6 Things You Need to Know If You Plan to Invest In Stocks
If you are serious about growing wealth in the stock market you got to be in it for long haul. Warren Buffett and other value investing proponents are quick to point out that you ought to be willing to stay the course for an extended period of time in order to get the benefit of value stock picks. Sometimes, this can even take over 10 years.
It’s important to be able to separate the long-term investment companies from the short-term ones. To find a stock that you might be keeping for 10 or more years, it’s important to know the characteristics that these stocks possess. Fortunately, there are several qualities frequently shared by these long-term plays.
Stocks for the long haul frequently share these characteristics:
1. A business that will still be thriving 10, 20, or even 30 years from today. Simple businesses that produce products or services that have stood the test of time are usually good long-term investments. A few examples of such products would include toothpaste, toilet paper, office supplies, banks, and insurance companies.
• Many of these businesses may be seen as “boring.” But these products and services have been around for a while and will continue to be important.
• High-tech firms frequently don’t meet this requirement, unless extremely well-established. Microsoft would be a good example. AOL is still around, but it’s hardly the company it was back in the late 90’s.
2. Solid financials. Companies with minimal debt and good cash flow are likely to survive even when the economy is faltering. These companies are typically unshakable and pay consistent dividends. Dividend payments come from earnings above and beyond what the company needs to thrive or expand.
• Is the company valued fairly? How close is the competition within the same industry regarding pricing? This is the perfect place to use the Price to Earnings ratio (P/E ratio) in your analysis.
3. Consistent earnings. Are the earnings affected by the strength of the economy? By how much? When the earnings have slipped in the past, do you understand why? Have the earnings been rising over the last 10 years? Can you reasonably expect them to continue rising?
• Value investors believe that price ultimately follows earnings. It only stands to reason that long-term earnings growth will lead to long-term stock price gains.
4. A good history. If you look at the popular stalwart companies today, you’ll see that most of them held a certain position far into the past. A company doesn’t suddenly have this characteristic. Many of these companies were around during your parents’ or grandparents’ childhoods.
• How has the company performed in poor economies? If it performed poorly, is it still susceptible to the same economic conditions?
5. Good, consistent management. Executives at this type of company don’t have to do anything spectacular. They simply guide the ship gently and avoid doing anything foolish. The human factor is unpredictable, so solid management is important.
• The best businesses may not require great management, but it’s good to have it anyway.
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