A lot of people don't know where to start when they want to start investing. A finance degree gives you a lot of the tools that you can use to analyze companies, but still many finance majors and investors everywhere forget the one basic tenant of long-term stock investing. Do your homework!
You can run all sorts of analysis and do all sorts of different types of investing but in the most general sense you want to invest in a company that you understand and believe in. The best way to understand a company is by sitting down and reading an annual report (aka the 10k, a 10q is a quarterly filing). You can get an annual report online from the website of any public company (usually through the "About" or "Investor Relations" section of their website) or if you like holding paper in your hands order them for free here Annual Reports. They deliver the report if they have it in stock, if they don't have it in stock they will have the company mail it to you.
Now in the future I will detail more specific ways of analyzing a companies prospects but the big one is actually working your own way and mucking through an annual report. The more you read finance the more you realize, understanding a good company is mostly common sense:
General Motors had trouble because it paid too much in health benefits through years of union concessions and had too large a product line which lead to added costs, other companies that didn't have these issues could easily undercut General Motors with better quality cars at lower prices. It doesn't take a finance whiz to come to that conclusion. General motors cost per car number was through the roof compared to its rivals - I recall working through analysis and attributing an extra $2000+ costs in health benefits to each GM car that was made over its foreign competitors (a conclusion many others also came to). In addition, the quality of their cars started to deteriorate and management began to get complacent.
On another note a lot of time Wall Street analysts also get caught up in companies and issue positive ratings or "buy" recommendations because that makes the companies happy. They also may nix an analyst that issues unfavorable ratings. In the case of Enron, nobody understood how they made their money, they were what industry folks call a "black box," it was too good to be true - and subsequently it wasn't true. Again, common sense, if now one can understand the company, something strange is going on.Like anything else it will take a while to get through your first 40-50 annual reports and you will not understand much at first, but google your questions and continue to try - there are learning curves to everything and it does take time. I would recommend that you start with a simple company though, steer clear of any finance and high-tech companies as they engage in complex activities, a manufacturer or a retailer would work well for starters. Lastly, once you find a company you like trust your analysis - you will have looked at many different ones and know more about them than most investors. It may take a while to reap your benefits, but over the long time if the company is solid and it is not overpriced it will show in your returns (later we will see how to spot overpriced stocks).
No comments:
Post a Comment