Just when the year was closing to it’s end last year, I managed to attend a stocks investment strategies class. It was held by none other than a market leader in it’s field (investment) – Kenanga Investment Bank.
It was a full seminar to find the best stocks in the Malaysian market. More importantly, the seminar fully focuses on ways to find stocks that gives the best dividend profits for it’s investors – for short and long term period, which also touches on companies that can sustain in the next 10 years.
Do have a brief read on stock investing for beginners as a start if you find this a bit technical.
Before we start, our minds must have answers to the queries below:
“What is your mission?”
“What is the return you need?”
Generally, people invest and invest more to make more money – but for what purpose?
Is it to fund your children’s education?
Is it to buy your new house? be it for property investments or your dream house.
Let’s say you want to reach $1 million. You have to work backwards to calculate how much percentage of return on stocks investments you need to achieve to obtain the $1 million by the period you want.
An investor can only improve and track their investing performance by having a set of NUMBERS that they want to ACHIEVE. Bear in mind that – what you can measure, you can improve!
To cut short, here are the steps to find the perfect stocks~
1. Understand the business
When we invest in a company, we must know the ins and outs how the company generates their money. We must visualize how they make sales – this what we call sales funnel. When we have an understanding, ask this question, does the way the company generate sales make any logical sense?
When we discuss about stocks investment strategies, this is important to avoid investing in scam companies who only wants to steal your money, or worst, companies controlled by bad syndicates.
Here are examples of companies with reliable sales strategy:
- Sales funnel : food products
- How do they generate money : Through retailers (hypermarkets, small retailers, etc.)
b) Poh Kong
- Sales funnel : Buy gold, design it, and sell them
- How do they generate money : Mark up the gold they made and sell it
Noticed how the companies mentioned above have clear ways on how they make money. Those are the companies encouraged to invest, not some WOW business model that sounds too good to be true.
2. Does the company have decent track record?
When it comes to stocks investment strategies, an investor should invest in a company with well known business background. A reputable company normally would have been with the characteristics as below:
a) Been in business for minimum 3 to 5 years
b) No unfair deals to shareholders especially minority shareholders (Didn’t pay back investors’ dividends for more than 2 times)
We can do a round check from news articles or the web if ever the companies have questionable histories. If they do, it’s advisable to avoid investing in them.
3. Is the company making profits?
There are 2 ways to look at this, the company:
a) Is at least profitable, be it in that year or for the last 5 years average
b) Even if they are making loss during the year, at least their revenue is growing – this is better if the company is making profits during the year
4. Does the company have good profit margin?
A good indicator on a company performing good is that, they are making at least 10% profit margin.
Here is the formula:
Profit margin ratio = Net Profit/Total Revenue
Say for example, Company Z is making 10% profit margin ratio – what does that mean? is that good or bad?
What this means —>
For every $1 sale, the Company makes $0.10 cents profit. A low performing company normally makes 5%, average companies makes 10%, while great companies makes 20% and above.
A good company have high profit margin because it has high pricing power. Hence, the company can demand higher product pricing in the market. This means higher returns (dividend income) for investors!
5. The company have good balance sheet
A general rule of thumb of a good business has the following 2 traits mainly:
a) A lot of CASH and ASSET
B) Low DEBT
We can analyze this by ensuring the following criteria:
- Net debt to equity advisable to be less than “1.0”
- Formula: Total liabilities/Total shareholder’s equity (This formula indicates whether the company’s total wealth can support/cover the company’s total debt) – we won’t want to invest in a company that have more debt than it’s total wealth now, do we?
A high cash and asset but low debt-bearing companies are super great as it would normally have excessive cash to pay debts, get more loans for business expansion, and better yet – pay you your dividend incomes!
6. Good Return on Capital
This is one of the major part in the stocks investment strategies. Most investors would look at their return on investments they made, rather than the total sum amount of returns that they received.
A good rule of thumb when we invest in stocks is —-> 10%
A key way to find companies that can reach 10% are normally companies with POSITIVE operating activities as presented in their cash flow statements (CFS). This means that the company have sufficient cash to cover for their monthly or yearly business operations.
However, if the investing activities in the CFS is NEGATIVE in amount then it is alright as it may also indicate that the company is currently heavily investing in other assets. This is one of the financial statements normally produced by a company in its annual reports by their accountants.
P.S: its okay if you do not know what the term “cash flow statements” or “balance sheet” means because those are normally accounting knowledge related, I had a rough time myself understanding those reports. Click the links in green down there for more information on this.
Company financial statements/reports normally comprised as below:
7. Are the major shareholders reputable?
Normally a good business has highly reputable people working in the company. People who really go to work and to build the business – not just sitting idle waiting for their paychecks to come in.
It is highly encouraged to invest in companies where the major shareholders are the ones who have stayed to build the company through it’s ups and downs in uncertain economic conditions. People who have sweated through the years to raise the company like their own baby.
By doing so, we would be putting our money at the hands of the right people – key people who will ensure returns for the investors who put their money to grow the company, expecting profits from capital invested.
With most of the factors combined above then we may be able to at least minimize our risk of losing money on capital invested in stocks – that’s one less thing to worry in life.
Again, if you find it a bit challenging to understand this article then you can also start by reading stock investing for beginners!
On a side note, be aware to invest only the amount you are willing to lose. Sometimes it is better to save than to invest. And, there are also times when it is the best time to invest rather than saving. It depends on your risks appetite. But then again, if your money is enough to cover only your basic needs then maybe some considerations need to be given whether to invest or not.
A good rule to simplify this is to “spend money on your basic needs, commit to save a certain portion of it every month, then invest the difference“.