How many stocks to buy

Question 1

What is a catalyst in stock investment?

Answer 1

In equity markets it is an event or other news that propels the price of a stock dramatically up or down.

The most common catalysts come in the form of new, often unexpected information that causes the market to reevaluate a company’s business prospects.

Question 2

What is an investment thesis?

Answer 2

A written analysis laying out the case for why can investment opportunity should generate a compelling return.

Question 3

What is step one in writing an investment thesis?

Answer 3

Identifying the underlying catalyst at play.

example: are you are interested in the long-term upside from a secular trend or economic super cycle, or a shorter-term rebound from the economic cycle or a bear market? Write out the primary reason you believe this investment has attractive upside potential.

Question 4

What is a secular trend?

Answer 4

Changes in the economy or business climate that develop over long periods of time. These transcend business cycles to reflect the overall success or decline of an industry, or in some instances, several related industries.

Question 5

What is an economic super cycle?

Answer 5

A sustained period of expansion, usually driven by robust growth in demand for products and services. They tend to produce strong, sustained demand for raw and manufactured materials, such as metals and plastic, that exceeds what commodity producers can supply.

Question 6

What are the four stages of an economic cycle?

Answer 6

1. Expansion
2. Peak
3. Contraction (recession)
4. Trough

Question 7

What is step two of an investment thesis?

Answer 7

Assess how the investment is positioned within the catalyst.

Look at how the particular investment opportunity compares to others that benefit for the same catalyst.

Is it the largest publicly traded company focused on this opportunity?
Smaller but with more upside potential?
Does it align with a particular long-term investment strategy?
Will it help you with balancing your portfolio?

Question 8

What is step three of an investment thesis?

Answer 8

Consider the biggest risks.

Some examples:
Can it withstand a recession?
Could congress enact legislation that would damage its prospects?
Is there a lot of competition within the industry?
Does it have too much debt, volatile cash flows, or an otherwise weaker financial profile?
Is the price high? Could that result in underperformance if the catalyst doesn’t play out according to plan?

Question 9

What is step four of an investment thesis?

Answer 9

Determine your conviction level.

What is your expected return from this investment and how much conviction you have in it’s ability to achieve that return. Given all the other info you’ve gathered is the worth the investment?

Question 10

What are the two types of stock analysis?

Answer 10

Fundamental analysis and Technical analysis.

Question 11

What is fundamental analysis?

Answer 11

Analysis based on the assumption that a stock price doesn’t necessarily reflect the intrinsic value of the underlying businesses. This type of analysis is designed for investors looking for excellent long-term returns.

Question 12

What is a value investor?

Answer 12

An investor who focuses on stocks that are under appreciated by investors and the market at large. These investors generally buy stocks that look cheap and hope the price will rise as more people come to appreciate the true intrinsic value of a company’s fundamental business.

Question 13

What is technical analysis?

Answer 13

Analysis that generally assumes that a stock’s price reflects all available information and that prices generally move according to trends. Basically it says you can analyze a stock’s price history to predict its future behavior. This is for those who are looking for short-term price fluctuations.

Question 14

What are considered the four most important and easily understood metrics every investor should have in their analytical toolkit?

Answer 14

1. Price-to-earnings ratio (P/E) - useful for comparing companies in the same industry with similar growth prospects.
2. Price-to-earnings-growth (PEG) - has idea that fast growing companies can be ‘cheaper’ than slow growing ones. Great to use in case where a stock’s P/E seems excessively high
3. Price-book ratio (P/B) - best used in conjunction with other metrics to compare businesses in the same industry
4. Debt-to-EBITDA ratio - a high ratio could be a sign of a higher-risk investment, especially during recessions and other tough times

Question 15

What is the price-to-earning ratio (P/E)?

Answer 15

A company’s share price divided by its annual per-share earnings.

Example:
Stock trades for $30 and the company’s earnings were $2 per share the P/E ratio is 15, or 15 times earnings.

Question 16

What is price-to-earnings-growth (PEG)?

Answer 16

This ratio takes a stocks P/E ratio and divides it by the expected annualized earnings growth rate over the next few years to level the playing field.

Example:
P/E ratio of 20 and 10% expected earnings growth over the next five years would have a PEG ratio of 2.

Question 17

What is the price-to-book ratio (P/B)?

Answer 17

A comparison of a company’s stock price and its book value.

The book value is the net value of all assets. A theoretical amount based on if the company shut down its business and sold everything it owned.

Question 18

What is the debt-to-EBITDA ratio?

Answer 18

Total Debts / Earnings Before Interest, Taxes, Depreciation, and Amortization

Debt can be found on the Balance Sheet and EBITDA can be found on the Income Statement. It’s a good way to gauge financial health.

Question 19

What are durable competitive advantages?

Answer 19

Things can may assist a company in sustaining and hopefully increasing its market share over time.

Example:
A trusted brand name can give a company pricing power.
Patents can protect it from competitors.
A large distribution network can give it a higher net margin than competitors.

Question 20

How can great management assist in investors making stock decisions?

Answer 20

Ideally, the CEO and other main executives have successful and extensive industry experience and financial interests that align with shareholder interests. High insider ownership and a large proportion of stock-based incentive compensation are two things to consider.

Question 21

How do industry trends assist in making investment decisions?

Answer 21

Investors should look at industries that have favorable long-term growth prospects. You want to look at the history of an industry as well as individual companies within the business.

Question 22

What are some things to do before you purchase your stocks?

Answer 22

• Pay off any debt first
• Make a budget
• Have emergency money set aside
• Have clear plan for other saving goals

Question 23

What are some things to consider when investing a small amount of money through a broker?

Answer 23

• No minimum balance fees
• No commissions or transaction fees
• Allows fractional share purchases