Everyone thinks that investing is hard because you need to read financial statements, keep up with the news, know how to do fundamental and technical analysis, have a huge capital to begin with etc.
I can tell you confidently that none of that is true and I will share with you today 4 easy ways to spot a good business to invest in! I use these 4 ways to spot good businesses myself.
0. It’s not a stock it’s a business
I want to start off with something that is not really a tip to find good stocks, but just a tip to perform better in the stock market. You will need to remember that behind every ticker symbol is an actual business. It isn’t some magical symbol with numbers that jump up and down everyday.
This is important as you should look at it as a business you are investing in. Similarly to anything you invest it, collectibles, a vending machine, they have an intrinsic value which they provide and it is your job to buy it when it’s worth less than it’s intrinsic value.
For example, if a collectible figurine is worth $50, would you buy it for $50 or $40? Would you sell it for $50 or $60? Just a little food for thought !
1. You must understand the business
Invest within your circle of competence. Warren Buffet and Charlie Munger came up with this concept when looking at companies to invest in. You must understand the business and how it makes money before you invest it in, otherwise it’s just called gambling and speculation.
For example, if you are familiar with the Technology Industry, you might know if the industry is doing well or not, and whether or not the industry’s future prospects are good. This can help you when looking into stocks to invest in as you can look for Tech stocks, which you are more familiar with.
This is very important as it helps you make much more well informed decisions as well as ensures you know what you are getting in to, and that you are taking calculated risks
2. You know or like its products
Easy examples would be, if you like Iphones and Macbooks, then invest in Apple. If you like disney movies, then invest in Disney. Invest in companies which has products that you like, know or even use. A local example would be Sheng Siong, it is literally everywhere. It is a supermarket and the things they sell are pretty cheap and fresh. In some places, it’s the only supermarket available that’s nearby.
But it does not only apply to normal stocks. If you like to go to Funan, Bugis+, Clarke Quay or ION Orchard then hey, there is Capitaland Mall Trust.
It is important to like or know a company’s products as you can accurately estimate its potential future earnings. If you see many people buying and owning Iphones, Apple’s worth will surely go up.
If you see more people visiting ION Orchard, Capitaland Mall Trust’s profits will go up as well.
I am not saying that if you like a company’s product, and you invest in it, it will surely increase in value, but it is important to know what you’re investing in.
An example would be BreadTalk, showing pretty rough results for their 3Q19, almost 50% decrease in profits.
Of course if you understand the business well enough, you might know that this could be a one time drop, and that its future revenue will still increase.
3. They must be making money
When I say making money, I don’t mean, as long as every year profit is good enough. No no no, when I say make money, it must not only be generating profits year on year but also, increasing its profits. It is important that the business is trying to improve itself year on year, be it increase its profits or reduce its expenses.
A good business should average 4 out of 5 years with increasing profits. Some one time expenses or news may occur, which could lead to the business not incurring increasing profits for 1 or 2 years. Things such as, the business’s industry is declining in market demand, or the business has faced a lawsuit or bad press.
Nevertheless, a good business or stock should always be bringing you more and more ROI year on year.
4. The business must have good prospects
This one could be a little harder to spot and may require some researching. What I mean by good prospects would be like, would the business’s goods or service be needed in the near future, such as 5-10 years.
A good example would be VICOM, which does vehicle inspection in Singapore. Vehicles in Singapore are required to go for inspections every 3 years some even annually. This makes VICOM a great business with very good prospects as its services will be in demand in the future.
Another example would be Apple. I’m pretty sure 10 years down the road, I’ll still see Apple products owned by 1 in every 2 people I see on the road. Be it Iphones or Macbooks.
For stocks like REITs, good prospects would be REITs with good pipeline assets from its sponsors. For example, Lendlease REIT’s sponsor owns JEM and PLQ, which are great assets that can be injected into the REIT.
I hope you guys have learned a little something from this short post and that you can make better informed choices before you invest into a stock. As always, you can take a look at my portfolio updates to see my current positions !
“This article first appeared on sgstockmarketinvestor.com“.