In today’s Exponential Investor…
- What, where and when?
- Tools to find stocks
- The X-Factor
I came to a realisation at the weekend that I probably take some things for granted.
It was because someone asked me a very simple question.
“How do you find good stocks?”
Admittedly that is as broad as the question, “How long is a piece of string?”
But at the same time, as broad as it may be, it’s also not a very hard question to answer. While it’s not hard to answer, it’s very hard to correctly answer.
That’s why today I’m going to show you, step-by-step, how I find stocks in the UK.
This methodology you can apply to other markets, but I think the UK is important to focus on. That’s because the UK market is a market you know. It’s usually contained of domestic companies you have seen before, know of, maybe even already use.
Investing in the domestic market is also easier with less barriers than international markets. Also, considering where the world is at with everything at the moment, I think the UK market is one of the best markets (if not, the best market) to build long-term wealth in the world right now.
Let’s have a look at how to find good stocks in the UK market…
Step 1: the search
The first thing you need to do to find good stocks is to know where to look.
On any given day there are in excess of 2,000 listed companies on the London Stock Exchange. Two thousand!
If you looked at one stock every day it would take you five and a half years to get through them all. That’s not factoring in companies that delist, IPO, merge, change name or change business direction.
It also would mean a freeze on time to get through them all effectively. That means absolutely nothing could change in those five and half years to assess them all.
Companies change, grow, shrink, get better, worse, release new products, services, achieve success, fail, in sometimes a matter of weeks and months. You could look at one company today, come back to it in five and half years, then and it could be a completely different company.
That’s why looking at and analysing stocks is something you’ll never effectively be able to finish. Looking through just the UK market is a perpetual job. It never ends.
That makes it crazy hard to assess all stocks at all times. No one is capable of doing that unless you have an army of 2,000 people to each look at and successfully analyse every stock, separately every day.
Some people think computers and algorithms can do that, but they can’t. There are reasons computers aren’t as good as people at analysing stocks for investment, which I’ll get to shortly.
But first, as I say, you’ve just got to know where to look.
You can subscribe to expensive services like Bloomberg data, or other data services that will provide you with all the data needed on all the companies in the UK market. But they’re not always cost effective for individual investors.
If you want a free service to look for and then filter stocks, I suggest you use two sites.
One is Yahoo Finance. You can find just about every company on the London Stock Exchange with Yahoo Finance. Importantly, you can also filter them.
The other site is the London Stock Exchange itself. Yahoo Finance can help you find them, but so can the LSE site. The filters aren’t as detailed, but you can still dig out lists of companies from certain industry and segments of the market.
Also, the LSE has loads of easy-to-find and access information – importantly, all the latest public company announcements and financial releases. There’s also charts and basic information about the company’s financial situation.
The LSE will have information on every company that is listed – there’s no uncertainty when you go right to the exchange source.
I think if you’re looking to invest, and don’t want to pay an arm and a leg for expensive data services, those two are a must to find the stocks in the industries you’re after.
Step 2: filter and drill
Now you know where to find them, how do you do it?
This is where you need to have some idea of the kinds of stocks you’re after. Are you looking for technology stocks? Perhaps you’re after “green economy” stocks? Maybe you want oil and gas? Or perhaps more along the lines of infrastructure?
It doesn’t matter. Once you’ve dialled into the industries you think the opportunities lie, then you can use those sites to filter down your list.
All of a sudden what was 2,000 becomes maybe a hundred or more, or perhaps it’s a few dozen. Now the search gets loads easier.
Here’s where you do need to step up your knowledge game a bit. The filter needs to get a bit more complex. Are you looking for pre-revenue stocks? Are you looking for profitable stocks? Maybe you want dividend-paying stocks? Or you’re looking to find more illiquid tightly help stocks with small valuations.
If you can ramp up your financial filters, you can then whittle down your list to very specific kinds of stocks within the industries you’re hunting for.
Now you’ve gone from 2,000 stocks to maybe six. Infrastructure stocks with a market cap under $100 million that are profitable and historically pay a dividend.
Now with just a handful of stocks to look at, you can go and look at each stock individually. You can then quickly find out what stocks are left that excite you and which ones you find utterly boring.
I usually have a rule of thumb when I get to this stage. Never invest in something you’re not excited about. Sure, maybe things work out with stocks you’re not really bothered about, but at the same time, investing is supposed to be fun – if you’re bored by it, or the stocks you’re looking at bore you, it makes the whole process a drag.
Which leads me to the final step…
Step 3: the X-Factor
Excitement is important, because now you’re also looking for the “X-Factor”. That means you want a stock or stocks that excite you but also have a certain quality that’s hard to describe.
They should have that element of risk or danger or potential tucked away inside that could give them that extra advantage if things play out the way you are expecting.
As you are looking through your easier to manage list, looking through the financials, the announcements, there will be a gem of information in there, hidden away, maybe a paragraph in a quarterly announcement that says, “Yes! This is the one, this is where I really see big potential that’s not yet been seen by the market.”
Companies without the X-Factor can be very successful, but I find ones with it, have that explosive potential we look for and importantly make investing fun and exciting, as it should be!
Editor, Exponential Investor