Selecting a good stock

This is the first blog for Monnaie, a blog to reach out to the masses on financial literacy, but focused more towards stock selection. The main reason stock selection is chosen is because this subject has caused many debates among many scholars, professors and fund managers with each touting the merits of their own strategy; thus leading to more confusion.

When I first started, I was also totally confused. Spent many days ( and sometimes night) trying to figure out which works. Technical analysis? Fundamental analysis? PE ratio that is high or low is good? ( if you browse through google, there are 100 sites saying a high PE ratio is good and another 100 saying that low PE ratio is good! sheer madness if you ask me!) cash flow analysis? 

Which leads to my First rule of Investing: Don't listen to anyone!

That is my first piece of advise to you. I learnt it the hard way by trusting people, my uncle's second cousin's wife's neighbor's maternal grandmother gave me my first stock to buy; which was a mining company. Rumour was swirling that the share would soar in a few days and that it is good to buy in now. I jumped in with two feet, hoping to make a quick buck.

Big mistake!

The share price tanked shortly afterwards. At first, agony, then despair, then anger, acceptance, guilt, the emotions going through that order.

I learned that day never ever trust anyone. Not the neighbors, not the analysts in the papers (most times all the time, when an analyst's report comes out to encourage masses to buy a stock, I am ready to sell.) not my dog. I trust myself.

Selecting a stock is not hard, all you ever need is to trust yourself, even when the tide is going against you, the stock fell 10% the day after you bought it. No problem, so long as you have done your research and the fundamentals did not change.

Don't trust the management of the company you plan to buy either; they will sprout all nonsense about how good their company performance will be next year ( remember Gpacket? A malaysian company in the internet provider business, for the past 4 years they had been saying that their company would be turning around the next year. They are till turning around! Im guessing they are turning in a big circle.) 

The first key to selecting a good stock is to understand the company. To people wo tout a top-down approach( basically meaning select an industry and drill down to individual companies under that industry) I say bullshit. They normally choose industries that are doing well, which means more competitors, which leads to lower profit margin in the future. I make the most profits from companies found in dying or boring industries. why you ask? Simple, in dying industries, companies tend to be cost-cutters, be more efficient leading to at least profit during bad times, and in most cases, exceptional profit during the good times; and when most competitors are out of business, well, good companies get the whole pie to themselves.

Do that! Select a company that is basically tanking; no1 has ever heard of, bothered too much about it. I can think of a few and in my next post i will share one company in that particular industry