To pick my stocks I always look at the companies I know and understand it’s business, background and stock valuation(P/E ratio). As an investor, It’s impossible to evaluate all the public companies in the world. I always asked myself when I start investing where do you look to find stocks to buy or what do you look for?
In all the information I found online on google or youtube they didn’t explain anything step by step and they didn’t explain the reason for that choice. In this video, I will try to teach you investing as I would to myself. I wish I had known this information earlier.
Back in the 1950s when Warren Buffet started his investing journey, he went thru thousands of books and newspapers to find his investment ideas, but today we are lucky because we live in the digital era. We have lots of tools online, and we find all the information in a second.
1. Understand the stocks you want to pick
When I choose my stocks I start with a company I know and understand its business model. How do they make money? What product do they have? What service do they offer? How is that product going to perform in the future? In what country do they operate? What competition there is in that market? All the informations are easy to find online. If you want to check the information you know, go to a friend or family member and tell him about the investment you are about to make, if you can answer all the questions he has, you may know enough. Warren Buffett once said: “Never invest in a business you cannot understand.”
2. Check the background of the stocks you pick
The second thing to look at is the background of that company and to check how they performed over time. If a company performed historically well over time is not the sole reason to buy or not to buy, but it can help lend some insight into what you can expect. I use Google Finance and Yahoo Finance because allow investors to research historical data, such as price charts that go back several decades. Users can also compare stock’s historical data with one another and it’s important to notice that if a company performed well before, doesn’t guarantee that is going to perform well in the future.
3. Check the stock value and P/E ratio
The third thing I look at is the stock valuation. Is the company at a good price to buy? Or Is it overvalued? Or Is it undervalued? How can you check that? I personally look at the price-per-earnings ratio. The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share. How do you calculate Price-to-earnings ratio? It’s very simple, you must simply divide the current stock price by the earnings per share. Let’s take for example Apple. The current price is 153.83, and earnings per share 6.12. If we divide 153.83 by 6.12, the price-to-earnings ratio is 25.14. The average price to earnings for the S&P 500 has historically ranged from 13 to 15. If the company has a high price to earnings the company may be overvalued.
Conclusion
Before you jump into the decision, it’s better to understand your risk tolerance and to do your research, don’t buy just because it’s popular. Warren Buffet said, “You can’t buy something that is popular and do well.” Experts generally suggest that individual stock picks make up only about 5% to 10% of your overall investment portfolio.
Recommendation
For long term, I personally invest in ETFs. An ETF is a secure investment that operates more like a mutual fund. An ETF can contain all types of investments: stocks, commodities or bonds so they are well diversified. I choosed iShares M S C I World. This ETF produced an average of 9% year over year since it was founded. It’s diversified worldwide and includes companies like Apple, Microsoft or Amazon. In long time I think it’s a good investment because you just buy and you don’t have to worry.
How do you choose what stocks to buy? Let me know in the comments below.
Warren Buffett’s recommendation book: The Intelligent Investor by Benjamin Graham