Investing For Fearless Men

If you are earning and managing to save some money on the side, well done, that’s the first step to making your money work for you. Banks aren’t really rewarding savers so much at the moment, so how can you increase your returns? How can you make your savings work truly for you? There are many ways, investing in stocks, property/land or starting your own business. This article is going to show you how to become Fearless with investing in stocks! Cue Fearless Stock picking..

Fearless Stockpicking

There are many ways to get involved with the stock market. You can choose to invest in a fund, run by a fund manager. You can choose to invest in tracker funds, that track a market, like the FTSE 100 or the S + P 500. You could buy commodities, or currencies. But I’m going to show you the way to become fearless- investing in stocks.

Many people, even big burly guys are afraid of investing. Many don’t understand it, many follow fads, buy and sell at the wrong times, and just make every mistake in the book. I know, I’ve made a few mistakes myself! Well, Warren Buffett has made the same mistakes as me, so I don’t feel too bad!

I’m interested in helping you guys to become truly fearless investors. I want to help you start the journey (or help you along, if you have already started) with becoming a great stock picker. I had a think about it, trying to organize it logically and came up with a list of 10 tips for fearless stockpicking:

10 Tips for Fearless Stock Picking

1. Choose the market leader (or a company that has a very strong brand)
2. Look out for companies with the highest profit margins
3. Choose companies in industries with long term potential
4. Pick a company that is shareholder orientated
5. Choose companies that have had a history of stable earnings growth
6. Seek companies with great R and D or companies that have a history of innovation
7. Go for companies that have low debt to asset ratios
8. Celebrate and seek companies that have high ROCE/ROA (I’ll explain!)
9. Favor companies that are easy to understand
10. Remember to go for companies that are easy to follow

1. Choose the market leader (or a company that has a very strong brand)

Choosing the market leader or that of a strong brand has multiple examples.
They are likely to be the go-to company. They are more likely to win the new customers/clients. They are more likely to have stronger balance sheets. They are more likely to have global ambitions (or be already situated on a global scale). They will have large marketshare (by definition) and will likely have large mindshare (people think of them when they think of the general industry- fizzy drinks=coke for example).

One can make money from small companies, but here I want to advise fearless bullet-proof strategies.

2. Look out for companies with the highest profit margins

Bizarrely it is not always the biggest companies that have the biggest margins, but it can be the case. Macdonalds has a massive margin compared to many other fast food chains. Anyway, go for companies with big margins.

They will do well in any market, good or bad. They will have more room to grow in any market, more money to expand, and more wiggle room with suppliers. Plus, they can take commodity pressure or supplier cost rises easier, as they already have the biggest margins. Those with tighter margins are inferior in this respect, and may struggle in tougher times. Further, some of the inferior competition will not be able to grow in tough times (some may go bust) thus this leaves the market leader (or a company with great margins)to grow even more. As a note, the Australian share market is performing well.

3. Choose companies in industries with long term potential

Long term potential. What’s long term? Well I consider 50+ years long term.
Warren Buffett eloquently pointed out that a Coke share bought when it listed in circa 1920 would now be worth over $5 million. One twenty dollar share. That’s long term.

Well, if you pick the right companies you can easily, EASILY, find companies that double, triple or (if you pick well) grow by x10+ in 10 years. I’ll highlight a few of these at the end of this blog post.
Don’t quit on me yet folks.

4. Pick a company that is shareholder orientated

There are tons of companies out there that have flashy annual reports that are really screwing over shareholders left, right and centre. Be careful. Main things to look for are Not the earnings of the CEOs and Directors. They have to earn a living. Rather, far more important, is the scrip issues and dilution of shares that can wipe out EPS growth and, more importantly, your profits.
Scrip issues and other ‘share offerings’ are often when the company wants ‘to grow’. Instead of utilizing a bank, or by waiting for organic earnings to finance growth, they dip into the shareholders’ wallet. While they can be okay companies, and can grow, I prefer for companies to grow due to their own strength and finances, not mine. Avoid them.

On the positive sign, look for companies that are doing the opposite. That is, they are buying back company shares, thus decreasing the share pool, increasing the net worth of each remaining share. This is a very good sign. It can also show that the company has a) excess cash b)is so confident in its own ROCE that it believes cancelling shares is the best way for a return on its own cash. A very positive sign of a shareholder orientated company.

If they are buying back shares and not giving out a dividend they are likely to be a growth company that want to ‘invest’ in themselves by reducing the outstanding stock and increasing the value of the company. Many growth companies then give out dividends at a later stage. These are clues though, share buybacks, and no dividend = potential growth company.

5. Choose companies that have had a history of stable earnings growth

Forget fancy promises. Just look at the facts. Has the company grown over the past 3-5 years? Have they grown over the past 10 years? If not, why are you considering them? Yes, some can turnaround, but to make it easier, there are tons of companies doing well right now!

Also, be careful not to exclude companies that have off years. Companies are like people, people don’t always perform well at their jobs, they have off days, and so do companies. I would say over a 10 year period it is okay to have off years, especially if there has been turbulence in the macro economy like from 2008-2012. Though it is interesting when companies can still grow in bad times. Find out how they are doing this- is it because they are low cost or because they are a true growth company?

Some companies are growth companies; they grow in any market, most years. Seek these out.

6. Look for companies with great R and D or companies that have a history of innovation

Research and development is important for product companies. New products are more important to the consumer market than the B2B or B2G markets. Either way, a strong research department means new products and services being developed and new streams of income. Which equals more growth in EPS and more bang for your buck.

If there is hardly any R and D, that is ok too. There’s not much R and D needed for a Hotel chain or a restaurant business. You might like to add ‘innovation’ to it, which includes a wider range of businesses.

Alas, even then some businesses just do not need to innovate that much.In that case figure out the metrics for the industry. Find differentiators that make the company stand out. If there are none- is it worth investing in them?
Maybe they have other factors. Remember not all companies that are investment-worthy fit all of my 10 rules… (go for companies that fit most).

7. Go for companies that have low debt to asset ratios

Even great companies can be saddled with debt. If they have debt their growth can be stunted. This is especially true for cyclical stocks. Catch them on the rebound (more on cyclical stocks here). No debt or low debt for the industry is what you are after.

8. Celebrate and seek companies that have high ROCE/ROA (I’ll explain!)

Return on capital employed or return on assets are just another way of saying how much money they can make from £1 or $1. If their ROCE is high it means they are efficient and it is a good sign of a god operation. Banks in the UK are offering about 1% ROC- return on your capital. Some are offering less I think.. I don’t put my money in the bank or bonds because I look for better returns…..

A good ROCE is over 10%. I look for ROCE rates of around 20%+. I have also found companies that offer ROCE of above 40% for 5 years+. Their shares have risen accordingly ( over 30 times in about 15 years). That’s another story really..

One thing though, companies may be spending money too, hindering their current ROCE in favour of future growth. That can mean that ROCEs are currently low. That’s okay. You can look at Earnings per share growth. Try to think- will this continue? With the combination of earnings growth and their investing for the future they could be good.
Ask yourself- Can they grow for 50 years? For 5? For 20? The longer the time frame, the better.

When these growth companies grow, they often split shares- not a bad thing as they are Not adding shares so as to reduce your stake, they are just splitting 1 into 2 or 1 into 3, or whatever. They are not reducing your stake, but increasing the quantity, often to keep the share price affordable to new investors. Same value. So if you buy, lets say 1 share in said growth company, you could hold for 30 years at which point it has split 3 times for 1 to 3 so you will have 9 shares. You can leave excess shares to children. That’s long term fearless investing people!(think coca cola and $5 million!

They are exceptions to this though.. just look at companies that cost a lot for 1 share… (google, apple, Berkshire Hathaway A shares- happily they created the B shares!)

9. Favor companies that are easy to understand

True fearless investing means getting it. If you can’t get the company you will worry with every last damn thing the economy does. But think to yourself, does wars, drought or terrorism really stop people drinking Coke? Does it stop you buying trainers or going to buy groceries. No.

Go for simple companies you will want to own for 5 years. Watch these double, triple or more. Fearless investing.

10. Remember to go for companies that are easy to follow

Some companies like to diversify and spread. Ok, fine. Just make sure you understand what is happening. Don’t sell before trying to learn. If you can’t understand what’s going on I really cant advise you on what to do. You’re in gambling territory, not investing territory.

About the Author

Jake Welford writes for Ways to Fatten Your Wallet, on a marketing blog and is now producing videos on his Youtube site too.