Risk & Reward
By: Investment Hub
Tags: Equity, Money, Stock Market, Stocks, Investing

Research, Research and dare we say…Research.

Before getting excited, we always try our best to take an educated approach to any investment. When we invest in companies we want to be smart and ensure that we feel comfortable in many areas, such as:

The Management behind the company;

The Financial health of the company;

The Total Addressable Market (TAM) & Competitors; and

Lastly the price you’re actually paying.

Although the above may seem like a lot of information to digest, we decided that it would be a good idea to just give you a brief overview of what you should be looking for (prior to releasing more detailed content in these areas).

Management Behind the Company

Every company is directed by a Management team who are tasked with the responsibility of maximising Company profits, whilst keeping the Company ahead of the curve.

We as investors are buying and selling shares in Companies through mobile applications, and therefore have absolutely no physical interaction with management.

So how can you trust somebody you’ve never met?

Well as stated before, you’re going to need to research.

Treat it as an investigation. The who’s, the what’s and the why’s.

Understand what previous experiences management have been exposed to, and whether or not they have a high success rate of execution. Without sound management in place, the chances of profit maximisation are significantly reduced.

Management are the equivalent to the captains on a ship, or the pilots on a plane, they decide how things go and you need to trust them! But unlike pilots or captains, their achievements or mishaps are under microscope and can easily be found on the internet. So research!

Today we live in a day and age where anything can be found on the internet and most people’s lives are on:

Twitter, LinkedIn, Instagram, Youtube and good-old Google!

The Financial Health of the Company

Undoubtedly, this is quite a technical area to get into when assessing an investment, but by no means do you need to be a certified accountant to decide whether or not the Company in question is in good financial health to execute on its targets or not.

Although Organisations cannot vocally communicate to us, they still can communicate to us through ‘the language of business’.

This is done through three sets of financial statements:

The Statement of Profit or Loss (aka. Income Statement);

The Statement of Financial Position (aka. Balance Sheet); and

The Statement of Cash Flows.

Each quarter (3 month period) Companies registered on the stock exchange need to produce these statements, which can be found on the investor relations page under the following headings:

10Q for Quarterly earnings; and

10K for Annual earnings.

Take a look around and see what you can understand.

As always we are open to conversation so reach out, you can now!

This is an area that needs an element of dedication to understand, however, we’ve got your back! We’ll be releasing 101’s in the near future covering all this in a simplified manner.

Total Addressable Market & Competition

When investing we always want to ensure that the industry is up-trending and has a huge amount of growth potential in front of it. Investing is a forward looking motive and we need to keep our eyes on the future, that is 2–5 years, or sometimes even more. The more the addressable market grows, or has potential to grow, the better!

You should also take note of the competitors in the same industry, and assess how well positioned your Company is to accumulate market share.

As an example, if you’re interested/invested in Nike, make sure to also check out their competitors…Adidas and Puma.

Getting in at the right price

The markets can be a pretty hostile place, and the current market is no exception. Even though we do not agree with trying to time the market, we also don’t want to get into an investment when it’s too pricy. If you buy shares in a company that is overvalued then you may be setting yourself up for disappointment.

So how do I value shares in a company?

Well…there are many factors that go into this, and a couple of metrics too, like, the forward and trailing PE ratios.

Once again, because this is a technical area, we decided to cover this in a future article with the help of an expert in the field, who can basically breakdown valuations to the point where it becomes stupid-simple.

As a warning to all, historically the market has never been this expensive, potentially meaning that shares are being overbought, thus translating to an over valued market, which could lead to a correction.