We’ve all heard about people reeling in big bucks from the stock market, but is it also true that there are countless others that are struggling to break even…
Why is it that some people can make money in the stock market while others struggle to even break even?
The answer is simple – Most successful investor have a system.
A proven step-by-step approach to analyzing their stock investment.
Having a systematic approach to picking the best stock investment will not only minimize your risk, but also increase your chances of making more profits.
What you want to do is to run through your stock picks through the system and see if it passes through the set criteria or gets filtered.
You then keep the ones that passes and throw away those that failed the system.
Here, we use a 4-step approach to analyze all our stock picks before making a the decision to purchase them. And this systematic approach has more than paid off, turning a -$400,000 private fund into one with over $2,000,000 in profits.
Want to know how we did it?
I’ll share more on the stocks we bought and also how to put everything together later in this article, but first, here are our 4-Step system you need to know if you are looking to invest and make some healthy profits in the stock market.
Let’s get started:
#1 The Business Quadrant
In the Business Quadrant, you need to analyse the business model of a company and how it generates its revenues and profits. A company with a superior business model simply has a more secure, stable and efficient way of making money.
In other words, this company is able to generate more revenue and profits with more predictability for a long time to come. What do think that’s going to do to its share price? 😉
Besides evaluating and understanding a company’s business model itself, there are three other areas you need to consider as well:
- Growth drivers. Does the company have any ways to grow and expand its business? A company with strong growth drivers has more potential to generate more revenue/profit and drive its stock price higher. A company with no growth prospects will simply remain stagnant.
- Economic moat. Does the company have a strong competitive advantage? Competition is fierce where there are profits to be made and a company needs to be able to defend its turf and continually stay ahead of its competition. If not, a once thriving business could be wiped out overnight – just take a look at what happened to BlackBerry when the iPhone came along.
- Risks. What are the potential risks that a company might face? Serious risks are anything that can harm a company’s revenue and profits permanently, and in the worst case scenarios, cause a company to go bankrupt. A company with fewer risks simply has lower chances of going down and higher chances of success.
#2 The Management Quadrant
A company’s top management team consists of the CEO, C-level executives, and the board of directors. They’re responsible for the leadership, direction, and overall growth of the company.
Good management can lead a company to higher revenue, profit and growth while also contributing back to society in positive ways. Poor management can bring a company down, sometimes toward bankruptcy, destroying shareholder value in the process.
Just like how Apple became the tech behemoth today based on Steve Job’s legendary vision and leadership, you need to pick companies with a CEO and management team that can lead a company (and its stock price) to greater heights.
Besides the talent of a company’s management team, you also need to consider how aligned they are with shareholders’ interests. Management that is aligned will protect the value of your investment and not undertake actions that would harm the interests of shareholders.
#3 The Financials Quadrant
This is the quadrant that most novice investors focus exclusively on, simply because it’s easy to analyse a company when you have hard data like numbers to examine.
While financial performance is extremely important and ultimately indicates how successful a company is, you can’t analyse a company based on financials alone.
A company’s qualitative aspects like its business model and management team are just as, if not more, crucial to its long-term success.
With that said, here is (but not an exhaustive) list of items you need to look at when analysing a company’s financials:
- Does the company have a track record of rising and consistent revenue and profit? A successful and growing company should see growing revenue and profit.
- Is the company able to maintain a good level of gross and net profit margins? Eroding margins might signal that a company’s business fundamentals are deteriorating.
- Does the company have a track record of rising and consistent cash flow? Cash flow is extremely important because a company needs cash to continue operating it’s business. A profitable company can go bankrupt if it manages its cash flow badly and runs out of cash.
- Does the company have a healthy amount of cash in the bank? Just like how we need a certain amount of savings in case of a rainy day, a company needs some cash in case it unexpectedly runs into difficult times. Too much cash however and it could mean that the company has problems deploying it for business growth and investments.
- Does the company have low, manageable levels of short-term and long-term debt? The higher the debt, the more risky is is. Take a look at a company’s current ratio and debt-to-equity ratio.
- Is the company able to generate good returns for its shareholders? Take a look at a company’s return on equity and return on assets ratios.
#4 The Valuation Quadrant
We’ve gone through the first 3 steps of the Investment Quadrant, and if the business passes these 3 criteria, you want to put it on your investment watch list.
The last step to ensure that you’ll profit handsomely from all your hard work is to buy at the right valuation.
A business may be doing well but if you buy it overvalued, you’re unlikely to profit much from the investment.
This is also the reason why you want to put the companies that pass the first 3 criteria on your watch list. Because when they reach the right valuation, you’ll then have the chance to buy them cheap.
There are many ways to value a stock including P/E ratio, PEG ratio, P/B ratio, the discounted cash flow model, etc. They all work – but the important thing is to use the right valuation method for the right type of company in the right business situation.
Now… That sounds like quite a bit of work isn’t it?
But then again, if I were to tell you that all you need is just 4 or 5 right investments, and you’ll become quite wealthy…
Will everything then be worth the effort?
In fact, we’ve used the above 4-step strategy to make quite a bit of money from the stock market… like… turning a -$400,000 fund to over $2,000,000 in profits.
Some of our Investments include:
Breadtalk – 178% in 2 years
Super Group – 243% in 2 years
Boustead SP – 121% in 4 years
Soup Restaurant – 63% in 3 years
Yahoo – 106% in 2 years
Japan Food – 176% in 3 years
Sure, everything we’ve talked about seems like a “ideal” scenario of a great investment.
But would you like to see how we put everything we’ve just talked about together?
Case Study: How To Put The 4 Step Formula Together
Download the report and take a look.
I’m sure you’ll find the report very insightful as we go through what we’ve just talked about – from idea generation, to business, financials and to valuation…
The end result?
A 243.5% ROI in 2 years.
Not too bad if you ask me. =)