“What has the question above got to do with investing?”, you may ask.
It has a lot to do with investing. You see, if you do not make the decision to commit the rest of your life with someone whom you meet for the very first time, then why are you making the decision to put your hard-earned money (which took you many years to painstakingly save up) into a company the first time you hear about it – whether is it from the investing forum, from a friend who tells you that the company is a good buy, or from a broker’s recommendation (I see many, especially those who are new to investing, doing exactly that, which is why I’ve decided to write this post to talk about it, along with sharing with you what you should do instead before you invest in a company.)
Just like you take the time to first understand someone inside out before you make the decision to spend the rest of your life with him/her, you should also spend sometime to first study and understand the company before you make the decision to invest your hard-earned money in it.
The following are 3 things I strongly suggest you do to help you get a better understanding of the company (and just by doing the 3 things below, you can increase the chances of seeing your money grow from your investment in the company):
1. The Company’s Business
One of the reasons why individuals suffer from crushing losses in their investments is because they know nothing about the company they invest in – some of them may be operating in sunset industries which they are not aware of, and over time, they see their investment losing money as the company’s share price go on a downward slide.
This is why it is especially important you only invest in companies with businesses you understand (as you will be able to identify threats to the businesses and should the company’s business comes under this threat one day, you will be able to re-consider your investment in the business, and sell your shareholdings before its share price fall to rock bottom), and it is what I’ve been doing as well, where I only invest my money into companies with businesses I understand.
If you look at my personal long-term investment portfolio (you can check it out here), you should be able to almost immediately identify the businesses they operate in for most of them.
2. The Company’s Financial Performances over the Years
The next thing I will do is to check on the company’s financial performances over the years (I tend to prefer to invest in companies where there are at least 5 years worth of financial performances to look at) to find out if they have been improving or deteriorating. You can find out a company’s financial performance from its annual reports, which you can download from the company’s “investor relations” page.
Personally, I will avoid investing in companies where its revenue and net profit (you can get the statistics from the company’s income statement page from its annual report) have declined over the years; my preference is towards companies which have exhibited an increase in its revenue and net profit for at least the past 5 years.
3. Increase in Dividend Payouts to Shareholders by the Company
I’m not sure about you, but I love it whenever I receive some cash on a periodical basis (in a form of dividends) from the company I’ve invested in.
This is another area I look at before I decide whether or not to invest my hard-earned money into a company – its ability to not only be able to reward shareholders in a form of dividend payouts on a regular basis, but at the same time is also able to increase its dividend payouts to shareholders over the years.
You can find out a company’s dividend payouts to shareholders in its annual reports – My preference is to invest in companies that have steadily increase their dividend payouts to shareholders over a period of at least 5 years.
On the other hand, I tend to avoid investing in companies that have seen their dividend payouts decline over the years – as most of these companies that does so are often in some sort of trouble.
For those who are new to investing and do not know where and how to get started – I have just documented simple steps you can do to first screen the companies you come across to make sure you have a good understanding of it before you invest your hard-earned money in it.
I hope you’ll find the above useful. If there’s anything you’d like to seek clarification on, or if there are any topics you’d like me to cover in my future posts (relating to short-term trading/long-term investing), please feel free to send me a message here.
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