How to Find Great Companies to Invest In

Edited bySantosh and 5 others

 Warren Buffett

Ever wonder how successful stock investors pick great companies? Here are a few steps taken from the playbook of investing greats like Warren Buffett, Benjamin Graham, and Peter Lynch.

Steps

1. 1
   Stay within your circle of competence: You are best positioned to identify winning companies within your own field of expertise. If you work in retail, you are more qualified to decide if you should invest in companies like Walmart, Target, Best Buy, etc. than the latest bio-tech company.
   
   
2. 2
   Look for Economic Moats: There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a "moat" around them to keep their competitors away. They have a durable competitive advantage. Some examples of competitive advantage are:
   
   • Brand - Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands resulting in deeper profits.
   • High Switching Costs - When was the last time you switched banks? Or cell phone providers? Or cigarette brands, if you are a smoker? You get the picture here? Companies that have high switching costs can hold on to their customers a lot longer than companies that don't.
     
   • Low Cost Producer - Companies that are able to make products and sell them at phenomenally lower prices than their competition automatically attract customers - lots of them. As long as quality is not compromised, of course. Walmart and and Dell have perfected this concept to a science.
   • Secret - Large pharmaceutical companies with patents; companies that own copyrights, drilling rights, mining rights, etc. are pretty much the sole producer or service providers in their area. Again, these companies can raise prices without fear of losing customers, resulting in higher profits.
   • Scalability - This is a product or service that has the potential to network or add more users with time. Adobe has become the defacto standard for publishing, Microsoft's Excel for spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom-line.
3. 3
   Check the quality of management: How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.
4. 4
   Even a great company can be overvalued. Learn to interpret financial statements and fundamental analysis to find one that the market has valued fairly, or undervalued.
   • Price to earnings ratios should be below 20. If the P/E ratio is over 20, then the company could be overpriced for it's earnings. Benjamin Graham popularized this indicator after the great depression.
   • Buy a Price-to-book below 2. The price-to-book ratio is the price of the company divided by the total value of its assets. A low ratio shows that the company's stock is cheap.
   
   

Tips

• Start thinking about everyday companies you come across with this new framework.
• Visit the company’s website and financial websites online that give you varied insights on the stock like Wikinvest.com and Morningstar
• Learn the basics of reading financial statements. Then, check to see how profitable the companies you're interested in are. Check their debt position. See if they have been growing steadily.

Warnings

• Never jump into buying stocks in a company unless you've sat down and done your research.
• Stay away from stock tips -- they are merely someone's grandiose theory about getting rich quick or a salesman that is paid to inflate a stock so that the company can raise money by dumping stock on unsuspecting investors.
• Warren Buffet says that it amuses him how high IQ CEO's mindlesly immitate one another. Warren says that he NEVER gets good ideas listening to others.
• While you should invest in companies you know, do not limit yourself to just one or two sectors. Try to research about companies in a variety of sectors and diversify your stock portfolio.

Related wikiHows

• How to Interpret Financial Ratio

Sources and Citations

• http://news.morningstar.com/classroom2/course.asp?docId=80345&page=1&CN=COM
• http://www.independent-stock-investing.com/Famous-Stock-Market-Investors.html

http://www.wikihow.com/Find-Great-Companies-to-Invest-In

A Primer to Ben Graham's Mr. Market (Video)

Warren Buffett - The Mr. Market Concept

Warren Buffett Secret Millionaires Club (video)

Rule Of Five

The Rule of Five is BetterInvesting's method of letting you know you're not perfect and neither are your stock selections.

It states "For every five stocks you select using BetterInvesting methods, 

• one will do much better than you expected, 
• three will do about as well as you expected, and 
• one will do much worse than you expected."

The Rule of Five forms the basis for the first step of portfolio management, defense.

Here are the three possible outcomes for a stock's fundamentals on the SSG.

Defensive portfolio management's ONLY concern is finding stocks whose FUNDAMENTALS of SALES, PRE-TAX PROFITS, EPS, & PRE-TAX PROFIT MARGIN are not meeting your projections for future quality. Click here for a more indepth discussion of defensive portfolio management or click here to see how the PERT Report is used to implement defensive portfolio management.

---

Last Modified 2005-05-13 


http://biwiki.editme.com/RuleOfFive

Developing Your Emotional Intelligence for the Next Level

by Rande Howell 06-05-2012

Most traders wake up in an emotion, never having seen the tell-tale signs of how an emotion takes over perception and runs a trader's thinking. Yet, the emotion was hiding in plain site - it is the trader's blindness that led them into a decision-making ambush. Working with emotions is not optional in the life of a trader. A trader’s lack of understanding of emotions and how they work is a major obstacle in trading performance, and it will stay that way until the trader learns to deal with emotions effectively. Most traders do not notice an emotion (fear, greed, or euphoria) until it has already corrupted their mindset and hijacked their capacity to think clearly. By the time the trader notices the "feeling" of an emotion, it is too late. When you (the trader) “feel” the emotion, it is already coursing as chemistry in your body and brain and your thinking is compromised in whatever direction the emotion is taking you.

When this happens, there is no way to put the brakes on the emotion and return to clear thinking. The best solution at this moment is let the emotional chemistry “burn” itself out so you can come back to your senses. (You can accomplish this by getting away from trading - i.e. take a walk, go exercise, go for a run – anything that accelerates the burn of the emotional chemistry in the body). But, it does not have to be this way. Let’s take a look at emotions in trading and discover how it is possible to build a path to emotional mastery.

What is an Emotion?

First, emotions are not feelings, although feeling is an element of an emotion. Emotions are not touchy-feely – they are biological. Emotions take over psychology and thinking. They are built to provoke the body and mind into specific forms of action based on the motivation of the emotion. This is why managing them is so important in trading. 

Fear, for instance, is built to avoid threat – both biological and psychological. The emotional brain, once provoked to fear, will manhandle the thinking mind to create explanations that support what the emotional brain believes. This is because all thinking is emotional-state-dependent. The key to successful state of mind management, therefore, is emotional state management. 

Second, an emotion (being biological in its nature) is defined as any disruption to a standard sensorial pattern that the brain has already established. That standard sensorial pattern is often referred to as your "comfort zone". So, as you are trading, if any deviation occurs from a pre-existing homeostasis, an emotion pops up to deal with the disruption.

Now what does that look like in trading? The movement from evaluating set-ups to committing to an entry point is just such a disruption to standard sensorial pattern. Suddenly your cozy comfort zone is disrupted and you are committing capital to risk. For many traders, this represents threat. And, if you do not develop your EQ (emotional intelligence), it will not matter how much you KNOW about trading and risk management while in the safety of your comfort zone, your trader’s hand still freezes and you cannot pull the trigger because the emotional brain dictates how the thinking mind will think. Here, the emotional brain perceives the uncertainty of putting capital to risk as a threat and jumps to fear and hesitation.

Becoming emotionally intelligent is essential to the development of successful traders. Learning how an emotion operates will give the trader an edge in managing his emotions and mastering the mind that he brings to trading.


Elements of an Emotion

Emotions are composed of a number of interlocking elements. The important thing to understand about emotions is that they are biological and they take over your psychology. Learning how emotions operate is the first step to mastering them. Here are the elements of an emotion:

Arousal. First, there is a change in the status of a trade which triggers an emotion based on the trader’s perception of threat (fear) or opportunity (euphoria or greed). What happens next is that the body begins to ramp up for action. Breathing changes. It stops or begins to become shallow and rapid. Muscles tense, getting ready to spring into action. The heart begins to race or miss a beat. You are now experiencing the arousal of an emotion. It is building, readying the body for action. This is the place you want to catch the emotion – before it builds up a head of steam and becomes an out-of-control locomotive. As the emotion’s engine revs up, it reaches a critical mass. It flips an internal switch and it springs into action. It is no longer building up – the switch is flipped and the emotion activates the feeling component.

Feeling. Feeling is the subjective experience of the emotion and is where most traders notice the emotion. However, the feeling element of the emotion is also the chemistry of the emotion coursing through your body. This chemistry is what you “feel”, and this is when the emotion contaminates thinking. In the life of emotional activation, the emotion can easily take 45 minutes to an hour for the chemistry to burn out if it is no longer being stimulated – not good for the trading mind. So you will no longer be in your “right” mind for trading if you are experiencing fear or euphoria. Both fear and euphoria set the trader up for skewed thinking. The feeling element of the emotion produces a belief in the certainty of whatever direction the emotion is provoking you to go.

Motivation. Motivation is where the emotion is taking you. Remember, emotions are biological and are about producing action in a particular direction. Those directions are called emotional motivation and are either avoid (run, hide, freeze, submit), attack, or approach. Feeling and motivation conspire to sweep the trader’s mind away. If you have ever been reviewing your trading day and wondered what happened to your right mind in the heat of trading – this is it. Motivation provided the direction of the e-motion and the feeling provided the certainty of the belief that hijacked your thinking mind.

Meaning. Meaning is the self-belief concerning the trader’s adequacy, worth, mattering, or power to manage uncertainty that becomes attached to the emotion. You can declare that you believe something, but that is only cheerleading. The proof of what you really believe about your capacity to manage uncertainty will be found in your trading account. Most traders avoid looking into their self-limiting beliefs (no matter how boldly their trading account points to them) because it creates discomfort in their comfort zone or current organization of self. This lack of courage is what keeps the trader locked in his self-limiting beliefs, that negatively impact his trading account.

Pre-disposition. Genetic pre-disposition is simply beyond the scope of this article. We are all wired with certain potentialities – it is what we do with our potential that matters, though.




Freedom of Emotion, Not Freedom From Emotion

Emotion is unavoidable in trading. The EQ skill is learning how to use emotions to produce effective states of mind for peak-performance trading. As a trader develops his EQ, he learns to regulate reactive emotionally-based pattern. The first step is to volitionally alter the arousal element of the problem emotion through breathing and tension release. By doing this, he is able to better manage the intensity of the emotion so that it does not activate the feeling state of a reactive emotion while trading. (If that occurs, the trader’s mind is compromised.) 

As he gains the emotional competence to regulate the emotion, he is able to get to the door of the trading mind. This is where he can use new-found courage to examine the beliefs that limits his capacity to manage the uncertainty of probability. Here is where meaning can be transformed - first, by discovering his inherent worth as a human being. This is really important. It is at this point that he can focus on his trading as a performance rather than a characterization of his being. At this point in the journey of a trader, he is re-organizing the meaning of self that is embedded into the emotional structure.

Here, the trader can begin to use emotion as information or data because he is no longer afraid of what he might find out about himself. He begins to see what is manifesting in his trading with far less avoidance and denial and he uses this information to design the mind that trades. No longer does he try to avoid the discomfort of reactive emotions and the self-limiting beliefs that lurk behind them. Instead, he is able to use the emotion as information that tells him where he needs to look for self-limiting patterns. He knows that emotions will lead him to what he needs to know about himself so he can grow as a trader. Fear has been transformed into reverence, vigilance, and concern. These emotional states that give rise to a peak performance state of mind are rooted in discipline, courage, patience, and impartiality.




http://www.traderslaboratory.com/forums/psychology/13312-developing-your-emotional-intelligence-next-level.html

Financial Planning and Reinvesting Your Passive Income

Reinvest money from passive income

My Cash Flow Framework

Cash Flow Diagram

HAVE YOU STARTED YOUR JOURNEY TOWARDS FINANCIAL FREEDOM?

No, what is financial freedom?	7 (6%)
No, I don't intend to start my journey.	1 (0%)
No, but I am preparing to start my journey.	26 (25%)
Yes, I have just started my journey.	40 (39%)
Yes, I am half-way in my journey.	17 (16%)
Yes, I have achieved financial freedom already.	10 (9%)

Source:  

My Investment Portfolio in Singapore

Saving Money In Singapore

Quotes/Rules of Investment

Rule no. 1: Never predict the market direction.
Rule no. 2: Don't forget the first rule.
Rule no. 3: It's far better for other to buy an overvalued stock from you, rather than you buy an overvalued stock from other.
Rule no. 4: No discipline is the key of losing money in the market.
Rule no. 5: For a wonderful company, be delighted when its stock price falls, be regretted when its stock price rises. 
Rule no. 6: Slow and steady will definitely win the race.
Rule no. 7: You can never find it easy to catch a butterfly unless you have a big net.

http://myinvestmentportfolioinsingapore.blogspot.com/2009_11_01_archive.html

15 U.K. Shares Trading Near 52-Week Lows

Published in Investing on 20 June 2012

These shares are near the cheapest they have been for a year.

Unless the market is gripped by irrational exuberance, there will always be some shares trading at depressed prices. I trawled the market to find companies whose share price is within 5% of its lowest point in a year. Investors have to determine what has led a share price to fall and what the probability is that a significant turnaround could occur.

A list like this should be used as a starting point for further research. These shares have previously been higher and could rise significantly if sentiment improves. Alternatively, the picture could worsen, driving further falls.

Company	Market Cap (£m)	Share price (p)	% off 52-week low	P/E	Yield %
Tesco (LSE: TSCO)	24,354	303	2.9	8.9	4.9
Glencore International (LSE: GLEN)	23,136	334	2.4	7.5	2.9
Wm Morrison (LSE: MRW)	6,892	278	5.0	10.7	3.9
Resolution (LSE: RSL)	2,707	197	3.3	7.5	10.1
Songbird Estates (LSE: SBD)	1,586	102	1.8	n/a	n/a
Man Group (LSE: EMG)	1,330	74	3.2	18.0	14.4
African Minerals (LSE: AMI)	1,108	336	1.3	n/a	n/a
Genel Energy (LSE: GENL)	805	605	3.2	n/a	n/a
APR Energy (LSE: APR)	564	722	1.6	n/a	0.9
Fidessa (LSE: FDSA)	550	1,495	3.9	18.5	2.5
Computacenter (LSE: CCC)	500	325	4.4	8.9	4.6
Shepherd Neame (LSE: SHEP)	497	625	0.8	12.6	3.8
Halfords (LSE: HFD)	476	239	2.4	7.0	9.2
Shanks (LSE: SKS)	308	78	0.7	11.4	4.4
London Mining (LSE: LOND)	292	212	2.7	n/a	n/a

Here are three shares I found particularly interesting.

1) Tesco

In the entire FTSE 100 (UKX) index, there is not a single company with a lower price-to-earnings (P/E) ratio, higher dividend yield and better forecast profit growth than Tesco.

The shares trade on 8.8 times forecast earnings for 2013. The forecast dividend yield is 4.9%.

21 FTSE 100 stocks are expected to pay a higher dividend than Tesco. The same number of FTSE 100 companies trade on a lower forward P/E. Only eight FTSE 100 companies trade on both a higher expected dividend and lower forward P/E than Tesco. None of those eight companies is expected to match Tesco's profit growth. At today's price, Tesco represents a unique proposition of blue-chip value, income and growth.

Much of the investment discussion on Tesco describes the company as "struggling". That pessimism is not matched by the professional analyst community. They expect Tesco to deliver modest eps growth for 2013 of 1.0%, followed by 7.7% growth for 2014. The dividend is forecast to rise 1.2% for 2013 and by another 7.9% for 2014.

Investors may have been encouraged by Tesco's recent announcement that it is withdrawing from the Japanese market. This decision leaves management more focused on the company's core markets. Worryingly, trading statements from rival firms such as Sainsbury's (LSE: SBRY) suggest Tesco is losing UK market share. Tesco's success in the UK market had driven international expansion and shareholder returns. The company's current valuation suggests investors expect Tesco rivals to continue to gain ground on the market leader.

2) Fidessa

Don't be fooled by the current low in Fidessa's share price. The financial software specialist is a great growth story.

Fidessa provides multi-asset trading and analytics software to major investment banks and asset managers.

Fidessa has established itself in an industry where technology solutions have enjoyed increased demand. Fidessa software might be used by a stockbroker to send your trades to the market and then report the transaction back to you electronically. Fidessa's products are also used by the increasingly significant algorithmic trading desks.

In the last five years, the company has delivered compound eps growth of 21.2% per annum. The dividend growth averages out at 22.7% every year.

It would appear Fidessa has suffered some rating compression. Five years ago, the company traded on a forward P/E in the high 20s. Although growth was delivered, the market is now placing a lower rating on Fidessa shares. Today, the company trades at 18.1 times the consensus 2012 eps forecast and 16.7 times the estimate for 2013.

Shares in the company have fallen 21% in the last 12 months. This might be explained by the previous high rating and the fact that analysts are now expecting single-digit growth for the next two years. For the shares to rise from here, either Fidessa will have to deliver better growth or the market will have to start expecting it again.

3) Songbird Estates

Songbird Estates is one of the largest companies listed on AIM. Unfortunately, that means the shares are not eligible for ISA investment.

Songbird's share register is dominated by three overseas investment groups. Their combined holdings total 68% of the shares in issue. As a result, there is not a lot of liquidity in the company's shares.

It appears that the company's small free float and lack of dividend are deterring investors.

The company's operations have traditionally focused on Canary Wharf. Songbird owns a majority stake in Canary Wharf Group, owners of the eponymous tower. The Canary Wharf estate spent a long time being derided as a white elephant. This changed in the mid-90s when the working population there more than doubled in four years. The company is now diversifying beyond Canary Wharf. Such large-scale construction projects are long-term in their nature.

Perhaps it is the absence of a fast payout that is seeing investors send their cash elsewhere. However, for long-term investors Songbird looks to be one of the best ways to get exposure to the multi-decade boom London is enjoying. Other companies looking to exploit London's construction and development bonanza include Capco (LSE: CAPC) and Quintain Estates and Development(LSE: QED).

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

• 2 Share Tips For Olympic Gold
• The 12 Fastest-Growing Blue-Chip Shares
• A £332 Billion Problem For UK Investors

> David does not own shares in any of the above companies. The Motley Fool owns shares in Tesco and Halfords.

http://www.fool.co.uk/news/investing/2012/06/20/15-shares-trading-near-52-week-lows.aspx?source=ufwflwlnk0000001