How to Research Stocks: Where Do I Start?

This is a guide for anyone who is interested in learning how to research stocks. Investing money into the stock market is not an uncommon practice. You may know friends, family members, and peers that talk about it all the time. Today, there are hundreds of investing apps that you can download right from your phone. Most platforms make it extremely easy to purchase stock in a company, typically with just the click of a button. With so much access, you may have wondered if you can invest too. 

In this section, I will go over where every beginner should start their journey in the stock market and whether individual stock picking is right for you. 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.

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

What is the Goal?

It’s a tough game to invest in individual companies. A stat that is often used to encourage index fund investing is that 90% of investors fail to outperform the S&P 500 market index over long periods of time. What this means is that many people would be better off just putting their money into an ETF that tracks an index and letting it sit for many years.

However, many people get it wrong. Investing in companies can be an extremely rewarding and profitable way to allocate your money, it just has to be done properly. That being said, it is fair to say that every investor’s goal should be to beat the returns of the S&P 500.

Peter Lynch is a legendary fund manager known for his ability to analyze fast growing companies. He is clear on this matter: you shouldn’t invest into individual stocks if you aren’t going to beat the market. Luckily, Lynch is also a firm believer in the amateur investor, providing more encouragement than doubt.

An Investor’s Mindset

Having our goal in mind, there are a couple things every investor should remember if they want to succeed. These ideas are based on the fundamental analysis approach to investing, which is the best way to learn how to research individual companies. Some of the greatest investors of all time, including Warren Buffett, Benjamin Graham, Peter Lynch, and many others are fundamental analysts, using a strategy called value investing.

Here are just a few core principles that value investors follow:

• Don’t invest money that you will need in the next few years

Stocks are volatile investments, and it can take years or even decades for a stock’s true value to be realized by the market. When you purchase a stock you should think of it as locking your money in a safe that you won’t have access to for a while.

• The price of a security is rarely representative of its intrinsic value

This is key to the value investing strategy, which seeks to discover companies that are trading below their actual worth. With over 5000 stocks in the U.S. stock market, there are bound to be companies that are valued above what they actually are worth and some that are underappreciated.

• Don’t try to make macro-economic predictions

By trying to predict what the stock market will do as a whole, you are branching away from investing and moving into the realm of speculation. Warren Buffett is adamant about this, saying that you won’t see many billionaires who get rich this way. 

• Maintain low expectations

This isn’t fundamental to the strategy, but it is crucial for your mindset. Charlie Munger was an esteemed investor and partner to Warren Buffett. He believed that this is an important part of being a successful investor and the secret to happiness.

• Don’t diversify a portfolio for its own sake

When you decide to pick individual stocks, note that diversification becomes protection against ignorance. If that is what you want, then you shouldn’t be picking individual stocks. The best way to diversify is to buy into market indexes. You do not need a large portfolio to do well. In fact, it becomes much harder to succeed when you introduce more companies to follow.

How Do I Value a Company?

Being able to correctly determine the value of an individual company is an important task. Financially, there are many metrics that will tell you how the company is doing on paper. But, researching a stock involves going beyond that. You will need to take into consideration the financials, company management, competitive advantage, and more.

This is where many beginners get lost or overwhelmed. It really can be broken down into two categories: a company’s financials and a company’s attributes.

A company’s financials can be found in their annual and quarterly reports. This includes things like a balance sheet, income statement, and other numbers reported to shareholders. Learning your way around company finances can be difficult at first, but it is a first step in truly being able to evaluate a stock.

A company’s attributes are more broad. These are the things that aren’t accounted for in financial disclosures. Things like brand recognition, advantages of scale, and company location are all examples of qualities that can enhance a stock’s value but are not necessarily reported by the company. This is where having an edge or insight into certain businesses will come in handy.

What’s Next?

In the next section of this guide I will go deeper into how we can use financial statements and annual reports to analyze a company’s prosperity.

Click here to read part 2, How to Research Stocks: The Numbers That Matter.

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