The most important thing about investment is strategy. Depending on whether or not there is an excellent strategy, it can be a successful investment or a failed investment. But there is something more important than an excellent strategy. It is just patience and consistency.
No matter how good a strategy is, if you do not have patience, you can not fail. Especially for individual investors, even if they invest with good investment strategies, most of them fail. The reason is that most of them do not maintain the consistency of their strategies.
Conversely, a person who is investing in patience and consistency, even if it is somewhat lacking strategically, can make a better return on investment than others.
That does not mean you have to be patient and consistent. First, you need to select good stocks to get return on investment. This means that you can get the best return on investment by selecting the best stocks and holding them to the end. In order to invest with patience and consistency, you need to have a “good stock” that can show patience and consistency.
So how do you find good stocks? Patrick O’Shaughnessy, author of Millennial Money, says five criteria must be met for stock investments that deliver exceptional results.
Many people forget the basic principles of investment. Investing in equities without the basic principle of investing is like floating in the open sea alone without a compass.
Patrick’s selection strategy
1. Find a company that is implementing shareholder-friendly policies.
Companies that implement shareholder-friendly policies are actively involved in returning to shareholders and repaying debt. These companies usually have a negative ratio of cash flow to financing activities compared to the market capitalization because the company is paying out dividends, buying treasury stocks, or paying off debts.
2. Find companies with high return on investment.
ROI(Return On Investment) = net profit / investment capital
Companies with high return on investment are companies that generate high profits by investing in facilities, workers, and research and development. When the net profit is divided by the investment capital, the higher the number, the higher the return on investment capital.
3. Find a company with a good profit.
A company with a good profit is a company with a strong cash flow.
Many people pay attention only to the net profit of the company, but the real thing is the actual cash flow. Net profit can trick numbers. But the flow of cash is difficult to deceive.
If you want to see the cash flow, you can subtract the operating cash flow from the profit on the business report and divide it by the market cap. The lower the number, the better. A low figure means that cash flow is higher than net profit.
4. Find a company with low stock prices.
Companies traded at lower prices than profits or cash flows are undervalued.
When will there be a profit opportunity in stock investment? Awareness of stock prices is different from the fundamentals of actual companies. This can be judged by the operating cash flow for the stock price and the surplus cash flow for the enterprise value.
The operating cash flow for the stock price is divided by the cash generated from ordinary operating activities. And the surplus cash flow against the corporate value can be divided by the enterprise value (EV) into the surplus cash flow.
The surplus cash flow is the sum of operating cash flow minus expenditures of assets, equipment, and land.
5. Look for companies that increase expectations of market participants.
Companies with rising stock prices can expect to get enough revenue in a relatively short period of time because they raise expectations for market participants.
The intrinsic value that a company has is always important. However, it takes quite a long time for these value investments to shine. So, if you take advantage of momentum, it will help you to decide when to buy stocks of companies with low stock prices.
Momentum is a tendency for stock prices to fluctuate continuously in one direction, which usually takes advantage of 6-month momentum. In other words, looking for stocks with the highest total returns over the last six months. Here, gross revenue refers to both dividends during the period and gains from stock price increases.
Note that if you take advantage of momentum, you may be buying more expensive. In order to take advantage of momentum, more attention should be paid to the selection of stocks.
The criteria presented by Millennial Money may be perhaps the most basic. But it is a criterion that have to check before buying stocks.
The most important thing about stock investing is that it is never buy expensively. Do you think it is natural? Surprisingly, many people buy at high prices.
Remember. The lower the price you buy, the greater the profit. It is a very basic and basic principle, but it is the principle that is not followed most.