One of the recent books I wrote for a client was about investing. The basic assumption of the book was that even if you had only a basic education and no business experience, you could succeed. And how much more could you succeed if you had even a little grounding in finance?
Entrepreneurs have a grounding in finance, but they don’t have the time to follow every up and down and panic and pitch of the stock market. Yet if your business is making money, the stock market might be the perfect place to invest some of your own profits.
There are many aspects of investing that one needs to consider:
- choosing stock
- timing buys and sells
- tracking growth
- risk and comfort
- start-up capital
- stock versus other investments
These are just a few examples. Right now, let’s just look at how to choose really strong stock, or as I like to call it, “iron man stock”. What I mean by this, is stock that is sure to grow over the long run. Stock that won’t wither away.
There are three standard stock-buying tips that everybody will give you. They are truisms and should be followed.
Check a company’s P/E. The price to earnings ratio is the best measure of the value of a stock. Since the only concrete value a stock has is the value of its earnings, you can compare stocks based on the P/E ratio. One that has a high price to earnings ratio is expensive. High price means expensive, right. Stock with a low price to earnings ratio is cheap. Low price is cheap, right?
What is high? What is low? There are no fixed numbers. You have to compare prices between stocks, and also between now and in the past.
If the cardinal rule of earning money on the stock market is buy low and sell high – and it is – then this is the way to buy low. Find those “cheap” stocks, the bargains with low P/E ratio.
Make sure the revenue is growing. You want to buy bargains, but it’s not a bargain if the company is on a long slide into oblivion. Make sure the core of the company is solid.
Kodak slid because it could not adapt well enough to the digital age. Yes, you want a bargain, but a bargain because people got short-term jitters about the stock, not because the company is structurally blasting its way to oblivion. You want to buy low, but you will also want to sell high. Even if a stock is not a bargain, growing revenue should mean growing profits for stockholders like you.
Be comfortable with the stock you buy. In the book I wrote, we recommended buying only companies you understand. That might mean IKEA or Matel, big brand names that you recognize and that you can explain to your neighbor.
Here are a few other rules for choosing iron man stocks:
Pick stocks with a history. Most start-ups fail. Sorry, but it’s true. The “next big thing” usually ends up being the next big nothing. I am not saying that nobody should invest in start-ups. Every Fortune 500 company began as a start-up. But start-ups are high risk, so you should only invest in them if:
- you really know what you are doing
- you have extra money to burn
Pick proven all-weather stocks. This is a really cool trick that most people miss. Yet I think it is the best tip. It’s probably the number one way to not get slaughtered in the stock market. Before buying a stock, check how it performed in the last few bear markets. Check how it weathered the past few recessions. Any company that holds its own in tough times is worth adding to your buy list.
Go for dividends. Look for stock where much of the profit comes in the form of dividends. This is the distribution of profits, real money. The price of stock can rise and fall based on profits, as well as on psychology. Ultimately, you want your stock to grow, so that one day you can cash in for huge pots of gold. But in the meantime, dividends can help pay the bills
Choose your sectors carefully. Specifically, choose sectors that people will always need. So even when times are tough, these companies won’t go under. For instance:
- Banking. Modern civilization rests on banking. Yes, a bank can go under, but generally, banks are great investments. I know I wrote about the future of money being digital, but trust the banks to find a way to grab their share.
- Energy and utilities. Everybody needs to heat in winter. Everybody needs electricity. These are basic necessities.
- Infrastructure. The ports won’t fail. The airports are solid.
- Base metals. Because we still need aluminum and steel for vehicles, appliances and other things. Even if the economy slows, these things do wear out. They need to be replaced.
- Food. People still need to eat. Basic food – milk, bread, eggs – never goes out of style.
- Certain cyclicals. There’s a good list here.
Pick only the best in class. Don’t just pick any banking or energy stock. Pick the top of the pile. Invest in the companies most likely to keep profiting in good times and bad. In a recession, there is usually a cull. Don’t invest in the companies that are most likely to be culled.
If you follow these rules, you’ll weather-proof your investing 99 percent. All it takes is a little research and then stick to your plan. When you buy strong, you can stick with your picks and go about running your own business without having to worry about your nest egg. You can hold the stock for the long term without needing to be a trader (which is where many people end up losing, anyway).
Pick solid stocks. Collect the dividends. Hold onto the stock for the long term. Buy into new stock when you get the chance. With this advice, you’ll be on your way to an iron man stock portfolio.