Finding winner stocks

Remember Warren Buffett, the renowned investor we mentioned earlier? An interviewer once asked him how he decided on his investments, to which he replied quite simply but profoundly: "I just buy companies whose products and services I use myself regularly. Because if I'm using it regularly, so is everyone else."

Take, for example, his considerable investments in Coca Cola, Nike, American Express, McDonald's, and more. These are all companies whose products and services Buffett frequently uses. His investment strategy centers on the premise that if he's a regular consumer, then so are many others. If a company enjoys a consistent stream of consumers, it provides a steady source of income—an income Buffett wants to own.

Consider his Coca Cola investment; he loves drinking Coke. He's also invested in Visa, Mastercard, and American Express—cards he uses daily for purchases. He bought Nike because he wears their shoes and Hershey's chocolates because he loves their sweets. These investments all stem from personal experience and usage.

This approach gives us a simple but powerful question to ask ourselves: what are the products we use regularly? And among these, which ones are consumer monopolies?

If you buy into consumer monopolies and hold onto them, you're virtually guaranteed to make money in the long run. Let's illustrate this with an example.

Imagine your daily routine. You wake up and brush your teeth. You'll need to buy toothpaste for the rest of your life. Who's selling it to you? Maybe it's Colgate-Palmolive, Unilever, or Procter and Gamble. After that, you might shave or shower, again using products from similar companies.

Consider your daily groceries, restaurant choices, and even online activities. Each of these activities potentially points to an investment opportunity. Maybe you're using Google daily or watching Netflix regularly. These are services offered by Alphabet Inc. and Netflix Inc., respectively. The key is to build a watchlist of companies whose products or services you regularly use, and then examine whether they pass your investment criteria.

Another important investment strategy involves identifying great businesses selling at a discount because of temporary bad news. We briefly touched on this in our previous lesson. You can uncover such opportunities by staying updated with financial news from CNBC, Google Finance, Reuters, and others.

Remember, though, to focus on facts and not opinions. Ignore the "experts" predicting the future. Instead, be on the lookout for factual news about great companies experiencing temporary problems—these situations can give you an opportunity to buy at a significant discount.

To illustrate this strategy, let's look at Warren Buffett's story about American Express. Years ago, he was interested in investing in the company, but the share price was too high. So, he waited patiently, keeping the company on his watchlist for several years.

Eventually, American Express found itself in hot water, losing a lawsuit that cost them nearly all their cash reserves. The share price collapsed by almost 50%. Buffett, seeing this as a golden opportunity, did some research. He observed that despite the company's troubles, people were still using American Express's services. This observation gave him the confidence to invest at a discount, resulting in huge profits when the company recovered a few years later.

This story teaches us the importance of patience and observation in investment. Sometimes, the best course of action is to wait for your favorite company to sell at a discount. Make use of this time to observe trends and consumer behavior, research the company's standing, and gather as much information as possible.

Remember, investment isn't about hasty decisions or blind predictions—it's about making informed choices and waiting for the right opportunities. Stay vigilant and patient, keep an eye on the companies that make the products and services you love, and don't shy away from a company experiencing temporary difficulties. These are your opportunities to buy valuable assets at a discount and maximize your investment returns.

Warren Buffett once said, "The stock market is a device for transferring money from the impatient to the patient." So, be patient, stay informed, and let's move on to our next step towards financial independence.

When it comes to investing, it's essential to remember that a company's quality and its stock price are not always directly correlated. For instance, let's take Amazon, a company I absolutely admire for its innovation and market dominance. However, even with its impressive track record, it's currently priced quite high. In my investment strategy, I tend to wait for situations where a great company gets into some temporary trouble and its stock price plunges—30%, 50%—that's when I'm ready to swoop in and buy.

Here's a fun analogy to help you understand my approach better. Imagine you're a lion in a safari. Now, do lions chase every gazelle they see? Of course not! They would get tired quickly and might end up starving because running requires a lot of energy. Instead, a smart lion will patiently wait and observe from the bushes, ready to pounce on an easy target—say, a young, distracted gazelle at the waterhole.

Similarly, as an investor, you should be like that lion, waiting for the right moment to strike. But what does an "easy target" look like in the investing world?

A potentially profitable deal is a solid company that has been temporarily hit by bad news, which affects its short-term profits or sentiment. However, the company's business model and economic moat (competitive advantage) must remain intact. Examples include Facebook's data breach scandal or the United Airlines incident where a passenger was forcefully removed from the plane.

However, avoid companies accused of financial irregularities. In the past, companies such as WorldCom and Enron faced such charges and eventually went to zero.

Let's look at some historical examples to demonstrate how to time your entries. Consider the case of Yum! Brands, the parent company of KFC, Pizza Hut, and Taco Bell. Back in 2015, its intrinsic value (fair value based on fundamental analysis) was about $70 per share, and it was trading just below that, making it undervalued.

However, when a food scandal emerged in China, panic selling ensued, and the share price plummeted from $69 to a low of $48. When a stock is in a downtrend, it can be challenging to identify the bottom. So, the best strategy is to wait for some consolidation (a period when the price moves sideways) and a change in trend.

By examining the stock's price action, you can spot a change in trend. With Yum! Brands, the stock was making lower highs—each peak in the stock price was lower than the last, indicating a downward trend. But in September, the stock price found a low at $47.76, and it retested this level multiple times, forming a strong support level.

I took an initial position in the stock as it bounced off this support level, then added more to my position as the 50-day moving average crossed above the 150-day moving average, signaling a change in trend. As the trend continued upwards, I kept adding to my position because Yum! Brands was a good company with a promising future, and its stock price remained undervalued.

Let's explore another example: Facebook. This tech giant had been in a stable uptrend, finding support at the 200-day moving average. However, when news of a data breach scandal broke, the stock experienced a sharp sell-off.

I already had a position in Facebook, which I had purchased much earlier. As the stock price started to recover and crossed back above the 200-day moving average—an entry signal—I added to my position.

Remember, the goal isn't necessarily to buy at the absolute bottom. As long as you're getting a good deal—that is, the stock is undervalued relative to its intrinsic value—that's good enough.

Sometimes, a stock that has been stuck in a sideways trend or a downtrend for years can surge on the back of good news. This sudden change in fortune can present a valuable investment opportunity. The key is to stay alert, patient, and ready to act when the moment is right—much like the lion in our analogy earlier.

In the end, the stock market is a vast jungle filled with numerous opportunities. By observing patiently, analyzing carefully, and striking decisively, you can make the most of these opportunities and achieve your investment goals.

Stock screening is a filtering process that helps investors sift through thousands of companies to identify potential investment opportunities that align with their financial goals and risk tolerance. It is the first step in an investor's due diligence process, narrowing down the investment universe to a manageable size.

Stock screening is vital because it allows investors to focus their research efforts on a select group of companies that meet specific criteria, such as growth rates, financial health, valuation, and many more. These criteria, or financial metrics, serve as a roadmap, guiding investors towards potential investments.

Now that we understand the importance of stock screening, let's delve into the practical aspect. How do we filter through the thousands of companies to find our ideal investment?

First, let's clarify that we are searching for companies with robust fundamentals. To do this, we focus on several key metrics:

• Growth Rate: Do we want the company to grow over the next five years? Of course! A positive growth rate indicates a company's ability to increase its earnings, an essential attribute for any investment. The exact percentage of growth you're seeking depends on your individual investment strategy. Are you targeting high-growth stocks? If so, a growth rate above 20% could be your filter. Or are you seeking stable, predictable companies? In that case, you may opt for a growth rate above 10% or even 5%.
• Return on Equity (ROE): ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. A good ROE benchmark is at least 12 to 15%. Thus, you could set your filter at over 10%.
• Sales Growth: A company with consistent sales growth over the last five years suggests stability and a proven business model. This parameter could be set at over 5%, 10%, or 20%, depending on your investment strategy.
• Price/Earnings to Growth (PEG) Ratio: Unlike the PE ratio, which only considers a company's earnings relative to its share price, the PEG ratio also accounts for the company's expected earnings growth rate. A PEG ratio under 2 can often signal an undervalued company.
• Earnings Growth: Positive earnings growth, both for the current year and projected into the next year, is a healthy sign. Again, you could set your filter for positive earnings growth or even over 10%, depending on your level of selectivity.
• Current Ratio: This measures a company's ability to pay off its short-term liabilities with its short-term assets. A current ratio over 1 is generally a good sign, indicating more short-term assets than liabilities.

Remember, the stricter your criteria, the fewer results you'll yield. It's like a matchmaking survey: if you're too picky, you'll end up with fewer matches. Therefore, a balance between strictness and flexibility is essential to yield a pool of potential investments.

Once we've established our screening criteria, we can use stock screening tools to filter through thousands of stocks. One commonly used screener is the Finviz screener, which allows us to filter companies based on various descriptive, fundamental, and technical criteria.

For example, if you apply the screening criteria mentioned earlier, you might narrow down your options from 7,400 companies to a much more manageable number, say 64. This filtered list of companies is now ripe for further analysis, using more detailed evaluation methods like the seven-step analysis.

If you want to filter even further, you can include technical criteria like the price being above the 200-day moving average, signaling a long-term uptrend. For instance, you can also filter based on specific sectors or company sizes, depending on your investment preference.

For international markets, investing.com offers an excellent platform for stock screening. You can screen for stocks in various countries. Let's take Hong Kong as an example, which is a hot market for many investors. Out of 2,200 stocks, by applying the same criteria we discussed, you could narrow down your list to around 130 companies.

Now, keep in mind that not all metrics available for US stocks are available for international ones, and vice versa. For instance, the PEG ratio might not be available for Hong Kong stocks. This lack of uniformity in available metrics emphasizes the importance of using multiple criteria to make a comprehensive assessment.

Once you've screened and obtained a shortlist of potential investments, you can examine each company more closely. One way is to look at their five-year charts to ascertain whether they've been on an uptrend. Avoid companies with declining or volatile stock price movements.

When narrowing down your list, aim to identify companies with clear, consistent uptrends. If the five-year chart is declining or choppy, it's usually a sign to steer clear.

Scaling Investment Opportunities

Identifying quality businesses and appropriate prices, and using everyday experiences to find investment avenues. Consumer monopolies provide steady income, and temporary bad news can lead to good investment opportunities.

Patience and Observation Impact Investment Decisions

Waiting for the right opportunity to buy valuable assets at a discount and maximize investment returns. Remember, investment is about making informed choices. Stay vigilant and patient, research the company's standing, and don't shy away from difficulties.

Timing Entries in the Stock Market

Identifying opportunities to buy stocks at a good price, such as when a stock is undervalued or when good news creates a surge. Examining price action and using moving averages to time entries.

Stock Screening: An Essential Tool for Investors

Stock screening is a filtering process to identify potential investment opportunities that align with financial goals and risk tolerance. It allows investors to focus on a select group of companies that meet specific criteria, such as growth rates, financial health, and valuation.

Stock Screening

Filtering stocks based on criteria to narrow down options for further analysis. International markets also available with different metrics. Analyze filtered list of companies by looking at five-year charts. Avoid companies with declining or volatile stock price movements.