In the first episode of Stocks4Docs, I introduced you to the concept of value investing.
It’s a strategy that focuses on buying shares of a stock when it falls below its normal value, with the belief that it will rise again in the future. Most of the time this means you’ve been watching a company for a while and they’ve proven themselves to be successful and stable. These investments are low-risk and high in reward, but the challenge is they don’t go on sale very often.
So how do you find these deals? By doing some homework, along with learning basic investment principles.
The Four Principles To Know
These principles come from Charlie Munger, the Vice Chairman of Berkshire Hathaway. He’s been Warren Buffet’s partner for over 50 years and is considered one of the most successful and respected investors of all time.
The first principle is the Circle of Competence…
This means that when you’re picking a company, it should be something that you can understand. The product, service, or company is in line with what you do, or know, or are passionate about. For me, it’s also important that it aligns with my values.
The second is the idea of Economic Moat…
This is the idea that the company needs to have a durable, competitive advantage showing that it can last in the market. It can outbeat its competitors because it has something special.
The third is Management…
You want to spend your money investing in companies that have good management and integrity. They’re talented at what they do. And if they have prior experience and success, that’s even better.
And the last is Price…
No matter how wonderful a company is, or how excited you are about it, it’s not worth an infinite amount of money. Even if it meets all three of the criteria above, you still need to come up with a price that it makes sense for you to pay.
Build Your Watch List
So how do you find these great companies to invest in? This is where building your watch list comes into play.
You’ve worked through the principles above in researching a company, and it seems great, but it’s just too expensive for you right now. Remember that the buying price has to make sense, as well as the rest of the principles. That’s when you put it on your Watch List. You can keep your list format as simple as an Excel sheet or a piece of paper. Then watch and wait. And wait for something to happen that causes the price to drop. Then you’ll be ready to aggressively buy, because you’ve already done all the research work.
Here’s a list of resources I recommend to help with your research:
- Barron’s Weekly
- The New York Times
- The Financial Times
- The Guardian
- The Wall Street Journal
- Motley Fool
- Seeking Alpha
- Rule One Investing
- Yahoo Finance
Obviously you’re not going to read all of these every week, but use them to search for information on companies you like, and get used to checking them for financial news updates.
Take Control of FOMO
One last thing to note… one of the biggest pitfalls with investing is the Fear of Missing Out. Don’t be swayed by noise from the media or articles about urgent stock picks that you must buy now or else you’ll miss out. Stick with your plan and trust the process. There are plenty of great companies out there, so wait for the stars to align and when all four principles fall into place, that’s when you should pull the trigger.
Learning and reading are the keys to making investing work for you. Do the work and don’t be swayed. You’ve got this!
In future articles, we’ll go further in depth on each of the four principles. Missed the first two episodes of the Stocks4Docs podcast? Find them here…