Chapter 10: Picking your Stocks – Investing made easy by Rosa Sangiorgio

Investing made easy is a bi-weekly series by Rosa Sangiorgio exclusively for Vivamost

Now that we’ve defined which asset classes we want to invest in (Chapter 9), it’s time for selecting which specific financial securities to include in our portfolio.

In the next few Chapters we will explore how to pick:

• Equities
• Fixed Income
• Private Equity/Private Debt and Real Estate

A few reminders…

Remember your risk profile and investment goal? It’s not the only key for your asset allocation, but also important for the securities selection process.

If you’re interested in preserving your wealth and have a low-risk appetite, you’ll better invest in stable corporations in sectors like consumer staples, that do moderately well in good and bad times.

If you need a recurring income, you may want to focus on buying (and holding) stocks in companies that pay good dividends regularly. Solid but low-growth companies in sectors such as utilities.

If you’re eager to see your capital growing fast and don’t mind volatility, then you can look for stocks of companies that are in their best early growth years and sectors like robotics and digitalization. You will take a higher degree of risk for the chance of big gains. Eventually, you can even invest in companies that are not yet public (private equity), but we will go into more details in one of the next chapters.

Remember diversification? Many investors make the mistake of investing most of their assets in a handful of stocks. Doing this, you increase the likelihood to lose a large part of your money on the investment. It is smarter to spread your equity investments as much as possible: across time – enter the market at different times; sectors – buy shares across multiple sectors; regions – buy shares from different regions.

Remember when we talked about impact? This is the moment to put your money in businesses that will have a positive impact on the world from an environmental and social perspective. And if this is not your intention, then you’re probably following the wrong author .

Deciding which category of investors you fall into is the easy part. Figuring out which stocks to pick gets complicated! Let’s dive in.

Equities 101:

Shares are proof of property. Buying a share you become co-owner of a company.

Ultimately there are two ways in which your investment in shares increases in value:

• Price gains: If you buy the share relatively cheap, and sell it at a higher price, you get a positive return. In order to discover cheap shares you will have to research the company, and guess whether the company will be profitable in the future (see below). Important, supply and demand determine the final price: if more people want the share, then the price rises; if more people want to sell their shares, then the price drops.
• Dividend: When a company makes a profit, can choose to pay out part of that profit in the form of dividends. If you are looking for recurring income, this may be your strategy!

Often investors forget the most important lesson regarding the share market. Stocks are always risky investments. Shares have usually the highest returns long-term, but this does not guarantee that you will achieve good results short-term. Spread your investments sufficiently and wait patiently, you will get good results in the long run.

Let’s Start: 

The next stage in the stock-picking process involves identifying companies. There are two simple ways to start:

1. Find the index or the Exchange Traded Fund (ETF) which track the performance of the industry (or region or topic) that interests you and check out the included stocks. This is as easy as googling for “Industry xxx ETF.” The official ETF page will disclose the fund’s top holdings.
2. Search the net for news and experts opinion on the topics you are interested about. They will mention companies in the investment space you’ve targeted. Remember, stay critical of everything you read and analyze both sides of the argument.

These methods are by no means the only ways to pick a company, but they do offer an easy starting point. Now… with thousands of stocks to choose from, how do you select a few worth buying?

Research the companies

Once you are convinced that the industry that interests you is a solid investment and you are familiar with the major players, it is time to turn your attention to investor presentations and financial statements. These reports also will have forward-looking information on the expected direction of the company and its industry. Browsing company websites will help you refine your search.

You are basically investigating whether the price of the share corresponds to the long-term value of the company. If the shares are undervalued, it may be wise to buy them. You may want to pay attention to:

• Sales: tell you if the company’s product or service is appreciated by the market, and ideally should grow with time. (e.g. Price-to-sales ratio)
• Earnings: show you if the business model covers its costs and create value.

Both Sales and Earnings could be relatively low in the first years of a new innovative company. (e.g. Price-to-earnings ratio, Earnings growth, Return on equity)

• Debt/Equity: too much debt can be critical, too little not efficient use of capital.

Ehm, but… how do we know if those numbers are good or not… you can only learn by experience! At the beginning, you may want to compare your candidates to the average metrics of the ETF or Index representing the industry.

At the end of your research process, you may be left with a single investment prospect or a list of ten companies. Or you may decide that this industry or topic is not right for you. That’s fine. All of that research may have stopped you from making a bad investment.

Knowing when to say no is an essential aspect of the art of picking stocks.

 Keep Your Eyes Open 

It’s vital to keep up with market news and opinions. A news article can be the foundation of your investment thesis, that through common-sense creates a valid to invest. For example, you might note that in the developing markets a new middle class is emerging, made up of people who need a greater variety of consumer goods. As a result, you expect a higher demand for certain products and commodities. The thoughtful investor has a ‘story’ that explains her decision to purchase a stock.

Tips for Nervous Investors

With the world looking so crazy, prudent investing isn’t just about what you invest in but also how you invest. If you want to build long-term wealth through stock investing and still be able to sleep at night, then:

• Decide what you want your portfolio to achieve (in terms of returns and impact), and stick with it.
• Pick an industry or a topic and explore the news and trends that drive it. Remember you’re buying a part of a company. Invest in businesses you understand and promote, in profitable companies that you feel comfortable with and believe a growing number of people will. The reason you invest is because the company is making an impact and a profit, and you want to participate in its long-term success. Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.

• A stock’s price is dependent on the company and on its environment, including its customer base, its industry, the general economy, and the political climate. Even if you buy and hold for the long term, continue to monitor your stocks. Staying informed will give you some resilience to surprises that are inevitable.
• Many investors panic when share prices collapse, selling their shares during these kinds of crashes. Unless you have observed a change in strategy of the company that makes you uncomfortable, or a dramatic change in your expectations about the economic environment, this is not a good strategy. Short-term movements are often irrelevant to your long-term strategy. Take a breath!
• Practice first. When you were learning to drive, you did not start driving a Ferrari. It is important to take some test drives first. For example, opening a free demo account is a good way to practice investing. Alternatively, you can also choose to simulate trades on paper. By doing so you might prevent your first experience from turning into an expensive disaster.

Did I scare you?

Achieving diversification through picking single stocks can be challenging and time-consuming, for this reason, some investors find it easier to diversify within each asset class buying collective instruments rather than individual investments. We will dedicate an upcoming full Chapter to Mutual Funds and Structured Products.

About the Author:

Rosa Sangiorgio, an Independent Advisor, is an expert at scaling investment methods that generate positive, socially responsible and environmental welfare impact in addition to a financial return. She worked for several European Financial institutions in the area of Wealth Management and Private Banking. Also, she was Head of Sustainability and Impact Investing in the Investment Management team of Credit Suisse until January 2020. Rosa is also a CEFA charterholder and TEDx speaker. 

• investments
• Risk
• Stocks