Let's revisit one of the most common questions I get from friends and colleagues:
How do you know what to invest in, since the total investment universe is quite large?
This is a valid question, as you don’t have time to study every single company out there! So, is there any shortcut we can use now that we know what we are trying to achieve and what we are looking for?
In this article, I will introduce a practical approach that can help you generate ideas to further investigate by looking at stock charts!
Generating investment ideas
While most financial stock price data is noisy in the short term, over a long period the chart typically reveals high-quality businesses. Therefore, taking a step back and looking at the bigger picture is very helpful.
I urge you to zoom out and look for companies that incrementally increased their share price over the past 5-10 years (or longer). In the long run, share price increases can only be sustained if the earnings power increases incrementally as well. In other words, the share price follows profitability per share.
What does this mean in practice?
The best way to demonstrate this easy approach to generating investment ideas is to look at two very different stock chart examples below.
Let's take a look at Apple. If you look purely at the share price from 2001 to late 2023 you can tell that the share price increased incrementally over time.
If you compare this to Singapore Airlines, you'll see a very different situation altogether. Singapore Airlines shows much more cyclicality and no incremental price increase over time. In fact, the share price is currently about the same as it was in the year 2000. It's not a great company to buy and hold forever if you want to compound your wealth! It's a great example of why you should do your own research, rather than listen to others raving about a popular stock –– Singapore Airlines is perceived as a prestigious blue-chip company by many, though our assessment indicates you should pass on this stock as an investment (even though they may pay a decent dividend).
So here you go! A fast and easy first step to make your initial selection of companies to investigate further. Please keep in mind that this approach to identifying potential high-quality investment-worthy companies is just the starting point of your investigation.
Hopefully, this simple approach will help you generate investment ideas! In case you don't know where to start, I suggest you go through a list of companies in a popular index such as the S&P 500, the Dow Jones or any other broad country index and test it out by going through all the companies in the index.
Thank you for reading!
The Financial Dutchman
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