While stocks are about buying and selling, what you want to avoid is a manic, willy-nilly approach that doesn’t support predictable, long-term wealth. One of the best foils to that approach is billionaire Warren Buffet whose eye for successful long-term stocks has allowed his investment holding company, Berkshire Hathaway, to generate 20% returns since it began trading in 1965. A number of stocks in Buffet’s winning portfolio have been there for three decades.
What to Look for in a Company Before Investing
Here are some shot-gun rules to start off with for choosing the best stocks for long-term investments. First, you’re better off investing in larger companies as they can grow quickly when the economy is revving up. At the same time, they’ve got resources to stay afloat when times are rough. Secondly, where there’s smoke, there’s usually fire – do some background research on a company’s board members to make sure they aren’t involved in any shady business.
Now, when it comes to choosing the right stock to invest in, you’ve got to test the waters on a few different fronts. First, it’s better to go for a company with good dividend consistency – meaning that a company has been able to pay its dividends to shareholders for a solid 5-10 years back. The next thing I’d pay attention to is the company’s future earnings projections. And if a company has a history of consistently increased earnings? Great!
A Company That Innovates Is a Good Pick
Another important thing to remember is to stick to companies that are growing well – i.e., they’re committed to improving their products and increasing efficiency. There’s a reason why Kodak went down the drain. Kodak was founded in the late 1880s. It became a giant in the photography industry in the 1970s. When a new kid on the digital technology block showed up, Kodak was too confident, refusing to update its technology. The company filed for bankruptcy in 2012 because it failed to reinvent its product. Despite surviving a hundred years as a company and dominating its industry, it ultimately got booted out of the market because of a lack in innovation. Watch for companies whose stocks are steadily decreasing and keep your distance. This may point to a lack of innovation or resilience on their part.
Before I make a long-term investment, I take a look at the debt ratio of a company. You want this to be less than 1%. Otherwise, you’re looking at a company that has more debts than assets. A company with higher debts than assets will struggle when the economy is unstable and may have lower stock value – and that’s what you need to look out for. So don’t get too excited about a low stock price – keep your eye on the ball and make sure the company has a good debt ratio.
Economic Conditions Are Important
Next, read the economic conditions like you watch the weather. This will tell you when things are looking bright and sunny or you’re in for some financial storms. A good place to start is to keep an eye on the Dow Jones Industrial Average, DIJA, or Dow 30. The DIJA is a major market index, and it represents the average of the blue-chip stocks belonging to 30 publicly owned companies that trade on NASDAQ. When the 30 companies experience distress, the DIJA becomes weak. Usually, this means that market earnings have begun to fall and that it’s not the time to invest. Another indicator to keep in your sights is the NASDAQ 100 index – this index is a container for the 100 largest U.S companies listed on NASDAQ. When COVID-19 hit, it plummeted by 7.4%, then fell another 12.4%, thrusting the stock market into a period of uncertainty.
If the market has been falling for some time and continues to fall – that’s not a good thing. It might mean that the economy is headed towards a recession. And while that’s bad news, when the economy hits bottom, that’s when you need to start paying attention again. At that time, stocks are cheap and when the economy picks up, so will their value. That’s when you go in for the kill. At the same time, not all companies are adversely affected by economic uncertainty – during COVID-19, Zoom upped its stocks by 500%. What’s important is that you keep on top of the news.
Define Your Investment Goals
Once you’re done investigating a company, get clear on how much you want to invest in a stock and how long you’re going to be in the game. There’s a lot of research to suggest that smaller valued stocks are the way to go because they bring in better returns over the long term. Keep your eye on the ball by determining a potential sell price for your stock before you invest in it to ensure that you’ll be making maximum gains.
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