Task #1: figure out who is going to make more money than the competition.
Easier said than done, but investing is 90% research and 10% luck, not the other way around, at least for professionals...
I put in a month of Sundays worth of research before I would buy anything. If you do your stuff right the market won't pass you by.
The first time I ever did a full on model I tracked the stocks of a particular industry for a few months and read every jot and tittle I could about the industry... I interviewed people. I asked questions. I read about 1000 balance sheets. I learned who was integrated how.
The result? In a non internet industry (oil)(for my project) I netted over 800% returns in just over 6 months under real market conditions. That does not happen every day, but it was interesting when it did! I was in the right spot at the right time. Too bad I was a student and had no real money to put into it...
Study the company and its composite make-up. What makes its top line and what makes its bottom line. Not what is the bottom line, but what makes it what it is...
Then compare that to all the others in the same industry. When you get corporations that are conglomerates of many unrelated industries that can get complex....
Geography matters as well. Where are they making the money? Many corporations earn revenue globally... figure up the revenues country by country if possible....
Just imagine a car engine... take the whole thing apart and compare parts from one engine to the other... The carberator on this one is XYZ... the pistons on that one are ABC....Then come up with how each component creates what you see in the balance sheet (or in how the engine runs)...
Homework pays. Put it that way.
Thanks for the reply again!
I don't want to sound like we'd bring out a dartboard to pick our stocks, on the contrary. I think that a group environment would be much more beneficial as far as research goes than doing it individually (at least on my end, being relatively new with an extra few pairs of eyes helps).
You offered a lot of insight as to what you did to recognize a good pick when you saw one. I do appreciate it. I only wish, as I'm sure you do, that you used real money! That's quite an accomplishment.
Like I mentioned earlier, I think the extra set of eyes would help. It's a small amount of money that we'd be investing, and I highly doubt any high-risk investments. If it turns out poorly, then we know what not to do while hopefully minimizing losses. If it turns out well, it will serve as a great learning experience for everyone involved. Then and only then would I entrust any sum of money into the stock market with only my oversight. (Hint: LONG way away).
Your analysis of the workings of companies is much appreciated. There is indeed quite a lot that factors into a bottom line, which makes for a lot to research when doing your homework! Thanks again for your post!