Are these good steps to find a good business?

RandomInvestor · 11 October 2016

Hey there guys so I wanted to make my self steps that I follow for investing. These are my steps (please any feedback/suggestions to improve is greatly appreciated)

I also have some guidelines/rules that I want to follow and only invest in businesses that meet that criteria.

1. Choose a random business listed on the public stock exchange.

2. Go on the company's website and find out as much as the possible so I know the company what it does its operations its products etc, well enough so when someone asks me for example "what does Mcdonalds do" I can give them a strong straight forward answer.

3. Read every annual report from when the company started to the date today.

4. Read every financial statement such as , Income, balance, cash flow statements. And determine health of company based on certain figures.

5. Haven't achieved yet which is IF the business is solid and has potential to grow is to find the intrinsic value formula for the business, but this has long to go I believe.

luutzu · 11 October 2016

RandomInvestor said:
Hey there guys so I wanted to make my self steps that I follow for investing. These are my steps (please any feedback/suggestions to improve is greatly appreciated)

I also have some guidelines/rules that I want to follow and only invest in businesses that meet that criteria.

1. Choose a random business listed on the public stock exchange.

2. Go on the company's website and find out as much as the possible so I know the company what it does its operations its products etc, well enough so when someone asks me for example "what does Mcdonalds do" I can give them a strong straight forward answer.

3. Read every annual report from when the company started to the date today.

4. Read every financial statement such as , Income, balance, cash flow statements. And determine health of company based on certain figures.

5. Haven't achieved yet which is IF the business is solid and has potential to grow is to find the intrinsic value formula for the business, but this has long to go I believe.

Don't chose a random business, choose one whose business (and size and operations) are simple enough that you could understand it.

You don't really need to read every financial statement or annual report in detail at first. Unless you want to for educational purposes, then sure. But I would just look at a few key figures and ratios... then if it look like it's a good business, then proceed to do a more detailed financials.

So if the company doesn't make any money for years; or appear high quality stuff but its price seems too high... poor business you can just ignore; good ones but high price now maybe leave til later... the fairly good company at reasonable or seemingly cheap price you can start to take a much closer look.

For detailed studies of established and great businesses, or failed ones, that you want to study to learn from... then pick those directly. Not randomly going through the entire market.

Tightwad · 11 October 2016

it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.

galumay · 11 October 2016

Tightwad said:
it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.

Indeed, and the idea of reading every AR of a company for the last 10 years fills me with dread!

RandomInvestor · 11 October 2016

luutzu said:
Don't chose a random business, choose one whose business (and size and operations) are simple enough that you could understand it.

You don't really need to read every financial statement or annual report in detail at first. Unless you want to for educational purposes, then sure. But I would just look at a few key figures and ratios... then if it look like it's a good business, then proceed to do a more detailed financials.

So if the company doesn't make any money for years; or appear high quality stuff but its price seems too high... poor business you can just ignore; good ones but high price now maybe leave til later... the fairly good company at reasonable or seemingly cheap price you can start to take a much closer look.

For detailed studies of established and great businesses, or failed ones, that you want to study to learn from... then pick those directly. Not randomly going through the entire market.

When I say random I don't say buy random I mean inspect random business like choose one for example of the asx 200.

RandomInvestor · 11 October 2016

Tightwad said:
it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.

Yeah that's my criteria which I haven't mentioned. I am looking for companies little to no debt, high rates of return on equity and on assets, high cash flow, assets and least double of liabilities.

systematic · 11 October 2016

RandomInvestor said:
Yeah that's my criteria which I haven't mentioned. I am looking for companies little to no debt, high rates of return on equity and on assets, high cash flow, assets and least double of liabilities.

Sorry; could you clarify that criteria?

RandomInvestor · 11 October 2016

systematic said:
Sorry; could you clarify that criteria?

What do you mean? What I said doesn't make sense or?

systematic · 11 October 2016

RandomInvestor said:
What do you mean? What I said doesn't make sense or?

...yes (just a bit of clarifying)

RandomInvestor said:
I am looking for companies little to no debt, high rates of return on equity and on assets

...this bit is okay

RandomInvestor said:
high cash flow

...in relation to what?

RandomInvestor said:
assets and least double of liabilities.

...I don't understand this

Smurf1976 · 11 October 2016

An easier way to that approach would be to first screen the entire ASX for stocks which meet your financial criteria.

For example, you might want (picking random things here just for example and not a recommendation) to find only those stocks which:

Pay dividends at a rate exceeding x% return per annum

Have a P/E under whatever amount

Have a trend of increasing earnings over the past x years

Those are just random examples but my point is that if you were to screen the entire market first, coming up with only those stocks which meet your specific criteria, then that's (1) going to avoid wasting time looking at stocks which upon manual investigation don't meet your criteria and (2) will turn up companies that you've never even heard of but which are actually pretty decent businesses albeit not well known ones.

Using that approach I've had 100%+ capital gains, plus dividends, on a number of stocks that I'd never heard of previously and in industries I hadn't really thought much about. One owns theme parks and other things of that nature, another is a travel agent, another is an oil company but they don't sell fuel to the public so aren't a well known name, another owns hotels, another makes and sells things to heavy industry and mining but isn't itself in the mining business as such. All companies that aren't well known "household" names and which I knew nothing about until they came up based on screening for financials and went from there with further research into what turned out to be pretty decent investments.

If you're wanting to invest (or avoid) specific industries then always do proper research and never assume what the company does even if it's a well known one. There's plenty of surprises there in terms of what businesses actually do and that's true even with fairly well known ones.

So_Cynical · 11 October 2016

RandomInvestor said:
1. Choose a random business listed on the public stock exchange.

This is a good exercise, i would start with very small company's, MC less than 80m as these business tend to be straight forward and easy to understand, i often just flick through random stocks looking for something that stands out.

RandomInvestor · 11 October 2016

systematic said:
...yes (just a bit of clarifying)

...this bit is okay

...in relation to what?

...I don't understand this

Oh I see, I didn't think about the relation I just mean't cash flow in trouble, but now that you said it I guess cash flow in relation to the capital expeditures and total debt.

RandomInvestor · 11 October 2016

Smurf1976 said:
An easier way to that approach would be to first screen the entire ASX for stocks which meet your financial criteria.

For example, you might want (picking random things here just for example and not a recommendation) to find only those stocks which:

Pay dividends at a rate exceeding x% return per annum

Have a P/E under whatever amount

Have a trend of increasing earnings over the past x years

Those are just random examples but my point is that if you were to screen the entire market first, coming up with only those stocks which meet your specific criteria, then that's (1) going to avoid wasting time looking at stocks which upon manual investigation don't meet your criteria and (2) will turn up companies that you've never even heard of but which are actually pretty decent businesses albeit not well known ones.

Using that approach I've had 100%+ capital gains, plus dividends, on a number of stocks that I'd never heard of previously and in industries I hadn't really thought much about. One owns theme parks and other things of that nature, another is a travel agent, another is an oil company but they don't sell fuel to the public so aren't a well known name, another owns hotels, another makes and sells things to heavy industry and mining but isn't itself in the mining business as such. All companies that aren't well known "household" names and which I knew nothing about until they came up based on screening for financials and went from there with further research into what turned out to be pretty decent investments.

If you're wanting to invest (or avoid) specific industries then always do proper research and never assume what the company does even if it's a well known one. There's plenty of surprises there in terms of what businesses actually do and that's true even with fairly well known ones.

Thanks smurf didn't even know about that thanks.

systematic · 11 October 2016

RandomInvestor said:
Oh I see, I didn't think about the relation I just mean't cash flow in trouble, but now that you said it I guess cash flow in relation to the capital expeditures and total debt.

...Ok

RandomInvestor said:
assets and least double of liabilities.

...what does that mean? I think you've got a typo or something? Current ratio?

luutzu · 11 October 2016

RandomInvestor said:
When I say random I don't say buy random I mean inspect random business like choose one for example of the asx 200.

Yea, I know what you meant. Just what I'd do is not pick a random company to analyse either.

If your work or life experience suggest that businesses in a certain sector would be more interesting or easier for you to start with... then start with companies in that sector/industry. So companies in, say, banks or insurance, where you're not familiar with, do that later as you expand and got more familiar with other aspects of business analysis.

Can't study all things at once... so the first hurdle would likely be the financial statements. Might not be a good idea to learn both financial interpretation as well as a completely unfamiliar business.

ANyway, just my opinion on what I do...

----

Regarding filtering for financial ratios as others have suggested. It's a good idea but what I found is you'd only want to use that prefiltering approach when you could invest in anything. But financial ratio filters alone could mean you might miss a great business that by mathematical roundings, did not hit your criteria and so you miss out completely.

Say, a great up and coming company that has only started to earn its profits after years of investment. Put in any sensible financial filters and you're definitely going to miss that kind of rare find. And it is rare so might not be worth the troubles to scour the entire market in hope of finding one when you're starting to get to know the market.

A good example of what I'm talking about would be Anaeco.
It's been a big loser, literally makes no money for 16 years and about to go bankrupt only 2 months ago.

It doesn't fit any financial metrics indicating a potential game changer for the portfolio... but if you read its business history and follow its development; it's worth a great deal of interest to any investor. Don't want to speak too soon but what I almost gave up for dead is changing my entire portfolio.

Anyway, depends on how we approach investing. As business owners or as simple financial analysts. For what it's worth, a good investor got to know how to use both business and financial ratio sensibly.

RandomInvestor · 11 October 2016

systematic said:
...Ok

...what does that mean? I think you've got a typo or something? Current ratio?

Well I was reading that assets that are higher than liabilities is better. I guess cause more assets than debt, liabilities is debt pretty much right?

RandomInvestor · 11 October 2016

luutzu said:
Yea, I know what you meant. Just what I'd do is not pick a random company to analyse either.

If your work or life experience suggest that businesses in a certain sector would be more interesting or easier for you to start with... then start with companies in that sector/industry. So companies in, say, banks or insurance, where you're not familiar with, do that later as you expand and got more familiar with other aspects of business analysis.

Can't study all things at once... so the first hurdle would likely be the financial statements. Might not be a good idea to learn both financial interpretation as well as a completely unfamiliar business.

ANyway, just my opinion on what I do...

----

Regarding filtering for financial ratios as others have suggested. It's a good idea but what I found is you'd only want to use that prefiltering approach when you could invest in anything. But financial ratio filters alone could mean you might miss a great business that by mathematical roundings, did not hit your criteria and so you miss out completely.

Say, a great up and coming company that has only started to earn its profits after years of investment. Put in any sensible financial filters and you're definitely going to miss that kind of rare find. And it is rare so might not be worth the troubles to scour the entire market in hope of finding one when you're starting to get to know the market.

A good example of what I'm talking about would be Anaeco.
It's been a big loser, literally makes no money for 16 years and about to go bankrupt only 2 months ago.

It doesn't fit any financial metrics indicating a potential game changer for the portfolio... but if you read its business history and follow its development; it's worth a great deal of interest to any investor. Don't want to speak too soon but what I almost gave up for dead is changing my entire portfolio.

Anyway, depends on how we approach investing. As business owners or as simple financial analysts. For what it's worth, a good investor got to know how to use both business and financial ratio sensibly.

Ok thanks, I had a important question that's always on my mind I never saw the point of ratios like debt to equity ratio is total liabilities divided by stock holder equity. But I could of sworn that is was total assets - total liabilities anyways, couldn't I just look at total liabilities and stock holder equity seperatly? I don't see the difference.

systematic · 12 October 2016

RandomInvestor said:
Ok thanks, I had a important question that's always on my mind I never saw the point of ratios like debt to equity ratio is total liabilities divided by stock holder equity. But I could of sworn that is was total assets - total liabilities anyways, couldn't I just look at total liabilities and stock holder equity seperatly? I don't see the difference.

Was starting to reply, but here - read this, it does a better job investopedia

Also, it's not always total liabilities to equity. As a few people have said recently, you need to learn the ratios to determine how you want to use and define it. For example, if I were to look at debt to equity, I might want to look at long-term debt to equity. I might not want current liabilities taken into account.

RandomInvestor · 12 October 2016

systematic said:
Was starting to reply, but here - read this, it does a better job investopedia

Also, it's not always total liabilities to equity. As a few people have said recently, you need to learn the ratios to determine how you want to use and define it. For example, if I were to look at debt to equity, I might want to look at long-term debt to equity. I might not want current liabilities taken into account.

Ah ok but coudln't you just look at total liabilities to look at the long term? Also I don't see the relation for the d/e ratio the stock holders equity part, what does the money that the stock investors put into the business matter for debt? Or is it an indicator how much debt is been stacking up compared to how much money poured in? If that's the case wouldn't we just use return on equity?

galumay · 12 October 2016

Part of the answer is that different types of businesses need different approaches for analysis and different metrics become more or less relevant. Sometimes you may choose a metric to concentrate on for comparison of businesses in the same sector, but if you are comparing companies in different sectors you may choose a different metric.

IMO good analysis and research skills can't be developed just by understanding and choosing a set of metrics or formulas to enter data into. Its also something that doesnt have a defined endpoint - as in if you learn a, b & c you will be a successful and good investor. I believe its a constant learning, the more you read and discuss the more you learn, every company you research and analyse adds to your understanding of the process, and finally every investment you make can end up teaching you more about the process, learning how and why, what happened.

I also run a decision journal to record all my research, deliberations, and actions with predictions for the outcomes. Then I revise it regularly and reflect on my initial decision, the process that led to it and the outcomes and reasons for the outcomes.

Its interesting to see the number of decisions that turned out well, not because of my research and analytical skills, but due to pure luck! Its also sobering to re-visit the decisions that had poor outcomes and be honest about the reasons! Like much in life its easy to fall into the trap my dear old Dad used to describe this way, "Son, there are only two outcomes in life, good management and bad luck."

Are these good steps to find a good business?

RandomInvestor

luutzu

Tightwad

galumay

learner

RandomInvestor

RandomInvestor

systematic

RandomInvestor

systematic

Smurf1976

So_Cynical

The Contrarian Averager

RandomInvestor

RandomInvestor

systematic

luutzu

RandomInvestor

RandomInvestor

systematic

RandomInvestor

galumay

learner

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