- Use stock screening tools to find stocks that may have market beating potential.
- Calculate Key Performance Indicators for each stock to determine whether the company’s financial performance is likely to be appreciated by the market.
- Examine a stock chart to determine whether the stock is worth buying from a technical analysis perspective.
- We need to understand the business if we are going to buy it. The father of security analysis – Benjamin Graham said that when we buy a stock we should act as if we are buying the whole business.
- Profitability analysis. Does this company have a history of making money? How consistent are the profits? How easily can we predict profits?
- Financial health. Financially strong companies produce the best returns. We want to see manageable debt and strong cash flows. A substantial amount of cash in the bank would also be comforting.
- Management assessment. Owning a great business isn’t going to be very rewarding if management aren’t doing a good job. We put the company’s management under the microscope and ascertain their effectiveness (or lack of).
- Industry analysis. The company you are considering buying operates in one, or possibly more industry sectors. It is useful to know what is currently happening in the sector. And what the prospects for the sector might be going forward.
- Company valuation. The worth of the company determines how much we should pay for the stock. Once we’ve valued the stock we determine how much money we’re prepared to pay for it. We want to pay significantly less than what it’s worth. That way we get both value and a margin of safety.
- The investment decision. This our final check. We’ve analyzed the stock thoroughly by this stage. Now we ensure that we’ve completed all of our due diligence. The stock looks good. It’s the right time to buy.
- Portfolio management. This is all about maintaining a portfolio that is diversified to minimize risk. And optimized to provide superior returns.
How to pick winning stocks