There are a lot of people who are quick to put down investing in the stock market. They will point to Enron or Ponzi schemes and spout about fools investing and the greed of brokers and those in the financial community. On the opposite end are the people who are so eager to be in the market that they don’t see the forest for the trees. Or more accurately, they see the mighty Sequoia and neglect saplings that will grow into mighty Oaks.
Had enough tree talk? Good, then we’ll get down to business. How do you decide what stocks you are going to buy? What factors influence you? Or do you just go with whatever your broker (or your next door neighbor or the guy at the water cooler) suggests? The real question is, do you have a system to analyze what you are considering? The stock market is filled with lots of choices and you need to look at all the pros and cons of each choice.
What are the important deciding factors that determine if a stock is going to rise or fall in price, and is that all you should be concerned with? The loud and clear answer to the second question is “no.”
If all you are doing is looking at the share price, that’s like buying a car (also an investment of sorts) by picking a color. It might be pretty to look at, but how’s it going to perform over the long haul? Looking into the company is akin to looking under the hood of a car. Doing research is the key to finding out the long-term prospects of either one.
What does a company do? That’s a real key to this decision. It’s all well and good to analyze the price and its 52-week fluctuation and the patterns over the years and whatever else you want to consider, but long term (and sometimes even short term) it’s about ownership in the company. You have to look at what they do and how they fill their share of the market.
By way of example, I used to recommend a company called Zebra (NASDAQ ZBRA) which fluctuated between 18 and 30 dollars a share. It had been doing that for a while, and if you worked the timing, it was fairly easy to make money buying low and selling high. But to me the most attractive thing was that the company made industrial printers that were used to make bar codes and things for manufacturing facilities and logistical companies, and they dominated the market share. Most companies used Zebra printers and their supplies. That last part was the key. Printers are fairly inexpensive, and the supplies get re-ordered over and over. The printers are also very reliable, so companies tend to stick with them.
What’s the lesson? Solid value in a company that’s been around a while and has a large share of the market. They are not going anywhere and will retain their value — at least until a technological upgrade comes along — and I’m sure they are working that angle as well. The point isn’t to buy stock in Zebra; the point is that stock means you are buying part of a company, and you want to make sure you check under the hood. The stock market isn’t some magical genie that can multiply your funds, but if you do research and choose carefully it can be your financial friend.