Last week I opined on the top 5 reasons that an investor should sell a stock. I figured it would only be fitting to now provide a list of the top 5 reasons to buy a stock. Without further ado:
- The company has a wide economic moat. Economic moat is extremely important. Warren Buffett has become the world's most successful investor by investing in wide moat companies. A continuous competitive advantage over its peers is the best asset a company can have.
- Proven strong management over time. Look for a stock that has exhibited above average financial ratios consistently. A company who has a very solid balance sheet to support all of its business plans.
- The stock has an attractive valuation. Valuation certainly does matter when buying stocks. I like to look at the PEG Ratio, especially in comparison to some of the industry peers. Finding a good solid company who looks undervalued against its peers is a solid reason to buy.
- The company does well either returnining money to investors through dividends or repurchasing its stock through buybacks. Dividends are a terrific tax advantaged investment vehicle, and stock buybacks show confidence in the company and provide support for the stock price.
- You see that the company is doing well or has a great product because you have an advantage of great knowledge about the industry. This is following the theory of Peter Lynch, the greatest fund manager of all time. The theory here is to buy what you know and have confidence in, as long as the financials look good.
You may be surprised that wide moat is number one on my list, but I feel it is completely justified. The whole idea of a company being successful over a long period of time is being able to sustain a competitive advantage. Short term investors are clearly less concerned about moat, but given my long term bias this was a very fitting #1. I caution investors not to listen to those who say that valuation does not matter. Valuation will always matter. Sometimes it will seem as if it does not when stocks are skyrocketing, but deciding to throw caution to the wind and just buy stocks without worrying about valuation is a losing strategy.
These five reasons to buy a stock should help investors think through the process of buying a stock.
I agree with your list - the important thing to note is that investing is not rocket science and the ads put out by big fund companies trying to convince us that it is do people no good. Investing does take work and requires a clear strategy, but I beleive that most people can do it.
Posted by: The Dividend Guy | October 14, 2007 1:50 PM | Permalink to Comment