Before picking a stock, there are some questions we need to answer, which hopefully the previous lessons from the Summer School can help you with. We need to know how active we want to be, how long we want to stay in investments and we also need to know our risk appetite.
As a quick recap, if you are an investor who wants to, or can be more active in the markets, you might want to pay more attention to economic cycles, earnings reports and fundamental changes for stocks. However, if you are not looking to be too active because of work or other commitments, knowing all of the above isnt essential for your investing decisions and your focus can be much longer-term.
Also, when it comes to risk appetite, are you someone who wants to take more or less risk? Those who favour more will be drawn towards stocks which offer the potential for more reward whereas those who are more risk averse will focus on stocks which might have limited upside but importantly have lower downside risk. An example of that could be dividend-paying stocks from long-standing, established companies. On the flip side, someone looking for bigger returns may look to tech stocks for a great potential return.
Brands you love and the future you believe in
If you are someone who is thinking about certain stocks to invest in but arent quite sure where to start, it can be a good idea to think about investing in the brands you love and use. Now, of course just because you love a brand, doesnt guarantee it will be a good investment but thinking about what people will be doing in the future can be useful when deciding on investments.
So what kind of questions can we ask ourselves? Well, we might think: what kind of cars do I love? Or see people driving a lot? Or what cars in the future could a lot of people drive? You might think electric vehicles will become ever more present and like Tesla, or think in the future more people will be driving them. You might ask yourself, will people still use Apple products, wear Nike clothes and trainers, eat Dominos and Mcdonalds and so on. These could all be potentially companies that could continue to grow over time.
When it comes to investing, investors are constantly thinking about the future. What areas in the market do they foresee growing in the future? It might be electric vehicles, renewable energy, drone technology, crypto or cyber security for example. A really useful thing for investors to check out on TBanque are the Smart Portfolios that focus on similar themes as those just mentioned and many more. You can either invest in those directly or check out what companies are involved in each theme. For example, you might really believe drone technology will kick on in the future, so you check out eToros Smart Portfolio for drone technology and see what companies have exposure to this industry such as Boeing, Microsoft, Intel and General Electric. You can then potentially make a decision on these and other individual stocks if you wanted single stock exposure.
Fundamental and technical analysis
When looking to choose a stock we can put analysis into two broad categories: fundamental and technical analysis. Fundamental analysis is where investors will look at all of the available data to then make a decision about whether they think something is under or overvalued. What investors might do in order to pick a stock, can include looking at a companys earnings report and their forward guidance. To keep it very basic, if a company has a good earnings report and has optimistic plans and goals for the future, as an investor you might see this as a good opportunity to invest. On the flip side, if a company reports bad earnings for the previous quarter and they are not too confident about their future growth, this could be a stock an investor would be more likely to leave alone.
For shorter-term investors, where we are in the economic cycle and macro environment will be key to their decision-making process. For example, if we are heading into a recession, investors will look at key data metrics to confirm this and maybe move their investments from riskier stocks to more defensive ones that perform better in this environment. For those who want to stay up to date with what is going on in the markets on a weekly basis, Ben Laidler who is the TBanque Global Market Strategist does a webinar with Sam North every Monday where they talk about what is currently driving markets and what could in the future.
When it comes to analysing the stock to invest in, some investors will use technical analysis to try and time the market more precisely. We have loads of super useful free resources on the TBanque Academy and we have weekly webinars where we discuss potential opportunities.
Technical Analysis is essentially an approach to investing or trading where we look at previous price market data to try and predict potential outcomes. So, while past performance isnt predictive of future results a great saying is, history doesnt repeat itself, but often it rhymes.
There are a few areas of technical analysis that can be useful for investors. Understanding support and resistance, which are essentially areas in the market where buyers and sellers have either entered the market previously or could enter in the future. Technical tools, candlestick and charting patterns can also be worth looking into if you want to potentially time the market better. However, if your focus is super long-term, it is not the end of the world if you have a more limited understanding of technical analysis. Technical analysts do have to be aware of a couple of things, however. They need to be sure other investors are looking at the same thing as them, and they also need to be aware of any fundamental developments as fundamental analysis will outweigh technical.
Stock diversification
Another useful thing to think about when picking stocks is diversification. Were sure youll have heard the saying dont put all your eggs into one basket well its the same when it comes to investing. You dont want to put all your money into just one stock. Remember, we cant guarantee it will go higher but by investing in multiple assets, you reduce portfolio risk. So as investors we might want to have 2 or 3% invested in each company rather than having 50% of your investment account invested in two stocks. If you invest 50% of your account on one stock and it performs badly, it is going to hurt you a lot more than if it was just 2%.
There is no secret sauce to the perfect number of stocks to have in a portfolio and it is up to you with regard to what feels comfortable. Just remember that being diversified can be a useful risk management tool.
Remember your rules
When it comes to managing our investments. It can be helpful to set some rules in place. Firstly you have to remember why you got into the investment and for how long you roughly plan to stay in it. Once you have decided that, then we can put our rules in place. The most important thing to say is if your reason for investing in a stock has not changed, then stick to your plan, especially if you are a long-term investor. There is nothing worse than getting out of an investment early and then looking back in a few weeks or months to see it did exactly what you thought it would.
In order to prevent this from happening, it can help to create some rules to follow. Has anything about the company changed from a fundamental perspective? Has the long-term global macro environment changed enough for you to come out of your investment? Have similar stocks performed in a way that might lead to your investment struggling? If the answer is no to these questions, then you might choose to stay in a position. Thinking long-term and having patience is key. The last thing you want to do as a long-term investor is to exit an investment after 2 months for no reason other than the price hasnt gone higher straight away. Have patience and remember your goals.
To help with this, in the next lesson we are going to cover investing psychology and why its important. Dont worry, it wont be too touchy-feely. We will go over how best to manage our investments and how to remain focused on those long-term goals.
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This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipients investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. TBanque makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
