How to Pick Stocks

Picking stocks can be a daunting and tiring process. There are hundreds of listed companies in Singapore alone, and analysing companies is often a tedious activity. These are reasons why we sometimes become sloppy and end up investing in less-than-ideal companies.

For more insight on how we can pick stocks, I found an illuminating passage from the classic investment book Common Stocks and Uncommon Profits by Philip Fisher:

“I do not spend hours and hours going over old annual reports and making minute studies of minor year-by-year changes in the balance sheet. I do not ask every stockbroker I know what he thinks of the stock. I will, however, glance over the balance sheet to determine the general nature of the capitalization and financial position.

If there is an SEC prospectus I will read with care those parts covering breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock (this can also usually be obtained from the proxy statement), and all earning statement figures throwing light on depreciation (and depletion, if any), profit margins, extent of research activity, and abnormal or non-recurring costs in prior years’ operations.”

From the passage above it quickly becomes clear what areas Fisher thinks investors should be focusing on.

The balance sheet is one important aspect that investors should look at. This financial statement gives us a good overview of the financial health of a company. From a quick glance at the balance sheet alone, investors can pull out important information, such as the amount of cash and debt the company has, and the size of its asset and equity levels. In general, investors should be careful with companies that have high amounts of debt and/or low levels of equity.

The next important aspect would be to find out if a company has any competitive advantages that can protect its profits and market share over the long-term. Since technological changes are constantly occurring, it’s important to ensure that a company has a good research program in place to keep up with the times and come up with new products and services.

The presence or absence of competitive advantages in a company can also be reflected in its profit margins. In general, a company with competitive advantages usually has higher profit margins than its peers.

In summary, picking stocks can be made simple if we can quickly filter companies through some of the important aspects that need to be looked at. This should give us more time to focus on a much smaller group of stocks which are potentially worth an investment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.