Stock Research

Finding Opportunities in the Stock Market Among the Buying, Selling, and Chaos

How I Find Stocks

I read financial reports and newspapers and follow the news. Opportunities arise in different ways. Investors sell stocks of well-known quality companies every day. Logical and illogical reasons cause stocks to drop. Some investors sell stocks to buy different stocks. A rumor could cause a sell-off in a company’s stock. Emotions can cause investors to sell. A company’s stock can decline 50% or more over a few weeks or months. This could leave well-financed companies’ stocks available for a fraction of their value. Constant research and valuing companies allow me to take advantage of these opportunities.

Research and Estimates

I look for quality companies that I understand. They have consistent earnings, strong financials, and low debt. The financial strength of these companies lowers their risks.

I analyze their financial performances. I calculate the future growth of these companies using their average earnings. Then I calculate the real (intrinsic) value of these companies. My estimates are conservative. Sometimes the real value will be higher than the company’s stock market price.

The gap between the real value price and the stock market price is the margin of safety. A wide margin of safety allows me to purchase a stock far below its real value. The margin of safety helps protect me from downside price risk if a company’s intrinsic value drops. The margin of safety also helps protect me from downside risk if I overpay for the stock. As long as the margin of safety is a significant gap, I still have the potential for an above-average return.

I try to purchase the stocks at 50% or more below their real stock price. I have purchased stocks at 30% below if a strong upside is present.

Some stocks reached their real value in 6 months. Most take longer. No one can predict how fast a company’s stock will reach its real value. Investors can overlook these companies for months. Then investors recognize the company and pile into its stock. The stock takes off faster and goes higher than most were prepared for.

That is why my research focuses on long-term investing. Timing the market is impossible. So I find the companies. Do the research. Purchase the stock at the lower prices and wait. And ride the stock as it climbs. Not chase it. I hold most investments for 6 months to 2 to 3 years. I have held some for 5 years. When the stock reaches its real value or becomes too overvalued, I sell it.

But sometimes I won’t sell. I will recalculate the company’s real value after a year. If the real value has substantially increased and the stock market price has increased, but is still 30% or more below the company’s real value, I will keep that stock as long as the estimates are favorable for higher returns.

Things to Remember

Stocks have inherent risks. No investment strategy, including my conservative approach, can remove all risks. I try to minimize risks with discipline. I avoid overvalued stocks and hyped stocks. Their prices can plummet. Their risk of losing capital is high. Some of those stocks never recover. I also avoid companies with weak earnings and high debt. Their poor financials add more risk to their estimates. I ignore the stock market’s ups and downs. The moves can be irrational. So I focus on a company’s performance.

Knowing more about a company improves my estimates and lowers risks. But estimates are not perfect. Warren Buffett would admit to this. Still, his long-term track record shows his estimates have increased the wealth of the shareholders of Berkshire Hathaway. And events can affect all stocks in the short term. But companies with strong financials do well long term.