Investing in Stock: Common Sense Analysis Part 1
I have posted for approximately a month now and you must be asking: when is he going to say something about what he invests in?
Ok, ok- here goes. For reasons I'll explain later, I invest in stock and not real estate. I tend to look for two things before investing in anything: (1) common sense analysis and (2) technical analysis. With respect to the common sense analysis, I tend to look for certain things (in multiple parts).
Investing in a business that is highly regulated
By this I mean you have to obtain permission from some regulator to enter into the industry, make changes or leave. Regulation limits the number of players in the industry and creates a high barrier to entry. High barriers to entry limit the number of competitors, a limited number of competitors avoid price wars (typically the best way to gain market share is be the lowest price competitor), lower prices means less profit, less profit means lower share price/less cash flow to pay dividends.
Think about industries that are heavily regulated: banks, insurance companies, utilities (electricity, pipelines, telephones)- they are all typically good stocks to buy.
Now think about industries with have very little regulation: restaurants, retail & technology- all very boom and bust businesses (if you have invested in the Gap, you know what I mean).
For this reason, my two largest stock holdings are TD Canada Trust and Transcanada Pipeline- heavily regulated industries where competition is limited and pricing relatively secure (this is not an endorsement to buy these stocks, please do your own research before investing).
Ok, ok- here goes. For reasons I'll explain later, I invest in stock and not real estate. I tend to look for two things before investing in anything: (1) common sense analysis and (2) technical analysis. With respect to the common sense analysis, I tend to look for certain things (in multiple parts).
Investing in a business that is highly regulated
By this I mean you have to obtain permission from some regulator to enter into the industry, make changes or leave. Regulation limits the number of players in the industry and creates a high barrier to entry. High barriers to entry limit the number of competitors, a limited number of competitors avoid price wars (typically the best way to gain market share is be the lowest price competitor), lower prices means less profit, less profit means lower share price/less cash flow to pay dividends.
Think about industries that are heavily regulated: banks, insurance companies, utilities (electricity, pipelines, telephones)- they are all typically good stocks to buy.
Now think about industries with have very little regulation: restaurants, retail & technology- all very boom and bust businesses (if you have invested in the Gap, you know what I mean).
For this reason, my two largest stock holdings are TD Canada Trust and Transcanada Pipeline- heavily regulated industries where competition is limited and pricing relatively secure (this is not an endorsement to buy these stocks, please do your own research before investing).
Labels: Investement Strategy
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