Picking stocks for long term investment that WIN
Tags: Investing Tips, Stocks

Everyone knows that investing is one of the ways to passive income. That being said, it is possible to lose your entire capital if you blindly invest in a company without sufficient planning and knowledge. Some people choose to be copycat investors, replicating investments made by others. However, if you prefer to have a better idea of just what you’re putting your hard-earned money into, you would want to do a bit more research into the company first.

So here’s the question — how do you pick stocks for long term investment out of the many available in the market?

Here are some key criteria’s to look out for in a business before investing in their stocks:

Sustainable competitive advantage

The keyword here is sustainable: this is especially important if you are investing in a company for the long term as you want the company to have the ability to last for the long haul and still be here in 5 or 10 years time. Some factors which show sustainable competitive advantage include strong branding and long history. It is also a bonus if the company is a market leader in the industry. However, this is not always necessary as we have companies that are not market leader but yet are able to generate good profits for their investors.

Another important thing to look out for are good products and services as well as having future plans for expansion or new products. This can be seen from the downfall of Toys R Us, a company which had an extremely strong branding in the toys industry. I am pretty sure some of you have vivid memories of visiting this magical kingdom as a child, especially during special occasions such as Christmas or on your birthday. However, the company suffered huge financial losses and was unable to pay its creditors, thus eventually filling for bankruptcy. This goes to show the importance of being able to keep up with changing trends and consumers as many companies in the past few years have gone bust due to their lack of adaptability.

Other key examples include companies which have gone bust almost overnight as they have failed to go digital. E-commerce is a huge market nowadays and not adapting to the changing world will be the downfall of many companies.

Competent management team

Relevant experience is something else to look out for in the leaders of the company. Having the insights of a seasoned executive brings valuable experience to guide the company through its various different stages.

Another factor worth considering is whether management are compensated based on their performance. Having employees being paid a fixed salary only means that they will be paid the same regardless of whether or not they work hard. This doesn’t give them incentive for them put in the extra effort to grow the company. Thus, you might want to look for a company that rewards management with performance based compensation. Having an incentivized team will almost inevitably result in a growing company, thus also leading to the the growth in value of your stocks.

Most importantly, the management should have good character and integrity. No amount of experience, certificates and compensation can make up for lousy character.

Sufficient insider holding of shares

The people who know most about a company are not analysts, brokers. Instead, they are those running the company. Are the shareholders holding, buying more or selling their shares? It is a good sign if the top management team such as the directors and CEOs are buying more shares in the company. In contrast, if you see huge chunks of shares are being sold, this might be a cause for concern as they might know certain information you don’t. This information can be obtained from the company’s annual report.

Healthy figures

Here we are looking at the more technical aspect of things and arguably the most important as in the end, numbers don’t lie. There is no point investing in a company with factors such as fantastic management and branding if it is not profitable.

To ensure the company has a healthy growth in earnings, the first thing you should be looking at is the company’s income statement - Is there an increase in sales or revenue over the years over the last 5 years? Another number to look at is the net income of the company. If the company is spending more than they are generating in sales, this shows they are not earning money which is also not good for you as an investor. An increase of 10% for both figures is ideal for a healthy company.

Some key financial ratios and numbers you should be looking at include:

Return on Equity (ROE) — A healthy figure should be about 12% Operating and net profit margin P/E ratio

It is also important that the company has healthy debt levels. One of my favourite quotes from Robert Kiyosaki is good debt helps you get rich, while bad debt makes you poor. This also applies to companies — good debt should spur the company forward and allow them to make necessary purchases they otherwise wouldn’t have been able to in order to give them a competitive edge. Companies with a good level of solvency indicate healthy debt levels. This can be seen from its financial statements where you can find the company’s long term debt and equity figures in the balance sheet.