This is just a brief overview:
–Buying any stock involves both a qualitative and a quantitative element. That is: What does the company do that makes this a good stock to own? and How do the numbers–the PE ratio, asset value, dividend yield and earnings growth–stack up?
–For value stocks, the numbers are more important; for growth stocks, the story is the key. That’s because the primary element in success for value investors is how carefully they buy (because the ceiling for a given stock is relatively clearly defined). For growth investors, it’s selling before/as the drivers of extra-fast earnings expansion run out of steam.
–Most tech stocks fall in the growth category. My advocacy for Intel a few years ago was one of the rare occasions where a tech story is about under valued assets.
–In most cases, tech companies own key intellectual property–software, patents, industrial knowhow–that is in great demand, and which competitors don’t have and can’t seem to create substitutes for. As long as that remains true, the company’s stock typically does well. As I just mentioned, a crucial element in success with tech (or any other growth sector) is to exit before/as the growth story begins to unwind. One yardstick is that this typically happens five years or so after the super-growth starts. Yes, the best growth companies, like Apple or Microsoft or Amazon, have an ability reinvent themselves and thereby extend their period of strong earnings success. But this isn’t the norm.
–Learning to be a stock investor is sort of like learning to play baseball. There’s no substitute for actually playing the game. The best way I know to learn about a stock is to buy a very small position and see what happens. Don’t just sit idle, though. Read everything on the company website, and the websites of competitors. Read the last annual report and 10k. Listen to (or read the transcripts of) the firm’s earnings conference calls. Find and monitor (at least the headlines) financial newspapers and relevant blogs. Try to form expectations about what future earnings might be and check this against what actually happens. Then figure out where/how you went wrong and adjust. Watch how the market reacts to news. At first you may be terrible. I certainly was. But if you’re honest with yourself in your postmortems, you’ll probably make considerable progress quickly.
–Sooner or later–preferably sooner, learn to interpret a balance sheet and income statement. A local community college course would probably be good, but you can get the basics of financial accounting (definitely don’t worry about double entry bookkeeping) from a book over a weekend. Remember, here too there’s no substitute for the experience of trying to work out from a given company’s actuals what future income statements, balance sheets and flow-of-funds statements will look like.
Thanks for the posts. Look forward to more sequels.
I am very thankful for your posts, that I read (almost!) every day!
You make quite often very good points and analyses.
The only remarks I had in the past were about your interpretation/understanding of the Italian politics (yes I am Italian) but since I am interested in American (tech) companies this is not very relevant.
Do you recommend any book to understand/interpret quickly balance sheets and income statements?
Thanks in advance!
Thanks for your comment. I’ll cheerfully admit I love Italy and know nothing about Italian politics. I’ve owned companies like Tods and Bulgari in the past but otherwise have avoided Italian stocks since I find them generally to demand a ton of local knowledge that I’m not willing to acquire. Better for me to learn about China, or even (ugh) the UK. You, on the other hand, may already know where you have to be careful. On accounting books, I’ve just done a quick Google search and found the McGraw Hill 36 hour Accounting Course that sells in Google Play for about $12. The prose style is terrible but the price is right and my quick skimming suggests it’s accurate and covers all the relevant topics–balance sheet, income statement and flow of funds. There’s no need to read the T-account, ledger entry stuff, though. The only time I’ve ever found that even remotely useful has been on the extremely rare occasions when I’ve been talking with a professional bookkeeper