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Deciding which company's shares to buy is a tough and complicated business.
Deciding when to sell is even harder for most private investors.
First things first, though. Your number one job as an investor is strategy and asset allocation. But once you've decided on your overall strategy, including how much of your money should go into equities; what next?
Why bother trying?
First, start with some startling realism: 75% of shares, and most private investors, lose money. So you may, wisely, decide not to bother trying, or select an index tracker and go out and do something less boring instead.
If you're still here at this point, you must fancy your chances.
Just remember that the odds are stacked against you. The trick is in trying to take the emotion out of share selection and, in my opinion, following a few basic 'value' principles.
This is personal advice, though. Not everyone agrees with the curmudgeonly value-based approach. Many private investors trade successfully and buy fast-growth, exciting shares and do well. But in my experience, you're highly unlikely to be successful going down this route unless you have genuine insight and exceptional skill, or are very lucky.
For the rest of us, running a few checks over our potential investments will help us rule out most likely losers:
Your own value judgement
Take a close look at the balance sheet, the company's earnings history and your own belief in future earnings prospects, weighing everything you can. Now decide; is the company fundamentally good value?
This may seem too simplistic, but novice investors can be guilty of getting their heads turned by a hot tip. I know because I was there myself once and know plenty of others who were, too.
Income
You'll read lots about the importance of dividends and the 'miracle' of compounding. Don't dismiss this as boring. Ruling out any company that doesn't pay a healthy dividend -- and looks unlikely to for another year or two yet -- ought in turn to rule out many losers.
Cash
Ultimately a company's value reflects its ability to generate cash. Using a price to cash-flow valuation as an integral part of your overall analysis should help rule out total losses.
Earnings
Find companies that have demonstrated the ability to generate earnings whatever the economy has thrown at them. You don't need to completely rule out companies promising 'jam tomorrow', just use a little healthy cynicism.
You're trying to discern what makes a company valuable today and why that valuation may improve in the future. This comes down to earnings and assets. If you're doubtful about future earnings, move on.
Equally, if you don't really understand exactly how the company makes its profits and what it does, it's probably best left alone.
Debt
Increasing debt to fuel the rapid expansion of a successful and ground-breaking business may be no bad thing. But on the whole, excessive debt should be actively shunned by investors. There are plenty of exciting businesses around with no debt, and plenty of cash and other assets.
Operating owners
Look for companies where the directors hold a reasonable stake, and make sure they aren't paying themselves inflated salaries. Aligning your interests with those of director-owners usually pays off in the long term.
Knowing when to sell
Deciding when to sell is something most private investors find hard. The safest way is to make your own judgement of a company's overall worth and to let that be your guide.
Personally, I find it helpful to make an educated guess of the market capitalisation in ignorance of the actual valuation, and to let my own summation rule my buy/sell/hold decisions.
It's necessary to keep reviewing a company to come up with your own view of the 'right' value.
If a share is moving up quickly simply by virtue of an overall rising market, then your perception of underlying value may have been realised purely by sentiment.
If the company's shares have moved up on specific news, however, and the inherent value you spotted is now accepted more widely, then great. Whether to sell or not depends on your updated view of real value. On the downside, the opposite is also true and it is never wrong to sell at a loss if the information has changed.
Happy hunting!
Deciding when to sell is even harder for most private investors.
First things first, though. Your number one job as an investor is strategy and asset allocation. But once you've decided on your overall strategy, including how much of your money should go into equities; what next?
Why bother trying?
First, start with some startling realism: 75% of shares, and most private investors, lose money. So you may, wisely, decide not to bother trying, or select an index tracker and go out and do something less boring instead.
If you're still here at this point, you must fancy your chances.
Just remember that the odds are stacked against you. The trick is in trying to take the emotion out of share selection and, in my opinion, following a few basic 'value' principles.
This is personal advice, though. Not everyone agrees with the curmudgeonly value-based approach. Many private investors trade successfully and buy fast-growth, exciting shares and do well. But in my experience, you're highly unlikely to be successful going down this route unless you have genuine insight and exceptional skill, or are very lucky.
For the rest of us, running a few checks over our potential investments will help us rule out most likely losers:
Your own value judgement
Take a close look at the balance sheet, the company's earnings history and your own belief in future earnings prospects, weighing everything you can. Now decide; is the company fundamentally good value?
This may seem too simplistic, but novice investors can be guilty of getting their heads turned by a hot tip. I know because I was there myself once and know plenty of others who were, too.
Income
You'll read lots about the importance of dividends and the 'miracle' of compounding. Don't dismiss this as boring. Ruling out any company that doesn't pay a healthy dividend -- and looks unlikely to for another year or two yet -- ought in turn to rule out many losers.
Cash
Ultimately a company's value reflects its ability to generate cash. Using a price to cash-flow valuation as an integral part of your overall analysis should help rule out total losses.
Earnings
Find companies that have demonstrated the ability to generate earnings whatever the economy has thrown at them. You don't need to completely rule out companies promising 'jam tomorrow', just use a little healthy cynicism.
You're trying to discern what makes a company valuable today and why that valuation may improve in the future. This comes down to earnings and assets. If you're doubtful about future earnings, move on.
Equally, if you don't really understand exactly how the company makes its profits and what it does, it's probably best left alone.
Debt
Increasing debt to fuel the rapid expansion of a successful and ground-breaking business may be no bad thing. But on the whole, excessive debt should be actively shunned by investors. There are plenty of exciting businesses around with no debt, and plenty of cash and other assets.
Operating owners
Look for companies where the directors hold a reasonable stake, and make sure they aren't paying themselves inflated salaries. Aligning your interests with those of director-owners usually pays off in the long term.
Knowing when to sell
Deciding when to sell is something most private investors find hard. The safest way is to make your own judgement of a company's overall worth and to let that be your guide.
Personally, I find it helpful to make an educated guess of the market capitalisation in ignorance of the actual valuation, and to let my own summation rule my buy/sell/hold decisions.
It's necessary to keep reviewing a company to come up with your own view of the 'right' value.
If a share is moving up quickly simply by virtue of an overall rising market, then your perception of underlying value may have been realised purely by sentiment.
If the company's shares have moved up on specific news, however, and the inherent value you spotted is now accepted more widely, then great. Whether to sell or not depends on your updated view of real value. On the downside, the opposite is also true and it is never wrong to sell at a loss if the information has changed.
Happy hunting!
