I simply look for companies I understand in areas that I understand and do research from there. I have an outlook of at least 10 years (but have different price expectations set usually five years out), because Warren Buffett once said that if you can't keep your money in the market for ten years, you shouldn't think about investing for ten minutes. Why ten years? Because this is a good timeframe to let a company get through the bumps in the road. For instance, those you invested in Microsoft, Dell, Yahoo!, etc., would still be positive after the latest market crash (the tech bubble burst).
I like to stress the fact that when you are investing in a company, you are becoming an owner of that company. The shares you buy give you that entitlement. This is why some people don't like to invest in "sin stocks" (companies involved with casinos, tobacco, etc.), because they don't want to be an owner of a business in that area. This is why it makes so much sense to invest in what you know. This is how I found Hansen as an investment, Makita, and many other companies I'm currently invested in. This way the research you have to do is minimal (because you already understand many areas of the company and its industry), and you have the pleasure of being an owner of some of your favorite businesses.
I don't think it is a good idea at all to diversify when you don't know what you are doing. It takes research, but by investing in a ton of companies you don't know about, don't understand, or haven't researched, your returns won't be improved. I think it is good to get exposure to industries
that you understand if the stock is reasonably priced, but in my case, I'll probably never be investing in health-care (although I did when I first started investing -- something I wouldn't have done if I could start again), because I don't know squat about it. But a doctor, well, if he didn't look even look into different health-care companies I'd probably call him crazy. Start in the area that you understand, because it's the easiest place to research, especially for a beginner.
Another thing I always stress is the comfort level with your investments. If you're not comfortable with it, it doesn't make sense to become an owner of it, does it? Only invest in companies you are as comfortable as possible with, because this way you won't worry about your investments nearly as much (hopefully not at all), and you will actually be able to hang onto that investment for 10+ years. I stay away from any company as an investment if I'm not comfortable with it. There are thousands of businesses out there on the stock market, it's just a matter of finding the ones you understand, are comfortable with, and you believe will be able to grow at a rate you like for the next ten years and beyond.
One thing I don't think is a good idea is trying to find a mutual fund that "fits your style." Mutual funds have been some of the worst investments out there (especially with equities), only a very small percentage have been able to beat the market over the long-term. And now,
there are more than 10,000 mutual funds out there. There are bond funds, large-cap funds, small-cap funds, turnaround funds, hedge fund funds, special situation funds, there are basically funds for every style, type, and size of investing. You know what? I gave up the search for a mutual fund in my portfolio after a week. Do you really think it is easier to find a mutual fund out of 10,000 selections more than it is to find a great business out of your favorite companies (which probably wouldn't amount to more than 50)? I doubt it. The research into finding a great company for the long-term is no more difficult than finding a mutual fund that has consistently beat the market and will be able to do so in the future, after taking all costs into account.
I don't think it is very difficult to beat the S&P 500 by investing in companies you love that are reasonably priced considering the future results (more on this soon). People say individual businesses can't beat the market. They say if the so-called mutual fund "expert managers" can't do it, who can? I'll tell you who can: A 14 year old. With commissions on my part, I'm beating the S&P 500 (currently) by about 5%. I'm smashing the NASDAQ returns, and am now so close to catching up to Berkshire Hathaway (run by two of the world's greatest investors, and just recently hit a new all-time high, may I add):
http://www.pencils2.com/pencilsfund.html. This doesn't mean that I will continue to beat the market, but it is possible, it is more than possible. The individual investor has so many advantages over a mutual fund manager, including the ability to "weight" a certain holding (mutual funds don't let one stock make up more than a certain percentage), the cash in an investor's account can be as high as possible (mutual funds must have at least 65% of all cash invested), and best of all:
the individual investor is in charge of his/her portfolio. I'll never be able to trust a mutual fund manager, because I think I can do a heck of a lot better over the long-term.
Here's what I mean when I say to invest in companies that are reasonably priced considering their future potential. I'm talking about the Future Value / Present Value evaluation technique, which shows what price a stock will be priced at if they grow their EPS a certain amount and if they have a certain P/E. It gives you an idea of how a stock will be priced if it does a certain way. You see this with my Pencils Fund write-ups, I do a rosy scenario, a more-likely scenario (my expectations), and a doomsday scenario. I normally like to be invested at a price that will be a double in five years if it meets
my estimates. This beats the market average of doubling every 6 1/2 years, which is why I use this goal. Here are some Future Value lessons from Tom Engle, I
highly encourage you to read all the lessons (available
here), but below are the ones where he discusses Future Value and how to calculate it:
http://www.pencils2.com/englepage13.html - Microsoft Calculator and Equation for Future Value
http://www.pencils2.com/englepage14.html - Present Value
http://www.pencils2.com/englepage15.html - An Example of PV & FV; Part 1
http://www.pencils2.com/englepage16.html - An Example; Part 2
http://www.pencils2.com/englepage17.html - An Example; Doomsday Scenario
http://www.pencils2.com/englepage18.html - Tweaking the Model
http://www.pencils2.com/englepage19.html - Making Sure Our Company is on Track
To start researching stocks, ask yourself: "What are my favorite businesses? What are my favorite products? (Find out who makes those products.)" I'm more than willing to help you out in evaluating different businesses if you need help, but first just find a basket of companies that you love and/or are interested in, and from there you can start to weed some out.
If you don't think investing for the long-term is the way for you to go, go with what you feel will be the best move for your money. The above is my argument/reasoning for long-term investing, but it may only suit some investors. I'm convinced it is the most profitable way to invest, but if you think you can do better, go with that! In any case, I hope you at least invest in some individual businesses (if you haven't already), because over the long-term (or short-term, if you really think so) I don't think there is a better way to go. Even investing in the S&P 500 would put you into a much better situation than, say, bonds. Stocks have outperformed bonds every ten years (such as 1940-1950) except for one ten-year increment (as you might have guessed, that was 1930-1940). That's a pretty good ratio of why stocks should be the majority of your portfolio, not bonds,
if you have ten years to spare. But, I think individual businesses can beat the S&P 500, which is obviously why I am investing in them. It all comes down to what you think will be the best choice considering your situation and outlook.
One will find a large number of types of insurance today. Most common are life insurance,
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cover insurance costs are also being provided by insurance companies and banks.
Tags:
investing, pencils fund, stocks, strategy, valuation
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