Years ago when I was first learning about the stock market, it was much more of a guessing game for the layperson. We would be limited to watching the news tickers and the stock listings in the newspapers to try and figure out which ones were the best investments. These days, with the help of modern technology and the access to information, there are a ton of ways to invest in trading stocks more wisely.
By following a sound fundamental investment strategy, I am able to optimize my trading strategy. Here’s some of the advice I follow when I ask myself how do I buy and how do I sell shares:
Invest in Value
One of the key fundamentals I learned early on was to invest in value stocks. Don’t try and trade simply on the news, look at the company’s value and try to find good value stocks. This is advice followed by the best in the business such as Warren Buffett.
I find that it’s hard to predict how stock values are affected by news. Also, it’s often the case that by the time news becomes public, it’s already old information. If you buy a stock after hearing good news, you might end up buying at the peak. That’s why they say buy on bad news, sell on good.
However, if you review a company’s financial fundamentals, you can see some signals that they might be undervalued. Information such as the company’s revenue, cash flow, debt, price to earnings ratio are all valuable clues that you can look up online and get an idea if the company is a solid investment.
Invest in Products You Would Buy
This is advice that I try to follow often. It’s not simply following a trend, it’s actually a good fundamental tip.
I find that I do a lot of research if I am planning to buy a product or service. I try to look at the product reviews and warranty. This information tells me if the product is widely used as well as the quality of the manufacture. Also, I get a good idea if it is a company that is going to last so that I can have the product serviced if necessary.
The other benefit is that keeping to this simple rule helps me stick with industries that I know. It’s always risky to invest in industries that you don’t understand. Keeping my investments to companies that create products or services that I personally use ensures that I have a good basic understanding of the industry.
We all try to buy products that have an intrinsic value that will last and also give a great service for the price. These are all the same qualities that we look for in a good stock.
Watch Out for Debt
I personally try to stay away from companies that have too much debt. In my mind debt equals risk. Too much debt could be an indicator that the company simply is not turning enough of a profit to pay back their creditors.
To me the best stocks have very little to no debt, have a good amount of cash as operating capital, and also have good revenue. A good example of this would be Apple stock.
Of course, it’s important to keep in mind that a company needs to maintain a good balance as well. Companies need to spend money to make money. It’s important to see if the company has future plans for innovation with all their extra cash.
It’s ok, if part of their plan for cash is to pay dividends to their investors, but I also like to make sure that the company has a good R&D department to ensure that they are not stagnant.
Is the Industry Growing?
There’s no reason you can’t find a good value stock that is also a growth stock. In fact, I think those are the best kinds. I’m always mindful about whether a company is in a growth industry.
Modern technology is expanding in a number of different directions. There are a lot of industries, such as wireless technology, that is growing. I try to look at the company news to see if they have solid future plans. Are they in a rebounding or growing industry? Are they an industry leader?
Answering these questions help me weed out the stocks that are more likely to perform versus ones that may stagnate.
Invest for the Long Term
I’ve read that Warren Buffet doesn’t believe in selling stocks. He holds for the long term. I personally agree with that advice as well.
It’s hard to time the market. To me investing short term and trying to time the market is a losing strategy. While, I have heard about successful day traders, that’s just not my style.
I think for the average investor, investing for the long term is a better strategy.
First off, it keeps me focused on a company’s fundamentals. I find that every time I take a change and ignore fundamentals, I’m more likely to lose money on my investment. However, if I stick to the tips above and think long term, I’m generally more likely to make money.
Also, I find that if I find a good value company that is also in a growth industry, I earn more by holding it for the long term. Just imagine investing in Apple stock 10 or 15 years ago, what that stock would be worth now.
Stick with the Fundamentals
My last bit of advice is to stick with the fundamentals. I find this is good overall life advice. But it’s particularly valuable advice when looking for good investments and dealing with your own personal finances.