharing your thought process.

    On Step 4 and particularly companies with too much cash, I am interested to have your thoughts on how you distinguish between cash-rich companies that have reached a saturation point and those who might simply have fiscal prudence to tide through unpredicable times like now. For example, Valuetronics has a cash hoard of over SG$200m and with no debt, yet is able to deliver a superior ROE without any loan assistance. What are your views on such companies? Thanks.

    ReplyDelete
    Replies
    1. Hi Ming Jie

      Yeah that's a good question.

      Cash is an obvious drag to the ROE for companies that generate plenty of free cash flow but yet do not allocate or distribute back the cash as much, hence cashpile will grow bigger. If the ROE can sustain throughout the years, it means that the company is generating higher roa through its asset generating ability which is a good thing.

      For me I think I'd tend to side with the rule that companies with cashpile must either have a minimum of 50% payout ratio as dividend policy or they must demonstrate an intent to use the cashpile in the next 3 years. Generally, I don't believe in holding super long term because there's a lot of variables that might erode unless you are moat companies like the obvious Google, Microsoft, Apple.

      Delete
  3. I hope I have read this 2.5 years ago when I started my investment journey, nevertheless it is still very useful as a reminder for me before making any capital injection into the market.

    Thanks for the great article.

    ReplyDelete
  4. Get A Blank ATM CARD And Cash Good Money/Funds Pay Your Debt directly today in any ATM machine around you anywhere in the world. contact cryptoatmhacker@gmail.com.. It's 100% guaranteed secure with no worries of being caught because the blank card it's already programmed and loaded with good funds in it, in such a way that's not traceable which also have a technique that makes it impossible for the CCTV to detect you, i am not a stupid man that i will come out to the public and start saying what someone have not done. For more info contact Mr john and also on how you are going to get your Card, Order yours today via Email: cryptoatmhacker@gmail.com

    Blog Site: https://cryptoatmhacker1.blogspot.com/2020/05/get-blank-atm-card-and-cash-good.html

    ReplyDelete
  5. Get A Blank ATM CARD And Cash Good Money/Funds Pay Your Debt directly today in any ATM machine around you anywhere in the world. contact cryptoatmhacker@gmail.com.. It's 100% guaranteed secure with no worries of being caught because the blank card it's already programmed and loaded with good funds in it, in such a way that's not traceable which also have a technique that makes it impossible for the CCTV to detect you, i am not a stupid man that i will come out to the public and start saying what someone have not done. For more info contact Mr john and also on how you are going to get your Card, Order yours today via Email: cryptoatmhacker@gmail.com

    Blog Site: https://cryptoatmhacker1.blogspot.com/2020/05/get-blank-atm-card-and-cash-good.html

    WhatsApp +13013596832

    ReplyDelete
  6. Hai semua

    Nama saya FRADESY RIRITIA, saya berasal dari indonesia, saya ingin menggunakan media ini untuk memberitahu anda semua kebenaran, setiap orang yang anda lihat pada catatan mereka di blog dan laman web ini adalah pencuri (SCAMMERS), saya telah menjadi mangsa cerita mereka dan mereka telah merosakkan hidup saya.
    Saya tidak di sini untuk memberitahu anda kisah bagaimana saya ditipu dan bagaimana saya kehilangan banyak wang kepada mereka.

    Saya di sini untuk memberitahu anda SYARIKAT PINJAMAN sebenar dan sahajalah yang ALLAH hantar untuk mengubah hidup saya, mereka adalah SEMUA PINJAMAN PEMBERIAN GLOBAL, mereka adalah satu-satunya syarikat pinjaman tulen yang diiktiraf dan dibiayai oleh WORLD BANK.

    Mereka adalah satu-satunya syarikat pinjaman tulen, mereka mempunyai syarat dan syarat pinjaman yang cukup besar, untuk menutup semua pinjaman mereka mampu dimiliki dan cepat dilunaskan tidak seperti syarikat palsu lain yang anda lihat di sini dalam talian yang akan mengambil wang anda tanpa mengeluarkan pinjaman anda,
    Tolong jangan tertipu oleh saksi yang mempunyai nombor dan whatsapp indonesia, mereka semua penipu, bagaimana syarikat individu boleh memberi pinjaman ?, itu harus menjadi pertanyaan pertama anda.

    Rakan-rakan saya di Asia, saya mohon anda mendengarkan saya ketika saya bersumpah kepada anda dengan nama Allah, bahawa saya mengatakan kepada anda semua kebenaran, Syarikat ALL GLOBAL GRANT LOAN, satu-satunya syarikat yang boleh dipercayai dan mereka akan memastikan anda menerima pinjaman anda setelah anda menyelesaikan proses pinjaman seperti yang diperlukan.
    Mengapa anda tidak menjadi antara berita baik ini dengan menghubungi mereka segera jika anda SANGAT MENARIK untuk meninggalkan perjuangan kewangan anda dan meningkatkan tahap kehidupan anda, berikut adalah EMAIL allglobalgrantloan@gmail.com.

    Anda bebas menghubungi saya di EMAIL fradesyriritia12@gmail.com saya untuk maklumat lebih lanjut, saya dengan senang hati akan mendengar anda berkongsi kisah kebahagiaan anda sendiri.
    Terima kasih semua, dan semoga ALLAH memberkati SEMUA PINJAMAN PEMBERIAN GLOBAL kerana memberi saya kegembiraan baru ini.

    NAMA Syarikat: SEMUA PINJAMAN GRANT GLOBAL
    EMAIL Syarikat: allglobalgrantloan@gmail.com.
    Whatsapp Syarikat: +1(304)997-4034
    E-mel Saya: fradesyriritia12@gmail.com

    ReplyDelete

  7. Assalamu'alaikum , Do you need a financial loan help with at 2% interest rate? Our loan ranges from $3,000.00 for more information Contact Us abdullahibrahimlender@gmail.com
    whatspp Number +918929490461
    Mr Abdullah

    ReplyDelete
  8. My name is Mrs Aisha Mohamed, am a Citizen Of Qatar.Have you been looking for a loan?Do you need an urgent personal loan or business loan?contact Dr James Eric Finance Home he help me with a loan of $42,000 some days ago after been scammed of $2,800 from a woman claiming to been a loan lender but i thank God today that i got my loan worth $42,000.Feel free to contact the company for a genuine financial service. Email:(financialserviceoffer876@gmail.com) call/whats-App Contact Number +918929509036

    ReplyDelete
  9. Natural herbs have cured so many illness that drugs and injection can’t cure. I've seen the great importance of natural herbs and the wonderful work they have done in people's lives. i read people's testimonies online on how they were cured of HERPES, HIV, diabetics etc by Dr Edes herbal medicine, so i decided to contact the doctor because i know nature has the power to heal anything. I was diagnosed with Herpes for the past 3 years but Dr Edes cured me with his herbs and i referred my aunt and her husband to him immediately because they were both suffering from Herpes but to God be the glory, they were cured too .I know is hard to believe but am a living testimony. There is no harm trying herbs, Thanks. Write him on WhatsApp on +2348151937428. @dr_edes_remedies deals with
    (1)Alzheimer virus
    (2)Cancer
    (3)HIV
    (4)Herpes
    (5)Genital warts
    (6)ALS
    (7)Virginal infection
    (8)HPV
    (9)Hepatitis
    (10)Asthma
    Email him on dredeshome@gmail.com
    https://dredesherbalhome.weebly.com

    ReplyDelete
  10. Halo semuanya! Bantu saya berterima kasih kepada Bunda Esther

    Saya Widodo saya tinggal di Medan di Indonesia, saya telah mencari pinjaman selama beberapa tahun. Saya 6 kali menjadi korban penipuan dengan pemberi pinjaman palsu yang telah menghancurkan hidup saya, saya memang mencoba bunuh diri karena mereka. Karena saya punya hutang dan tagihan yang harus dibayar. Saya pikir ini sudah berakhir untuk saya, saya tidak lagi memiliki perasaan hidup. Saya hampir menyerah, tidak sampai saya mencari saran dari teman SISKA WIBOWO (siskawibowo71@gmail.com) yang kemudian mengarahkan saya ke pemberi pinjaman yang sangat andal, Ny. ESTHER PATRICK yang meminjamkan pinjaman tanpa jaminan sebesar 150 juta Rupiah dalam waktu kurang dari 24 jam tanpa tekanan atau tekanan pada tingkat bunga lebih rendah dari 2%. (estherpatrick83@gmail.com)

    Saya sangat terkejut ketika saya memeriksa rekening bank saya dan menemukan bahwa jumlah pinjaman yang saya terapkan langsung ditransfer ke rekening bank saya tanpa penundaan atau kekecewaan, karena saya berjanji akan membagikan kabar baik sehingga orang bisa mendapatkan pinjaman dengan mudah tanpa stres . silakan hubungi ibu sekarang estherpatrick83@gmail.com

    Dan saya tahu sebagian besar dari Anda juga telah menjadi korban penipuan, Anda tidak perlu repot lagi karena saya harus menyampaikan kabar baik dan satu-satunya pemberi pinjaman yang dapat Anda percayai, Jadi saya tidak dapat menyimpan ini untuk diri saya sendiri sehingga saya harus mulai dengan membagikan kesaksian tentang mengubah hidup ini bahwa Anda dapat menghubungi saya melalui email (widodocepi@gmail.com) Ny. Esther Patrick Saya selamanya Bersyukur atas Segala yang telah Anda lakukan untuk saya.

    ReplyDelete

UA-57154194-1