Become Your Own Stock Analyst

Courtesy : Investopedia 

Nobody asks you to become your own doctor or your own lawyer, so why should anybody ask you to become your own stock analyst? Some people like to take up cooking simply because they enjoy doing it. Similarly, there are people like Warren Buffett who enjoy the process of making investments. Therefore, if you are an investor who likes to be self-reliant, then you should consider becoming your own stock analyst. With a big question mark hanging over analysts' credibility, it is always better to learn the ropes. Read on to find out how you too can think like an analyst, even while sitting at home.

 Analysis Is a Process

It doesn't matter whether you are an investor looking for growth or value; the first step in thinking like an analyst is to develop a probing mind. You need to find out what to buy or sell at what price. Analysts usually focus on one particular industry or a sector. Within that particular sector, they focus on select companies. An analyst's aim is to deeply probe the affairs of the companies on their list. They do this by analyzing the financial statements and all other available information about the company. To cross-check the facts, analysts also probe the affairs of a company's suppliers, customers and competitors. Some analysts also visit the company and interact with its management in order to gain a firsthand understanding of the workings of the company. Gradually, professional analysts connect all the dots to get the full picture.

Before making any investment, you should do your own research. It is always better to research several stocks in the same industry so that you have a comparative analysis. However, the biggest constraint in doing your own research is time. Retail investors who have many other things to do may not be able to devote as much time as professional security analysts. However, you can surely take up just one or two firms in the beginning, to test how well you can analyze them. That would help you in understanding the process. With more experience and time, you can think of putting more stocks under your lens. 

The Best Place to Start Is Where You Are

Analyzing the analysts' reports is the best way to start your own analysis. That way, you save a lot of time in cutting short preliminary work. You can learn about your selected company simply by reading analysts' research reports. You may not blindly follow analysts' sell or buy recommendations, but you can read their research reports to get a quick overview of the company, including its strengths and weaknesses, main competitors, industry outlook and future prospects. Analysts' reports are loaded with information, and reading reports by different analysts simultaneously would help you in identifying the common thread. Opinions may differ, but basic facts in all reports are common.

Furthermore, you can take a closer look at the earnings forecasts of different analysts, which ultimately determine their buy or sell recommendations. Different analysts may set different target prices for the same stock. Always look for the reasons while reading analysts' reports. What would have been your opinion about the present stock, given the same information? No clue? Then move on to the next step.

 What to Analyze

For reaching your own conclusion, you need to understand the various steps involved in a stock analysis. Some analysts follow a top-down strategy, starting with an industry and then locating a winning company, while others follow a bottom-up approach, starting with a particular company and then learning about the outlook of industry. You can make your own order, but the entire process must flow smoothly. Any process of analyzing a stock would involve the following steps.

 Industry Analysis

There are publically available sources of information for almost any industry. Often, the annual report of a company itself gives a good enough overview of the industry, along with its future growth outlook. Annual reports also tell us about the major and minor competitors in a particular industry. Simultaneously reading the annual reports of two or three companies should give a clearer picture. You can also subscribe to trade magazines and websites that cater to a particular industry for monitoring the latest industry happenings.

 Business Model Analysis 

You should focus on a company's strength and weaknesses. There can be a strong company in a weak industry and a weak company in a strong industry. The strengths of a company are often reflected in things such as its unique brand identity, products, customers and suppliers. You can learn about a company's business model from its annual report, trade magazines and websites. 

 Financial Strength

Whether you like it or not, understanding the financial strength of a company is the most crucial step in analyzing a stock. Without understanding financials, you cannot actually think like an analyst. You should be able to understand a company's balance sheet, income statement and cash flow statements. Often, numbers lying in the financial statements speak louder than the glossy words of an annual report. In case you are not comfortable with numbers, no need to hesitate, just start learning as early as possible.

 Management Quality

Analysts also focus on management quality. It is often said that there are no good or bad companies, only good or bad managers. Key executives are responsible for the future of the company. You can assess company management and board quality by doing some research on the Internet. Tons of information is available.

 Growth Analysis

Ultimately, stock prices follow earnings. So in order to know whether stock prices would be moving up or down in the future, you need to know where future earnings are heading. Unfortunately, there is no a quick formula that can tell you what to expect for future earnings. Analysts make their own estimates by analyzing past figures of sales growth and profit margins, along with profitability trends in that particular industry. It's basically connecting what has happened in the past to what's expected to happen in the future. Making accurate enough earnings forecasts is the ultimate test of your stock analysis capabilities, because it's a good indication of how well you understand those industries and companies.

Valuations

Once you know about future earnings, the next step is to know about the worth of a company. What should be the worth of your company's stocks? Analysts need to find out how much the current market price of the stocks is justified in comparison to the company's value. There is no "correct value," and different analysts use different parameters. Value investors look at intrinsic worth whereas growth investors look at earning potential. A company selling at a higher P/E ratio must grow at a higher price to justify its current price for growth investors.

The Bottom Line

The ultimate goal of every investor is to make a profit. However, as the saying goes, not all roads lead to Rome. Never blindly accept what stock analysts have to say and always do your own research. Not everybody can be an investing expert, but you can always improve your analytical skills when it comes to stocks.

Having A Plan: The Basis Of Success

Courtesy : Investopedia

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett 

Any veteran market player will tell you that it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.

The Benefits
As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.

Maintain Focus
By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation, and increased usage of computers, all of which fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all which contributed to weak market sentiment.
In such a fragile and shaky environment, it's crucial to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and can assume a more objective view of current price fluctuations. If investors had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.

Sidestepping the Three Deadly Sins
 
The three deadly sins in investing play off three major emotions: fear, hope and greed. Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.

The second emotion is hope, which, if it is your only motivator, can spur you to buy stocks based on their past performance. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain. 

The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom, investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then, when prices began to tank, many investors didn't budge and held out in the hope that their stocks would rally. Instead, their once-large gains turned into significant losses. 

An investment plan that includes both buying and selling criteria helps to manage the three deadly sins of investing. 

The Key Components 

Determine Your Objectives
 
The first step in formulating a plan is to figure out what your investment objective is. Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments. If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be risk averse.
Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively young investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk. 

Risk Tolerance
 
Most people want to grow their portfolios to increase wealth, but there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. 

Asset Allocation
 
Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds, 70% in stocks and 10% in cash equivalents.
It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work toward your objectives with a level of risk that is comfortable for you.

The Choices.
 
Once you formulate a strategy, you need to decide what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. 

You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance. Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.

Summary
 
An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.