How to Find Stocks for the Long Term

I had recently wrote that that investing can be like learning how to ride a bicycle.

When we learn to ride, it is common sense to avoid practicing on busy roads – instead, relatively uncrowded places are ideal. Also, it is common sense to dip our toes into the world of cycling by first practicing with bikes that come attached with training wheels. In this way, there’s something to help support our balance while we learn.

The same common sense-type of thinking can be applied to investing too.

Peter Lynch’s principle

Peter Lynch, the legendary manager of the Fidelity Magellan Fund in the U.S., once said that investors should start investing with “what we know.”

Like how we take safety precautions when learning to ride a bicycle for the first time (the use of uncrowded spaces and training wheels), starting with companies with simple businesses that we can understand helps give us a safety net.

But how simple is simple? Lynch has some choice words on the topic:

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”

Simple businesses can be found from the products you love using, the hobbies you have, or the services you frequent.

For a car driver, understanding the utility of vehicle testing and inspection firm Vicom Limited (SGX: V01) should be within reach.

For a ramen lover, understanding the pros and cons of ramen restaurant chains Menya Musashi and Ajisen Ramen may be within the individual’s circle of competence. Both ramen restaurant chains are operated by Japan Foods Holding Ltd (SGX: 5OI).

A Fool’s take

Businesses that you can understand can form the starting point for your research. The upside to investing in a business that you can understand  is that you can also easily keep up with the company’s business developments over the long term and decide if they make sense or not

So, consider starting simple – and slowly ride your way to investing success.

Learn more about investing through a FREE subscription to Take Stock Singapore. Sign up here for The Motley Fool's weekly investing newsletter that will teach you how you can GROW your wealth in the years ahead.

Like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Vicom Limited.