When it comes to deciding what to invest in, particularly stocks, people can get easily overwhelmed – especially those just starting out. Not only are there thousands of stocks to choose from but too many people focus on charts and numbers and the never-ending analysis and advice. Some of the most successful investors in history, like Warren Buffett and Peter Lynch, have developed the ability to break things down into simple ideas and have been wildly successful at putting them into practice.
Here are some simple ways to see through the clutter and find great companies to invest in, as inspired by the world’s greatest investors.
1) Go with what you know
Buffett is famous for avoiding investing in companies that he doesn’t understand. He has never understood much about technology, for example, and thus he has largely stayed away from investing in technology companies. He has slowly, steadily grown his wealth by investing only in those companies that he fully understands. Many of them also happen to be companies that are relatively easy to understand, as the list of companies owned by his company Berkshire-Hathaway illustrates. Consumables like food and clothing, necessities like insurance and transportation, and past-times like RV travel.
How about you? What’s literally ‘under your nose’ – or what do you put on or into your body or on or into your home – that you really like and understand, and what companies produce those goods? Do you buy a lot of stuff on Amazon? If so, then why not own a share or two of Amazon (AMZN)? Are you hooked on Starbucks? If so, then why not own some shares of Starbucks (SBUX)?
What’s literally ‘under your nose’ – or what do you put on or into your body or on or into your home – that you really like and understand, and what companies produce those goods?
Even if you don’t buy or particularly like a certain company’s product or service, if you understand it and the company has shares available to purchase on a stock exchange, then you now have one way to find companies to invest in.
2) Find out what’s popular
Some more great investment opportunities can be found by watching what other people are excited about. Maybe you don’t care much for Starbucks or Costco or Ulta Beauty, but do you walk or drive by locations of these stores and see a lot of people in them? More importantly, has this been the case over at least a few years? If so, then maybe they are worth your attention.
A word of warning: it’s important to investigate whether a company’s wildly popular product or service might be a passing fad or if there’s more to it than meets the eye that will give it staying power. For example, most people might think that Starbucks is mostly based in North America and sells only coffee-related products. This has led some to speculate, some for several years now (even when the stock was a lot cheaper), that it will soon lose popularity because people might get tired of it. In reality, it exists in 70 countries with over 24,000 retail stores. It is also branching out into tea and food and has been selling a number of its products in grocery stores and other retail outlets. So even if its coffee and/or stores lose popularity, one should consider whether other parts of its business might keep it popular into the future.
In any case, you now have a second way to find companies to invest in.
3) Ask questions
Ask a retailer how much of a fee they have to pay MasterCard (MA) for each transaction and then think about how many transactions might be taking place in your town, city, province/state, or country per day – even per hour! Go to a trade fair where merchants are using phones and tablets as mobile payment devices and then tally how many of them are using Shopify (SHOP) as their payment AND online retail platform!
There are a number of businesses that operate ‘under the radar’, so to speak, that aren’t household names yet certain industries and even much of the world would not function the way it does – or even properly – if the products and services of certain companies did not exist. Consider Cognex (CGNX), for example. Finding out what some of these are could be very beneficial.
By asking questions and otherwise snooping around, you now have a third way to find companies to invest in.
4) Get advice
Once you have found a list of companies that might be worthy candidates, you must not go on a whim or with your gut or based upon a tip from a friend-of-a-friend before first getting other opinions. Maybe a company that seems super-successful because you see people buy their stuff or use their service all the time is in the midst of a scandal or controversy that could seriously harm or even kill their company. Maybe it is not managing all the money it makes very well and is on the verge of bankruptcy. Maybe a competitor is just over the horizon that will soon eat away at its market share.
Whether or not you are seeking professional financial or investing advice, it would be highly beneficial to also subscribe to an online investment service whose sole purpose is to educate people about which companies are the best-of-the-best.
This site unashamedly promotes The Motley Fool and the good news is that reading articles on http://www.fool.com is free. If you like what they offer, then you can pay an annual subscription for one or more of their paid services. Stock Advisor is one of the top-rated in the entire industry; it’s the perfect service for beginning stock investors. You not only get advice on good companies to invest in and why, but also which ones to avoid and why. Perhaps most importantly, there are many articles that teach you how to become a better, wiser investor because it isn’t just about what stocks you pick but more importantly about developing an investing personality.
For the purpose of not appearing biased, you could also check out Cabot Wealth Services (cabotwealth.com), which has been around for many years, even longer than TMF. The Motley Fool promotes the very simplistic strategy of buying a stock and then holding for a VERY long time, not being concerned very much with timing or current stock price. By contrast, Cabot has a much more active strategy of buying and selling at certain recommended points and thus your trading fees will be a lot higher if you go with Cabot, plus you will need to spend more time reading their update bulletins.
Ultimately, only you can decide which strategy and thus service suits your goals and personality the best. The good news is that both companies offer trial periods for their paid services.
The Final Word
Like learning a trade or profession, becoming a successful investor takes a lot of time to learn. Sounds complicated, right? So is anything when you’re first starting out. But starting out is simple when you can invest in the stocks of a handful of companies that you already know and understand, and especially also use and like. Then all you need to do is find out if the investing service you subscribe to supports your hunch and go from there.
In the meantime, do your homework and look in your home and the world around you and start finding out which companies are central to making and keeping it what it is. Own shares in even a few of these companies and you could be setting yourself up for a very solid financial future.