How to Become a Good Investor

We’ve all heard the expression, “buy low, sell high,” and that’s great if you can do it. The question is, HOW do you do it? Well, it’s not as easy as you’d like it to be. But it can be done, and many people have different views on the best ways to do it.

Some people think that you could put a list of stock names on a wall and throw darts at them. Then, whichever name the dart hits you could buy that stock and have just as good a chance of buying low and selling high as buying any stock. Well, that could happen but that’s not the best method of going about it.

There are never guarantees when buying stocks but let’s look at several important criteria to consider. Here are a few key factors to keep in mind:

Financial Performance: Evaluate the company’s financial statements, which include revenue, profit margins and debt levels. Look for consistent growth and a strong balance sheet. This information is readily available online. Simply go to where you “search” on your computer, type in the name of the security and look up current financial data, such as earnings reports, general corporate information and find out what analysts have research covering the company and read it. Also, pay close attention to news developments about the company. For example, look for news about new products, government approvals for mergers or new drugs. This type of information is very easy to find these days and is very useful in helping you to form an opinion about the current position of the company. This is not as daunting as it may seem.

Industry Analysis: Assess the sector or industry the company operates in and its growth prospects. Consider industry trends, competition and potential disruptors. This information is also easily accessible online. Look at the other companies that are in the same industry group as the one you are interested in and determine if it is the “Best in Class.” You can determine this by seeing how it is ranked by the biggest investment houses. You can also see if there is a new development coming for the company you are considering.

Company Management: Evaluate the competence and track record of the company’s management team. Look for experienced leaders who have a strong vision for the future. If the company has stable management, with low turnover in the top jobs, such as CEO, CFO and President, that tends to be a good sign.

Business Model: Understand the company’s core business and how it generates revenue. Assess the stability and scalability of its model. It’s very important to know and understand the business that the company is in. Furthermore, it’s good to know if they are developing a new product, drug or service, or if they are merging with another company. The goal is to invest in companies that are growing revenues, which leads to growth in earnings, leading to increases in the share price of the stock.

Competitive Advantage: Determine if the company has a unique selling proposition, such as patented technology, strong brand recognition or a dominant market position.

Valuation: Consider the stock’s current price relative to its intrinsic value. Look for stocks that are trading at a reasonable valuation for the industry group it is in and ones that have the potential for long-term appreciation. Historically, growth stocks such as Apple and Facebook have demonstrated they will sell for a higher price-earnings ratio than financial stocks like JP Morgan. This doesn’t mean you should only own growth stocks as opposed to value stocks, it means you should do your research and determine if the companies you choose to invest in are “Best in Class.”

Dividends and Return on Investment: If you are interested in income, look at a company’s dividend history and yield. Additionally, consider the potential for capital appreciation and long-term returns on investment. Many people build a portfolio of high-quality companies with consistent management, a longtime track record of paying dividends that grow over time and that have shown longtime growth over many years. The nice thing also about dividend income is that dividends have favorable tax considerations.

Remember that investing in the stock market carries risks, and it is essential to conduct thorough research and seek professional advice before making any investment decisions. The stock markets go up and down over time depending on current news cycles but be careful not to act impulsively when the news is bad. There are several times over the last number of years where markets have big sell offs and then when the dust settles markets go higher.

Over long periods of time, investing in the markets has shown itself to be profitable. Be careful about using margin if you don’t understand what you are doing. A good financial adviser can explain the risks of this. Also, don’t short stocks unless you completely understand the risk in these trades. And it is very important to evaluate the tax consequences of buying and selling. In a retirement account, you don’t have the same tax issues as you are only taxed when you withdraw money from your retirement accounts at the appropriate age. But in non-retirement accounts, buying and selling stocks create tax consequences on all transactions so take that into account when you make changes to your portfolio.

There is so much information available now to investors that is intended to help you make informed decisions. For example, there’s no shortage of books and publications on finance and you can watch CNBC, FOX Business Channel or Bloomberg to hear opinions from various experienced investors as well as business news about many companies. You can learn as much or as little as you want to know but always remember, this is your money so be thoughtful and informed when you make your decisions and get the opinion of your advisor. Finally, I believe you will find it’s a good strategy to invest in companies and/or industries that you know and understand. Happy hunting!

Rebecca Rothstein works with high-net-worth individuals, families, and institutions, helping them advance their wealth management goals. She began her career as a financial advisor in 1987 at Bear Stearns. She spent 10 years with Deutsche Bank Alex Brown and 13 years with Morgan Stanley Private Wealth Management (formerly Smith Barney) before joining Merrill Lynch. As a Managing Director at Merrill Private Wealth Management, Rebecca focuses on wealth management, tax minimization, and estate planning strategies for affluent clients. She also works with corporate officers, devising liquidity and diversification strategies for concentrated positions. Rebecca has garnered a number of national honors as a financial advisor. Barron’s magazine named her one of the “Top 100 Financial Advisors in America” from 2007 successively through 2012. Barron’s also named Rebecca one of the “Top 100 Women Financial Advisors in America” from the inception of the list in 2006 successively through 2012, profiling her in the 2012 issue. In 2017, Rebecca was recognized by the national publication Forbes, which named her one of “America’s Top Wealth Advisors.” In 2018, 2019, 2020 and 2021, Rebecca was again recognized by Forbes, which named her the #1 of “Top Women Wealth Advisors.” Rebecca is very active in the community. She is the Chairman of the Board and Founder of Teen Cancer America (a global charity founded by Roger Daltrey and Pete Townshend). She is also a Co-Chair of the Childhood Autism Board at UCLA, which helps children who have been diagnosed with autism, developmental disabilities, and behavior disorders, and she is a board member of the UCLA Health System. In her free time, Rebecca enjoys cooking, sailing, and participating in a number of charitable efforts. She has four sons and splits her time between Incline Village, Nevada and Beverly Hills, California with her husband Ron.

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