About Investment

                                                       How to Invest

 I'mgonna walk through how to research a company and ways we can learn to becomea better investor I plan on starting with the very basicsand I'll give ideas along the way for how we can take our investing game tothe next level so I've been investing for over 15 years and I startedinvesting shortly before I went into college then I got my bachelor's degreeI got my master's degree and I'm currently working towards my doctorateof Business with a specialization in finance but my real love for investingcame from when I was young and my father worked on the floor of the New YorkStock Exchange and that was really my early introduction to investing thatbeing said I understand that investing can seem intimidating for people whohave never been around it who I've never done it for the first time or if you'rejust starting out the process itself can seem cool you know quite overwhelming sowhat I'm hoping to do here is I'm gonna break down the actual process I gothrough whenever I analyze a new company and I believe that if we follow thisprocess we can all get really good at analyzing companies and ultimatelypicking companies to invest in so if you're not a hundred percent confidenton how to read financial statements

I think that this book is a fantasticplace to start it's called Warren Buffett and theinterpretation of financial statements and I got an Amazon link in thedescription below but I like it because it's very simple I that's really thereason I love this book and as you can see it's quite a small book and it'ssuper easy to read now i think that mary buffett she's one of the authors i thinkthat she used to be married to or she still is married to i'm not sure imarried to warren buffett son and and although this is called warren buffettand the interpretation of financial statements I can safely say afterreading it that this is not a shortcut for thinking like Warren Buffett thinksas far as investing goes but I'm not even saying that's why I would like thebook what I'm saying is that they do a fantastic job of making it very verysimple they walk through different key ratios different pieces of each of thefinancial statement

 and I think it's an amazing place to start if you want tolearn how to read financial statements like Buffett doesthen Ben Graham's book security analysis is the place to go but I read that bookand I love reading about this stuff and that is a really tough book to read thatbook took me over a year to read this one took like you know a couple hours Imean it's really quite simple okay so now let's pretend that you'recomfortable with the basics of financial statements and you could probably moveon to these next steps even if you have just the very basics they're just a verybasic understanding of financial statement analysis and I put the links Iput links to the videos that we created on each of the financial statements inthe description below and you could probably get away with just that for nowbut I think the key to really becoming a good researcher and ultimately a goodinvestor is being able to analyze a company's business or understand thebusiness itself so now let's look at how we can learn about the business and ifyou're wondering this is the these are the exact

steps I go through for everycompany that I research either for work or for when however Ido it these are the steps there's eight steps in general that we go throughokay so let's pull up any company how about we start the next company that I'mgonna cover for the Dow 30 analysis Goldman Sachs so the first step is topull down the most recent annual report which is called the 10k now 10k's arerequired to have a certain amount of information in them one of thosesections one of the requirements is that they have a business description in itso whenever I start with a new company or even if it's been a while since Ilast analyzed the company I always start with the business description this isthe business description for Goldman Sachs and here they break out thesegment's they break out what the company does and this one's about 20some odd pages and they're all usually in that area call it 15 to 20 pages sothis isn't your typical they throw a description out there they do a reallygood job at least Goldman did in this example of explaining what the businessdoes and how they make money now many times when I first start researching acompany this may be as far as I get if I get through this section and I don'tlike the business itself or it's too complicated or I question how manyprospects they're gonna have over the next fewyears then I could just stop here and I think that this is an important pointbecause you can bail out on a company at any time you don't need a thousand goodinvestments all you need is a handful of great ones and you can make a killingwith your investments so I think we all need to be very picky about thecompanies that we elect to ultimately put our money in okay now we know whatthe business does so now we're on to

step two now we're going to read themost recent management discussion and analysis section from their most recentfiling if it was their annual filing the same place they got the businessdescription great otherwise you have to pull down the quarterly filing which iscalled a 10-q now the business section is usually only in the 10k but the MD&Asection is usually in every one of their quarterly and annual filings nowsticking with our Goldman example Goldman's annual report was filed onFebruary 26th of 2018 it's now November so it's a bit outdated but their lastquarterly report was filed just two weeks ago so we know the businesssection is from back in February and the MD&A section is just from two weeks agoso in the MD&A section we're gonna learn a lot about the business whatmanagement what the management team is trying to do with the business whattheir plan is they might talk about the industry or maybe what different trendsthat are happening in the industry they're likely to break down thefinancial performance for each of the segments and basically they're gonna talkabout how the business as a whole is performing now I bring up the datesbecause I think it's important to remember if you're reading the businesssection and it was from almost a year ago just keep that in the back of yourmind you know you might want to update those numbers in your head as you'rereading through the quarterly MD&A section okay and this kicks us rightover to

step three which is on to the financial statements and I highlyrecommend that we pull those financial statements directly from the latestquarterly and annual reports because these financial statements come with thefootnotes and the footnotes can be key to understanding the financials often acompany does something unique with a particular line item and in thefootnotes they explore what they're doing and why they're doingit so if they were ever going to let's say change an accounting rule or adopt adifferent accounting rule well we should probably just Google what thataccounting rule change is and I think that this type of practice can get usreally good at exposing ourselves to different types of financial statementanalysis and I think that the more we look at the actual financial statementsnot something off of let's say Yahoo Finance or whatever it might be go tothe actual source and if you have a question about a particular line itemlook at the footnotes they'll probably explain it there now

step four is get the company presentations and recent earnings callsnow steps two three and four can really be pushed together or swapped aroundbecause for me on a personal basis after I read the business section assuming Istill like the company well I go ahead and download everything from steps twothree and four all at once because each of these are often interdependent andsometimes they say the same thing in each of them so I think it's a great abit faster just to download them all at once and start going through themtogether now up until this point we've made no attempt to value the company allwe're doing at this point is getting to know the firm understanding what they dohow they make money where their margins what is their growth rate look like dothey have free cash flow how does free cash flow look what's management's plando we think that their plan is reasonable things like that during stepstwo through four those are the questions your time you're trying to answer okaynow in

step five now we need to find competitors so in their MD&A sectionor maybe in the business section or maybe in the earnings call wellwe would have come across hopefully something about the industry and now weneed to identify competitors ideally two or three of them if we could do that I'mhappy now at this point we know the company well and you know what they doyou know what they're planning to do you understand where they're going and nowonce we find competitors what we want to do is we want to read a little bit abouteach of the competitors and try to understand what their plan is what'stheir growth rate like what's their margins like what business line are theytrying to go into and sometimes if let's say you see a big difference inmargins between one company and another you could look at well why is there sucha big difference sometimes this reveals a competitive advantage that one companyhas over another so now once you understand the very basics of what thecompetitors do you pick two or three and we move on to

step 6 now we want to tryto value our company now assuming that we still like them of course nowsometimes you'll come across one of the competitors and you'll say I like thisone better maybe I'll switch over to that company to that competitor becausemaybe they have a competitive advantage that we identified so what we do is westart this exact same process over with them but this time imagine how mucheasier it's going to be to understand that business read the managementdiscussion over there because now we're going to know that business so muchbetter we're going to know the industry we're gonna understand the language somuch better so the second the third the fourth time we do this for similarcompanies the easier this is going to get but now let's imagine that we stilllike our company so now what we want to do is we want to try different valuationmethods maybe we try discounted cash flow or p/e multiple or EV to EBITDAthere are lots of choices and the more experience we get with different typesof companies and different types of valuation methods the betterwe'll get at choosing which one is appropriate for that particularsituation now this is also where you want to compare the company with theircompetitors compare the ratios also compare the company with themselves fromprior years if management says that they have a particular plan in mind well howlong's that plan in place are they actually working it can we see it in thenumbers and for me I think you can learn a ton about a company with this type ofanalysis digging into the differences from year to year or from company tocompany can really point out a lot personally this is also where I like tofind industry associations often these types of groups can do a great job ofexplaining the industry explaining the potential of the industry maybe theprojections or the future of the industry and I think that this is greatto identify what our company does what their competitors do where they falloverall in the industry now if you have access to analysts research this is agood place to pull it all down I like to see what valuation methods areusing what does consensus say about revenue about earnings and personallywhat I like to do is I start with consensus for revenue let's say or evenfor earnings per share and then I read their investment thesis and I say youknow what I'm either more bullish than their or I agree with them I'm rightline with what they're thinking or I'm a bit more bearish than they are and thenI can adjust their expectations in one direction or another if I think itshould be higher I can move it slightly higher slightly lower or much highermaybe they're not accounting for something I also like to look at whichvaluation method they're using are they using PE or EV to EBITDA and if I haveaccess to a few different analyst reports that could be useful to see howeach of them do it so I can look to see at least what's popular among analystsfrom a valuation perspective don't forget they in theory specialize inthese types of companies so in theory they should know which type of valuationmethod is best and this ties us into our next step

step 7see what the stock is doing now we also we've calculated our fair value we knowwhat we believe this stock should be worth where's the stock actually tradingso sticking with Goldman here's a recent chart from Goldman Sachs looks likethey're trading right around two hundred and seven dollars but here's the pointof this step this isn't necessarily to see where the stock is right now look atthis drop right here what happened how about this drop or what made it movehigher in this spot and in each of these we want to pull down the news from thattime period to see if we can identify what was happening either with thatcompany or with the industry to identify what moves the stock pretended withGoldman Sachs that every time a big headline comes out about rising interestrates are falling inflation or whatever it might be and when that news comes outwhile the stock goes crazy in one way or another that's good information for usbecause we want to know what is a driver what does Wall Street or what doinvestors believe is a driver of this stock you can usually tell that bylooking at big movements and what put it thereusually its earnings but sometimes it could be more than that now it almostdoesn't matter what you're over there we now have an idea of what to look forgoing forward plus if we similar headline come out one morninglet's say a month from now after we've done all of our research well weprobably have a good idea of how the company will react and this brings us toour last step

 

step 8 look for a buying opportunity okay sonow I know what the company does we know what their plans are and we know what webelieve they should be trading at we've looked at some recent news and now weneed to determine what our personal margin of safety is so if we like thecompany but maybe we think that there's a lot of risk well we want a largemargin of safety using the Goldman chart as an example so if we think that thisstock is really worth let's say 230 based on our calculations well maybedown here at 207 maybe that's good now that's plenty of margin of safetyfor us but if we think the risks are larger maybe we don't want to get intoit unless it's at 190 or maybe below 175 that's going to depend based depending alot of different things could be your portfolio could be your level of risktolerance could be your confidence in your projections whatever it might be sonow going back to the news for a second one thing that I really like to see ifthere's a company like this that maybe I wanted to get below one ninety one thingthat I really like to see is let's pretend earnings come out and they missby a penny and the stock drops you know nine percent because of it well thatcould be a pretty dramatic drop for something that over the long run doesn'tchange a lot unless the fundamentals of where we think the business is going ormanagement changes their plans or something like that that could be anenormous opportunity I look for something like that as a buyingopportunity to get this stock back within my margin of safety so if I wantto below 190 or below 175 whatever might be that looks like an ideal opportunityto me don't let everybody selling off scare you away from your analysis do youneed to update the analysis but don't let them scare off if you're confidentwith what you've done with the research that you've done so at the end of theday if you like this company well we can go on buy it simple great that's easybut maybe you want to wait for it to get below 190 or 175 or whatever fine what Ilike to do is I have a bull pen of stocks where I just put it over thereand I wait for them to get there and then what I do almost immediately ismove on to the next company this is the key point to remember withthis whole process that the idea here is that the more you read about companiesthe more you analyze different industries and how different companiesplay different roles the more ideas you're going to come up with and thebetter you're going to get at analyzing companies and ultimately coming up withgreat investment opportunities so if you have any questions or if there'sanything that you would do when analyzing a company that I didn'tmention here please post them in the comments below and thank you forsticking around all the way to the end of the video and if you haven't done soalready hit the subscribe button and I look forward to seeing in the next videothanks

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