Picking Stocks

950 Words2 Pages

My knowledge about picking stocks is very unstructured. I did not apply any systematic approach of picking stocks yet. This is my first attempt to formulate rules and techniques. Therefore, this exercise plays important role of developing set of rules and bridge the gap in the overall investing strategy. Also, it will be useful to learn reading this post in the future, when the results of this process will be visible. My understanding of picking stocks is primarily influenced by Warren Buffet and Benjamin Graham. I recommend to read legendary book Intelligent Investor by Benjamin Graham. Warren Buffet calls Graham his teacher. If I am not wrong, the first edition was published in 40s. Nevertheless, I think that it is very good book for beginners, because it gives comprehensive overview of investors' strategy and behaviour. Before I go into details, I want to say that it is very important to have data for long period of time in order to be able to recognise any trends and tendencies. For the next selection of stocks I plan to use 10 years period and see how companies performed in 2 financial crises in 2001-2002 and 2008-2009. Also it is important to analyse overall industry dynamics, profitability and competition structure in order to understand in what context a company operates. This type of analysis is very difficult to do and requires some knowledge of a given industry. For the first time, I will try to use industry reports. Fortunately, being as a student in the business school I have an access to necessary business databases. Size First of all, in order to invest in a company it must be of adequate size and market capitalisation. I will screen companies which market capitalisation is more than $1 bln. Profitabil... ... middle of paper ... ... recovered. Price to book (P/B) ratio shows the relationship between stock price and book assets (total assets - intangible assets and liabilities). It should not be more than 1.5. Also Graham and Buffet recommend to select companies with sustainable competitive advantage(s) and long term proved track record. A company have to have a sustainable 'moat' (competitive advantage) to protect its market position and revenue. Also there are few recommendations what not to do, for example, not to buy a serial acquirer. Also it is not advisable to buy a heavy borrower or issuer of new stocks and a company who relies on a single customer. Each selection criteria deserves a detailed and comprehensive research. I plan to tackle each criteria in future and write detailed essays discussing different points of view, my ideas and results of real application of those criteria.

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