Saturday, February 19, 2011

5 Steps to Successful Equity Investing

I'm still trying to introduce the ideas behind value investing, so these 6 steps are very general. In future posts I will go into more detail on each and every step, so don't worry.

Big picture first, then details. Remember, in the most basic sense we are trying to by anything something that is worth $1 for $0.66. It can be stocks, corporate debt, etc. This list is mostly directed at stocks (equities), but some tweaking can help with other securities.

Enough blabbing, onto the list:

Step 1: Identify Potential/Create a List of Potentially Undervalued Stocks
- Look at ‘daily/weekly low’ lists in Wall Street Journal, Investor’s Business Daily, Financial Times, other newspapers, internet sources such as Barron’s.
- Financially distressed/bankrupt securities (note, this takes more extensive knowledge)
- Other special situations such as spin-offs (what's a spin-off?)

Step 2: Evaluate the Balance Sheet/Foundation (look for red flags)

- The balance sheet shows the financial position/solvency of a company
- Gives an idea of actual worth, how much it owes, and what resources it has going forward
- Basically the same form filled in for a loan
- Make sure it’s not overburdened with debt
- Make sure has enough capital to stay in business during bad times

Step 3: Evaluating Earnings Power/Prospects (lifeblood of company)
- Use “normal”/adjusted earnings for all these calculations – not simply last years net income
- Adjusted means you remove non cash items (e.g. depreciation), non-recurring/extraordinary items (e.g. large one time write-off), etc
- When we say adjusted earnings, we basically mean free cash flow (money that is available to shareholders basically)

Step 4: Come Up With Questions to Understand Competitive Position & Growth Prospects

- I'm going to do a detailed post on this soon, so for now I'll leave it at that

Step 5: Step 5: Get Info Through the “Scuttlebutt” Method (from Phil Fisher)

- "Scuttlebutt" is basically Fisher's way for saying you need to ask important questions to customers, suppliers, employees (& ex-employees), management, competitors, and anyone else who understands the company/industry and may have insights
- One of Fisher’s favourite questions for top executives: "What do you consider to be the most important long-range problem facing your company?"

Upcoming posts:
"Why Buffett Loves Investing in Insurance Companies" (everything from auto insurance (GEICO was a dear of his) to MASSIVE reinsurance (reinsurance = insurance that is purchased by an insurance company (insurer) from another insurance company (re-insurer)) deals)


"Understanding Student Loans and a Basic Analysis of Various Debt Instruments Available to You" (I see too many students on campus with a student loan of more than $100,000! The worst part is they don't know the details of that debt ... if ignorance is bliss, then bliss is expensive!)


  1. I'm taking part in an investment challenge later this year. Thanks for the info.

  2. I'm actually quite interested in trading, but I don't have the capital to set up a trading account yet. Have to save that for the future.

    I need about 16,000USD to set up a trading account where I'm from, complete stupidity of the govt/bank.

  3. oh god this is way to confusing for me, but i think i somehow got it

  4. So I had a quick read through and it looks really helpful for someone like me who has no idea about investing. I'll have to read through it a bit more carefully and see if I actually want to do any investing. I wonder if I can contact you for advice if I ever need it?

  5. It's sad how many people (who really want to) don't invest in stocks. Thanks for sharing the info and keep going! There's no telling how many minds you will spark! =D

    I've got a new daily blog, check it out!

  6. Man, I'm really glad I decided to follow this blog. This last post is just the roadmap I needed to get started investing at my own scale! Thanks, man!

  7. Dude this is sick. I am getting my undergrad in Economics right now and I am sooo interested in entrepreneurial business! Lets talk, I am interested in stocks as well! Please let me know some of your ideas for a cool business! Love to hear what your mind is thinking!
    Following. Obviously?

  8. Useful information, and nice guide. It was simplistic enough for me to understand it too, thanks.

  9. Great post. Looking forward to the Student Loan one. The cost of higher education is staggering.

  10. Must say something I might get into is equity dealing, thanks for sharing!

  11. i'm looking forward to see step 4 explained in a more detailed post!

  12. I agree, its all in the details! thanks for the info!

  13. Thanks for the steps dude! I'll come back here when this comes up later on in my life.