Picking the Right Stock

There is no one perfect way to pick a stock. Investors with a long time investment horizon would tend to beat the short term focus of the market. Our investment objectives are important as it would influence the type of stocks we pick. Those interested in growth would seek out companies that show increasing revenue growth but earnings may be less predictable while those more concerned with capital preservation would go for undervalued companies based on value investing model favoured by Warren Buffett. When we become owners of a stock, we take a stake in the company.  If we do not understand the business well, the risk of failure is relatively higher. As such, it is ideal to find companies that we understand well. Doing some research to find out more on those companies we are keen in will allow us to understand more about their business, their market share, their growth potential and their competitors. Once we have shortlisted the companies, we should consider if they have  a sustainable competitive advantage or what Buffett would refer to as a moat, which can give a company a strong advantage over its competitors. After narrowing down to the companies with a good competitve advantage, we can start deciding on a fair price to pay for the stocks to determine if the price presents a good value. Financial metrics like P/E, P/S and P/B ratios can be used as a gauge depending on if we are looking at value or growth stocks. The final step in stock picking will be the margin of safety to minimise potential huge losses by buying companies below our estimated fair price. Value stocks do not need a wide margin of safety as compared to growth stocks with less stable earnings. We need to bear in mind that stock price is determined by future expectations. The past can only serve as a rough guide. It is near impossible to get the lowest price for a stock or to perfectly time the market. Once we have done sufficient research to make a calculated decision and when the stock price looks reasonable, we should not hesitate to buy.
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