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How much research do you do before to buy?

7K views 30 replies 16 participants last post by  DavidW 
#1 ·
Realizing how little I get from my TSFA and RRSP, I decided to see if I could get better returns if I take care of it myself. Being the nerd I am, I first read a big bunch of books about investing. Long story short, most advice to research about the companies before to by (and that makes sens to me). So, following those advice I chose a random company (crescent point energy corp) and downloaded 4 years of annual report and the last quarterly reports so study while at work tomorrow. Then I realized it would take me the week (if lucky) to see clear in all that and that's just one company.

So that brings me to two questions:

1st, how far do you go in your research before to feel confident about buying into a company?
2nd, how is that working out for you?

Regards,

Pat
 
#2 ·
I prefer a technical approach which means minimal fundamental research. A technical trader goes by the charts, a fundamental trader goes by the news. Your study of annual reports would be appropriate for a long term, value oriented fundamental investor.

Only Warren Buffet reads random company reports for fun. Everyone else narrows down the field by using a few key indicators to zero in on the most promising prospects.
 
#9 ·
... Only Warren Buffet reads random company reports for fun. Everyone else narrows down the field by using a few key indicators to zero in on the most promising prospects.
Odd that I didn't notice my name was "Warren Buffet". :biggrin:

I read them because the press story is mostly quoted from the company's rosy release. At times, the reports contradict this view long before anything surfaces in the media. Sobey's walking away from about $45 million in SAP licensing fees due to not be able to stock their stores with the new system was buried in the reports, long before the press announcement or the heated annual meeting that covered the topic.

There's also things like poster's here on CMF doubting Canadian banks can diversify into other markets while the BNS reports have years worth of Central/South America revenue/profits are at 90% or better of Canadian retail revenue/profits or have contributed 1/3 to 1/2 of the overall, new record profits announced.

The couple of years in the job Canadian oil company US citizen CEO moving the Canadian HQ out of Calgary to Colorado.

The "US" software company incorporated in Las Vegas with 95% of it's staff including developers in Vancouver.


Cheers
 
#3 ·
It's not so much how much work you need to do, rather are you doing the right kind of work.

I follow the rule of only investing in things I understand. If a company makes a widget that I've never used and sells it to people I don't associate with, I think I'm a pretty poor candidate to understand if it's a good company. I've learned not to trust the opinions of others.

So, first I pick companies I understand, the next step is to learn about the company in some detail. Things that are important to know is how the company makes money, how stable that source of money is, how likely is it going to continue and increase going forward.

Once I know the source of the company's revenue, and am sure of its security, I need to know how much it's going to cost me to get a piece of it. No point in paying $1000 in order to make $1 (though some companies have this kind of valuation). If the cost is reasonable, it may be worth buying, at this point I look for intangibles which may affect the company (this is where some general information is needed).

If everything checks out, I'd probably buy...if not, I put it on my watch list and wait for a crisis to hit which drives the price down. A quick check to make sure nothing has changed and it's just the baby being thrown out with the bath water and I jump in if it's on sale.

Patience is often rewarded in investing.
 
#8 ·
You say you read a bunch of books on investing. They must have given you some criteria for picking out a stock to research. If not, you could try Benjamin Graham's book on Security Analysis. Don't bother with The Intelligent Investor, you won't learn anything from it you don't already know.
 
#10 · (Edited)
... So that brings me to two questions:
1st, how far do you go in your research before to feel confident about buying into a company?
Depends on the company and how volatile their market is ... lots gets written up about large companies while less popular smaller companies with a success story aren't written up much.

Though if you are learning, it may be better to go with the bulk of the investing in a low effort/reasonable results style like a couch potatoe setup then branch out as you learn/test investing in individual companies.
http://canadiancouchpotato.com/


...2nd, how is that working out for you?
Some +700% before dividends over a long time, some nice short term big gains (two to three years) by buying in Dec '08 through July '09, some that were overall losers for others (ex. Corel, Nortel) I risked a set amount that did well.

Had some cut dividends or become worthless (mostly in the '90s when I was trying out different things).

Keep in mind there's many ways to make money. At times for something I liked long term, I've bought low then sold for a modest profit while leaving the basic amount as is. In mid 2008, I had AGU that had run up from $28 to $115. With the gathering storm clouds as well as not willing to lose out on the gains, I sold 60% for about $105. After watching for months, I re-bought in less than two years for $50.

While a lot gets posted here about 2008/2009 dividend cuts, from what I owned going into the crash - I could find only two that cut their dividends. Where it is pointed out that the index as well as ETFs dropped by 40 to 50%, on a monthly basis - I could only find a drop of 10% for my equity at the same time. I'm sure some of that is because of trimming some equity in 2008 (ex. AGU) and buying into the lows.


Cheers


PS

There is also making money by knowing the rules so that one makes them work in one's favour. Another item from 2009 was to have an investment that had been held for years, paying an 8% dividend. Being short of cash, when it dipped to have a minor CG - it was transferred as a stock to my TFSA. A tiny CG was paid, where dividends were now tax free and the share price recovered within a year.
 
#11 ·
I don't read annual reports anymore, but that is not to discourage those who want to. I think every DIY investor should learn to read them.

I rely on the reaseach of others that is available on the internet and in libraries. Such sources supply me with a list of sound companies that I'm unlikely to lose money on, and likey to gain on all of them.

With that list in hand, I'm similiar to Rusty, as I use technical analysis to help me know when to buy. Once bought I plan to hold forever, unless the fundamental story changes for the worse.

In short, I don't spend hardly any time at all. which doesn't mean you shouldn't. You should research until you know you have done enough.
 
#13 · (Edited)
As a general practice - no I don't read reports randomly or for companies I already know I am not interested in. Maybe if someone was paying me, I would have the time. :biggrin:


At the same time, being aware of leveraged split share corps from articles in the late '90's plus news of the general market panic that made me think a leveraged split share corp, heavy with Canadian financials for a fixed amount could be a good multiplier of a rebound. Some internet searches showed the types of shares had changed dramatically as well as a helped me build a short list. SEDAR made it easy to download the reports to be sure of the rules/share class rations and evaluate them (http://sedar.com/homepage_en.htm).

The news items on split corps that mentioned the one I bought was a couple of years after I'd sold out, having made +240% on the share price and dividends worth 40% of the purchase price being paid while holding. It was interesting to read the articles condemn the class of shares I'd used as being "for suckers only, avoid at all costs".


I suppose one could argue that the articles about the general market trends were what prompted my search/report reading but the corps themselves were not in the news, nor was anyone that I read suggesting them as a way to play a rebound scenario at a cheap cost.


Cheers
 
#15 ·
Well, I am not a great investor and don't do much research but manage to churn out good overall returns. I have a strong financial services industry background but as I have been retired 15 years my experience is no longer that relevant; however, banks make up 45% of my portfolio and have treated me well. I also read this site daily and take note of other peoples opinions. As I do not normally invest in commodities, start ups, retail, and desire a blue chip dividend paying stocks like FTS, BCE, T, etc it reduces my choices. Also, I am only 25% invested in the market with the balance for then most part in fixed income.
 
#16 ·
So that brings me to two questions:

1st, how far do you go in your research before to feel confident about buying into a company?

Some but I don't kill myself over it. To be honest, the most profitable and stable companies (historically speaking) are easy to find. All the big ETFs and mutual funds own the same companies. The real trick is a) entry point into those companies and b) if at all possible, finding the "next generation" of profitable and stable stocks. The latter is very difficult to do.

Most people don't play the latter game so they index invest - which long-term - works out very well for investors.

2nd, how is that working out for you?
So far, so good. Matching the broad market Canadian index for the most part, almost 7-years into the approach. No complaints.
 
#17 ·
Thanks for all the replies and advice!

You gave me ideas and made me think. That's a great start. Rusty O Toole got me curious about technical analysis so I made some research about it but didn't find this to be my kind of stuff. I read a For Dummies book about it this week and wasn't hooked on the idea. Oh and I just bought the book he suggested. Hopefully that will be good :)

Lonewoolf mentioned about establishing parameters for when to sell and I read lots of advice about this but to be honest, I'm not too sure where to go with that. 25%? 50%? more? hard to guess.

I wond't comment on every single advice but most are useful! I find that reading people on this forum has been helpful in researching to.

So far it seems like my favorite way to do things is to check beaten up companies.I find them easy to spot in the Tsx and I have the feeling it's a good time to enter when the price just took a huge drop. I'm building a list of ratio to look for in those companies reports and try to keep it simple but have enough to get an idea of the financial state of the business. If after a crash a company would improve on the financial level, that would be a good indicator for me. Opening this thread came when I started doubting I was collecting enough.

For example, one I am following right now is Empire Company Limited. I'm checking cash flow, debts, current ratio, debt to equity, profit and a few others for the last few reports in the hope to see those numbers improve. I'm guessing there is no limit to how far you can check a company but there has to be a limit.
 
#22 ·
...

I'm building a list of ratio to look for in those companies reports and try to keep it simple but have enough to get an idea of the financial state of the business. If after a crash a company would improve on the financial level, that would be a good indicator for me. Opening this thread came when I started doubting I was collecting enough.

For example, one I am following right now is Empire Company Limited. I'm checking cash flow, debts, current ratio, debt to equity, profit and a few others for the last few reports in the hope to see those numbers improve. I'm guessing there is no limit to how far you can check a company but there has to be a limit.
I've been reading Al Rosen's latest book Easy Prey Investors which talks a lot about how IFRS accounting has changed things, I'm only a little over halfway through the book. Something I have wanted to improve for awhile now is my ability to read and understand the cashflow statement of companies better. Today I was looking at Empire Company's results today as it has been a holding of mine for awhile now.

Keeping in mind I am not an accountant and the book I am reading I would like to get other people's thoughts on what should be included in 'Cash from Operations'. Empire Company's results today show some items in cash from operations that I'm not sure should be there, it doesn't effect net earnings to my eye but does make cash from operations larger. Should things like amortization of intangibles, asset impairments, deferred items, equity in earnings of other entities be reported in this area? It doesn't make sense to me, and is a fairly big topic in the book.

When I look at Empire's balance sheet some things I say to myself is... current liabilities are a little higher than current assets, hopefully they fix that... net equity is finally going in the right direction, how about that... biggest portion of assets is property and equipment, that is good... long term debt is a little over half of equity, that sounds ok.... no more big goodwill write downs, hooray.

In a recent Warren Buffet interview he made an association between an interest rate and PE ratio's - I've always had it in my mind that PE ratios were a reflection of growth expectations. Oh well. A lot of companies seem to trade based on yield and one of the checks I do is does earnings, and if not does cash flow cover the dividend. After this check I would make a judgement to set my own expectations for the companies ability to grow. My recent learnings are causing me to question this practice.

One of my own personal traps is that after I have done this for a company it can be quite a while before I repeat this for the same company.

Would really like to hear what kind of things other people look out for, and look for.

Thanks,
David
 
#18 ·
That sounds like the 'value approach' or classical security analysis. Every stock has 2 values, subjective and objective. An expert accountant, or security analyst, can analyse the company's assets and liabilities, profit and loss, income and expenses and put an objective value on the stock. If you want to know the subjective value it is published on the net every day, and it jumps around every day. If you find a sound company whose stock is selling for less than the objective value you have a good deal. These are a lot harder to find than when Graham started in 1934 or Buffett started in 1950.
 
#19 ·
For example, one I am following right now is Empire Company Limited. I'm checking cash flow, debts, current ratio, debt to equity, profit and a few others for the last few reports in the hope to see those numbers improve.
The problem that when "those numbers improve" , stock price will also significantly "improve" :) , so it will become too expensive.... not only you,but millions of other investors , include institutions with full time researchers ...
I'm trying to buy dividend champions on pull-backs, couple of bad Quarters, market dips...
have it done with stocks like MCD, PG, PEP, JNJ .... and it's usually work....
 
#20 ·
Most of my significant investments are in ETFs. I research these for about 2 years before committing money into them (or advising people to buy them).

Over those 2 years I read all the financial statements, management discussions of performance, and monitor their behaviour. I look for signs that the ETF is flawed in some way.
 
#26 ·
2nd part
Valuation does matter as it determines what future returns will be. Overvaluation was the reason why the Vanguard Pacific Index Fund (MUTF:VPACX) did not return much over inflation over the past 27 years. Paying too much for equities is dangerous. Too much in my opinion is 25 - 30 times earnings or more. Sticking your head in the sand is dangerous. Buying asset classes for the sake of following some blind model could be costly down the road.

For example, a lot of investors today are holding a large portion of fixed income instruments today, which are unlikely to generate much in terms of long-term returns. With a 10-year bond, the most you will get is 2.50%/year, unless you are willing to take on more risk. A portfolio that is heavy on fixed income does not have high expected returns. A portfolio that is more equity-centric will have higher expected returns today.

As a rule, I am worried when a group of investors piling on one-decision stocks or portfolios, without giving it much though.

Conclusion

Most index investors will hate this article. I am hopeful however that the lessons I shared in this article will inspire investors to improve themselves.

No one knows in advance if their portfolio of index funds will do better or worse than a portfolio of dividend stocks over any period of time. There is no guarantee that an index fund portfolio will even turn a profit for you over your holding period. Of course because of the behaviors they exhibit, it is likely that this indexing approach is not a bad course of action for a large portion index investors who will stick to the strategy even when times get rough.

I didn't write this article to tell you that index fund investing sucks, and that dividend investing is better. People who make such arguments need to make bold claims, in order to make themselves feel better about their poor life choices or to compensate for some deficiency they have.

I wrote this article in an effort to share my observations with investors, and help them become better versions of themselves.

The chief reasons for investor failures includes:

Not Saving Enough
Failure to develop and stick to their plan through thick or thin
Paying high investment costs for commissions, advisers, taxes
Overtrading
Chasing Performance
Blindly following others
An investor in index funds is not somehow magically immune to these problems. If they stick to their plan, however, they will do well for themselves.
 
#28 · (Edited)
I'm a pretty noob investor but like you I started off reading the books like Security Analysis, Common Stocks and Uncommon Profits. Also watched some Martin Shkreli videos on Youtube of him doing analysis on companies using their financial results and earnings calls. So that got me into looking at financial reports as well. Ran into same situation as you, we only have so many hours a day outside of working hours and scouring through financial reports one by one is really trying to find a needle in a haystack (needle being an undervalued company and haystack being all the listings on the TSX).

So lately I've been focusing on a single sector, mining. Base metals, gold and uranium market prices have gone down a lot so their stock prices are down quite a lot. However gold and base metals stocks generally have gone up last year and this year. So what I do now is I've found a good site with knowledgeable people from mining: ceo.ca. It's got a former mine engineer: Doug Beattie @ocotilloredux - Cameco's former chief mining engineer who is optimistic on zinc. An active who's been quite good with past predictions: @PamplonaTrader. Another speculator is @MiningBookGuy who posts videos explaining why he's put money in some exploration plays. The site also used to have a fund manager: Warren Irwin @BDminefinder but he's inactive now. BTW Mr. Irwin was ranked No. 1 in hedge fund performance this past year due to his fund's play in Nexgen energy which the site ceo.ca was early to pick up on.

Anyways these guys give their picks and I do my due diligence on them: read the presentations, do a rough calculation of their inferred deposits versus market cap, make sure the company isn't overloaded with debt, and see the management is reputable. It takes me a week usually for a single company but I'm constantly reading up on posts from the aforementioned users because usually they have quality posts with insights to mining especially @ocotilloredux.

It doesn't answer your general question but it's what I've been doing lately: Focusing on a particular sector, finding a site that offers good fundamental analysis with people that discuss the options, then doing due diligence on the companies mentioned. I'm not going for 20 companies a year, getting in on 2 to 3 quality ideas is my focus. I haven't made money this year yet (I have speculating gold last year) so my experience is worth absolutely nothing. But by the time I've either lost or profited it'll be too late to tell you anyways. I hope my amateur experience helps a bit, if not generate a lead for you.
 
#30 ·
Yes I think that's key: focus.

Now when I see threads that have people arguing about the index, which fund charges what MER, exchange rates, vague macro economics, it's a complete skip for me. Those are some kindergarten topics being discussed. I mean if you are going to do index then just do it, not like the perspective changed from 20 years ago. And for macro economics when I listen to Ray Dalio and Larry Summers speaking at Davos I don't even think they are 100% sure of the outcome of all the variables in play, yet you a layman retail investor has an opinion? Jesus.

It might work out for me, it might not. But one thing I know for sure is that the big guys didn't make it big spreading their chances far and wide. They did it with focus, understanding a single thing well and going after it when they see it.
 
#31 ·
The following article, on valuing companies uses some cash flow studies which I think might be of some use to investors as an early identifier for the safety of their investment positions. This is the second article I have seen from the author in the last week, each looking at different companies, and I like the way the method sources from different parts of the financial statements. There may be some dispute on the particular values being used, I think it just depends on what numbers do you want to be watching.

The formulas are a bit lengthy. I did try them on a company for which I was already familiar with, and although I have not done extensive testing with them I believe his boundary layers have merit and may even be considered cautious. Still these are just a measurement of how the company is doing and a person still needs to look at where the company is going, as well as one's other considerations for inclusion in a portfolio.
 
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