How to Research Stocks: Thinking Like an Investor

While company financials and investing strategy are both important, there is something you must do if you want to learn how to think like an investor. The greatest value investors of all time all understood this. The secret to discovering undervalued companies lies in the attributes that don’t show up on a balance sheet. 

Oftentimes these intangible values aren’t as hidden as you may think. In this post I will share with you the most important ones. In conjunction with a company’s finances, these attributes will provide the whole picture needed before investing into an individual stock. But first, if you are still considering whether you want to learn how to invest into singular stocks, take a look at my post Index Funds vs. Individual Stocks before diving in.

In part 1 of this series we covered the investor mindset and the core principles of value investing. In part 2 we dove into the key financial metrics needed to evaluate a company on paper. Now in part 3 we have gone beyond the numbers to uncover the intangible attributes that complete the picture. Combined, these three posts give you a full framework for researching any stock on your own.

This is part 3 of a 3 part series on stock research. Read part 1 here and part 2 here.

Company Attributes

A company will have many different characteristics that aren’t seen on a balance sheet or given in the annual report. By going beyond a business’s financials you are able to adjust your real-world valuation. Eventually, your goal is to come up with what you think is a fair price to pay.

I’ll cover some of the most important attributes to understand about your company when researching a stock.

Brand Recognition and Consumer Loyalty

These two go hand and hand. Building reputation is something that takes a long time in the corporate world of business. Strong brand names like Coca-Cola or Costco are valuable assets that need to be considered when determining the intrinsic value of a stock. Not only do these companies have a fiercely loyal fanbase, but they are also going to beat out competition in many cases because of their wide recognition.

Deciphering the value of certain brands belongs to a more practical category of research. You may have to go past the typical Yahoo Finance report and learn what the real customers think. The numbers will not always project true consumer sentiment. This is why amateurs have a leg up on Wall Street. 

Do some investigative work (this may look different for each stock). Maybe you read a product review or test out different items/services for yourself. Ask around to see what other people think. This is where you may have to get creative!

Competitive Advantage and Moat

A company’s competitive advantage is a unique attribute that allows them to out-perform the competition in some form. Warren Buffett often calls this a company moat, guarding it from the invading forces. Ideally, the competitive advantage should be durable. It doesn’t mean much if your business releases a new product that is carbon-copied by every competitor within the same month.

Competitive advantages come in many shapes and forms. Maybe a company has lower production costs and higher profit margins, a trademark/patent, or an advantage of scale or technology. Whatever it is, look for something that sets this business apart. These intangible assets could be overlooked or already calculated into market valuations for different stocks, so be aware of what your business has to offer.

Management Quality

Different investors value management in different ways. Peter Lynch has said to find a business that any idiot can run because eventually one will. Finding a simple and reliable business can be important because you aren’t in control of who heads a company.

However, a company’s management is not irrelevant. Businesses that haven’t grown much or that are struggling to perform can benefit largely from great management. It is very difficult to pick out a good manager or CEO before looking at their record. The easiest and most reliable way to check on a company’s management is to look at what they have done in the past and see what they plan to do in the future. How has the business performed under their stewardship?

Industry Position and Market Share

This is similar to a company’s competitive advantage. The size of a company is important because it can indicate its strength against competition. When a company takes up the largest portion of total revenue or sales in an industry, this is usually a powerful asset because it means that they have room to raise or lower prices. 

It is important to understand the industry that your company belongs in. Not only do different financial characteristics belong to different industries, but so do different barriers to competition. If you are well versed in certain sectors, this could be a good place to look because it remains within your circle of competence.

Insider Buying and Ownership Stakes

Insider buying is almost always a good sign. When the management of a company is using their hard earned money to reinvest into the project that they are working on, it means that they believe in the company’s future. Insiders will know key components of the business better than anyone else, so look to see when they are purchasing stock. It’s good for management to have some of their own money in the company because it keeps their interests aligned with shareholders. 

However, do not panic when the insiders are selling. This may sound counterintuitive, but management is often granted stock as gifts or bonuses on a regular basis. This means that when they sell these positions they may just be re-allocating these assets into a more diversified portfolio or liquidating the position because they need cash. Insider selling is much less effective at determining where a company is headed than insider buying.

Putting It All Together

When it comes time to determine what all this means you have to be able to decide whether the company is being priced correctly. All these attributes that we have discussed are intangible assets that may or may not be accounted for in a stock’s current price, and it’s your job to figure that out. 

Brand names may deserve certain premiums and a durable competitive advantage should make you love a company even more. With practice, it is pretty easy to evaluate what a company is worth on paper. It takes more skill and speculative research to be able to come up with intrinsic value. At some point, all you can do is get started.

Get Some Skin in the Game

If you have read all three parts to this series, thank you! I believe that by taking these sound principles to heart and by learning a few different financials you can begin to research stocks on your own. 

The best thing to do is to just get started. If you aren’t entirely confident in your abilities yet, that’s okay (it’s actually a good thing). Start small and build discipline and habit. By jumping in now you are learning in ways that you wouldn’t just by reading these articles on stock research. 

If you are still curious about how the greatest of all time investors think, check out my book review University of Berkshire Hathaway, Daniel Pecaut. 

Hopefully you enjoyed this series. If you have, you should subscribe to my blog where I post weekly personal finance tips, book reviews, and more.