"Do Your Own Research" - How?

snowcat53

Good advice above about only betting (sorry investing) what you can afford to lose. But that said owning some individual shares certainly introduces more interest to investing. I have a smallish self select ISA since when i got some free demutualisation shares from ex building societies. My approach is not very technical - just selecting companies that seemed to be going places or undervalued, often tipped by one of the papers, often after a big sell off (eg BP). I have picked some stinkers (eg Railtrack) but some diamonds too (Autonomy).

The other bonus is that some shares entitle you to perks or discounts - eg if you have L&G you get reduced charges on their pension funds, M&S you get vouchers every year.

gadgetmind

Linton wrote: »

As you already have a FTSE All Share tracker why do you want to chose a few more FTSE100 shares - why not just increase the % in the tracker?

Maybe to increase yield at the expense of long-term gain? Of course, a fair few of those on good yields (Vodafone, pharmas, food, household, booze, etc.) have very good EM exposure and so are also good growth stories.

The passive portfolio I'm thinking of starting is going to use some FTSE All Share plus some FTSE 250 to increase smaller companies coverage.

The high yield stuff might look odd alongside this, but my wife holds these and doesn't pay tax, so the dividend yield is handy. I've basically gone for the same holdings as all of the high income funds/ITs hold but holding direct to avoid fees.

IronWolf

Investing in stocks is not gambling and unless you approach it as an investment and not a bet then you shouldn't be buying shares.

There are a lot of factors in determining a companies value, and it involves a lot of reading to find out what to look for. If I had to list the basics I would say the most important things are

1. Competitive advantage not easily (or cheaply) replicated by competitors

This means they can have a strong brand, e.g. Coca Cola, or they have a low cost operating model which allows them to beat their competitors on pricing e.g. GEICO or Amazon.
Typical companies that do not have this are things like retailers like HMV, who have fierce competition who beat them on pricing.

2. True earnings

This can be different from reported earnings, either larger or smaller. You need to know the accounting rules but the main thing to look for is depreciation charges and cash flow statements. Some companies need to continually invest in infrastructure in order to remain competitive, but this expense doesnt appear in income, it is in the form of depreciation which could understate how much it really has to spend in order to maintain its current earnings. But you have to differentiate between capital investments to maintain earnings, and capital earnings to grow earnings, which isn't easy as they arent separate on the cash flow statement.

3. Return on re-invested earnings

Companies will only give you a certain % in cash, in the form of dividends. The rest they spend on the company to grow its earnings. Now there is a difference between a company which say spends £100m of it earnings on property in order to increase its earnings by £5m next year, and a company that spends £100m of its earnings on property in order to increase its earnings by £20m next year. The latter company is much more valuable even if they both earned £100m total. The return on equity over time gives an idea of how a company will reinvest its earnings, also looking at value from past acquisitions.

Together, 2 and 3 should give you a good idea of the future prospects for the company in terms of potential for growth, which is very important in valuing a company. You also need to consider qualitative factors though, like is there room for them to grow in their market or is it already saturated?

4. Avoid companies with too much debt

Even the best companies can go bankrupt from debt. I usually avoid companies with debt greater than 3 times earnings, also you need to distinguish between short term bank loans and long term bonds, the former being a much greater risk to solvency.



All the above you can get from reading the annual reports from companies websites. Never use third party sites as the information is often inaccurate, get the info from the source.

I suggest reading some books:

The Intelligent Investor: Ben Graham
Analysing financial statements: Mary buffett
The Essays of Warren Buffett: Lawrence Cunningham
How to think like Benjamin Graham and invest like Warren Buffett: Lawrence Cunningham
The theory of Investment Value: John Burr Williams

gadgetmind

IronWolf wrote: »

1. Competitive advantage not easily (or cheaply) replicated by competitors

This is the main one for me, but that's because of my technology company emphasis. I seek "wide moats", which is mainly for me well protected (patented and copyright) intellectual property.

Of course, I also look for low debt, good management, and a solid and profitable route to market, but the latter is meaningless without the former.

However, I approach this way because I can research tech companies, even to the level of finding and reading their patents (my brain hurts!) and this isn't going to work for everyone.

IronWolf

gadgetmind wrote: »

This is the main one for me, but that's because of my technology company emphasis. I seek "wide moats", which is mainly for me well protected (patented and copyright) intellectual property.

Of course, I also look for low debt, good management, and a solid and profitable route to market, but the latter is meaningless without the former.

However, I approach this way because I can research tech companies, even to the level of finding and reading their patents (my brain hurts!) and this isn't going to work for everyone.

I'd be interested to know what sources you use? I've stayed away from tech companies so far just because I don't have the expertise to know whether they're going to be rendered obsolete in a few years, but its an area Im keen to try and improve my knowledge of as businesses can be very fast growing once they've got something good.

Loughton_Monkey

These days, buying individual shares on the basis of one's own 'fundamental research' is getting much hairier in my opinion. Whatever research is done - company might be 'sound', sector might have 'prospects' - but companies are so sensitive to the '!!!!-up factor'.

M&S was always the golden boy, but value was based upon Brand Value which they virtually lost overnight. BP had their oil spill just before they would otherwise have been due for bumper profits with the oil price going through the roof. BSkyB might have been on course for bumper growth.....

I used to do a very small bit of share trading - as a sort of hobby - and to learn a bit about markets. Ultimately I did a calculation in which I costed the time I spent [at the same rate as my then salary] and then found the 'true' returns to be laughably low/negative as compared with the alternative of buying funds.

gadgetmind

IronWolf wrote: »

I'd be interested to know what sources you use?

There are no shortcuts. Analysts talk rubbish, media spout similar, and pundits ramp endlessly.

You need to study the subject area, and learn how to read a patent, which is much easier once you've filed a few yourself. As I say, no shortcuts.

Even after all this research, there are still serious risks. Getting technology to market takes time, and I have fallen victim to a couple of pre-packs. Tech great, organisation great, finances wobbly, so major creditor decides to wipe out other investors and take the lot.

Bitter? Me? Well, a bit, but the 20 baggers make up for these, in spades.

lvader

Loughton_Monkey wrote: »

and then found the 'true' returns to be laughably low/negative as compared with the alternative of buying funds.

I'm the opposite, all my funds are well down but apart from a couple of stinkers all my shares are doing well.

cashbackproblems

Loughton_Monkey wrote: »

These days, buying individual shares on the basis of one's own 'fundamental research' is getting much hairier in my opinion. Whatever research is done - company might be 'sound', sector might have 'prospects' - but companies are so sensitive to the '!!!!-up factor'.

M&S was always the golden boy, but value was based upon Brand Value which they virtually lost overnight. BP had their oil spill just before they would otherwise have been due for bumper profits with the oil price going through the roof. BSkyB might have been on course for bumper growth.....

I used to do a very small bit of share trading - as a sort of hobby - and to learn a bit about markets. Ultimately I did a calculation in which I costed the time I spent [at the same rate as my then salary] and then found the 'true' returns to be laughably low/negative as compared with the alternative of buying funds.

same here, am down thousands on shares barc, aviva, sres, pmk. but funds are all holding up well!

gadgetmind

lvader wrote: »

I'm the opposite, all my funds are well down but apart from a couple of stinkers all my shares are doing well.

Ditto, but that's because I committed the sin of timing regards my general (not tech) stock buying. I don't know how to value general FTSE stocks so well, so have to rely on p/e ratios, yield, divi cover, gearing, and boring stuff like that. And no, I can't read Glaxos patents - not my area, big time!