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How much time should you spend researching a stock?

By Shlok Kamat

6th Aug 2022

2 mins read

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Investors are looking for an "easy" way to make money, and the whole stock market is geared to meet this ambition. From free to commission-free trading apps, to simplified valuation techniques such as the price-earnings ratio. And the market is geared toward finding the "best" solution and making the most money as fast as possible without spending too much time and effort on different options.

This is precisely the opposite approach one should take when managing one's portfolio. Successful investors buy securities intending to hold them for many years. They also conduct rigorous due diligence on every share call before taking a position. They do this to reduce downside risk and ensure maximum chance of growth in their portfolio.

At Berkshire Hathaway's 1996 annual shareholder meeting, Warren Buffett explained that reading annual reports was his favourite method for researching companies. Reading annual reports can be boring, but it sure does give you a lot of knowledge about the company you want to invest in. It also helps you understand the functioning of the sector in which the company operates.

Method to analyse business

The time you require to spend researching stocks is quite subjective. The availability of advanced screening and fundamental analysis tools and platforms has made it considerably easier. You can easily acquire all the data related to a company with a few clicks on your computer.

You have to first find out the sector and industry you want to invest in. Once you find that out, the following steps become comparatively easier. To find out the potential industry you can invest in using the "Top-down Method" of analysis. In this method, you can begin your research with the economy, then the industry and narrow down your list to an individual or a couple of stocks for the industry.

An alternate method would be the "Bottoms-up-Method"; you look at a particular stock and then expand towards the economic factors.

Industry Analysis

There are publicly available sources of information for almost any industry. Often, the annual report of a company gives a good enough overview of the industry, along with its future growth outlook.

Management Quality

Management quality is also a critical factor for an investor. It is often said that there are no good or bad companies, only good or bad managers. The key executives are responsible for its future. You can assess company management and board quality by doing some research on the Internet.

Growth Analysis

Stock prices follow earnings. So, to know whether a stock price would be moving up or down in the future, you need to know where the future earnings are headed. Unfortunately, there is no quick formula that can tell you what to expect for future earnings.

It's basically connecting what has happened in the past to what's expected to happen in the future. Making accurate earnings forecasts is the ultimate test of your stock analysis capabilities because it's a good indication of how well you understand those industries and companies.

Valuation

Once you understand future earnings, the next step is to know about the worth of a company. What is the price of a company's stock? Is it over or undervalued? Analysts need to find out how much the current market price of the stock is justified in comparison to the company's value.

Parting-words

The ultimate goal of every investor is to make a profit, however, not every investor or analyst is good at it. It's recommended to not blindly follow advice unless it is backed with facts. Not everybody can be an investing expert, but you should always try to improve your analytical skills when it comes to stocks.

FAQs

What is an alternative to investing if I do not have sufficient time to analyse stocks?

An alternative to not buying stocks would be buying mutual funds and ETFs. These require no active investor research.

Are all stocks worth your time?

This is a very subjective question and would highly depend on your investment goals.

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