So at this point you may be asking Yourself how do you go about finding a Great investment and we have covered a Lot of material so far so in this Section i'm going to be reviewing the Components of a great investment and Really what are the main things that i Am looking for because if you go out There and you're trying to find Everything i've discussed in this course You're never going to find it it's going To be pretty much impossible to find the Perfect investment out there because You're not going to find an investment That meets all the criteria that i've Mentioned in this course and if you do Find an investment that meets all those Then let me know because i have yet to Find one But these are basically the biggest Things that i look for when i am Evaluating a potential investment and Really you guys are going to develop Your own strategy and figure out what Things are important to you and what you Are looking for in an investment but as Far as me these are the main things that I am looking for so when you are Analyzing different stocks and companies And deciding on whether or not you want To invest in them you're going to look At each stock individually and consider Each aspect and you're going to look for The best opportunity you're not ever
Going to find the perfect opportunity Out there so you're gonna just kind of Look for what is the best opportunity And if nothing is appealing at the Current time then it may not be a good Time to be investing i know one of the Things we've discussed already Is as we get into a more over extended Bull market there's going to be less and Less value opportunities so if you're Following value investing principles and You can't find any good value Investments it may just be due to the Fact that we are in an overextended bull Market and there isn't much value out There so your best bet might be to wait On the sidelines And again while it is important to spend Time looking at each detail you want to Avoid analysis paralysis and this is When you are looking at too much stuff Doing too much research and you end up Doing nothing because you're just Looking at too many different details And just driving yourself crazy trying To uh find out as much as you can so you Don't want to under research an Investment and just make a speculation And you also don't want to drive Yourself crazy by trying to understand Everything you want to find a strategy Somewhere in the middle where you are Looking at certain things and you know You're not just you know spending all of
Your time Researching stocks But as far as the biggest things i look For i break them up into different Components and these are in no Particular order but the first component Of a great investment is rising profits I want you guys to think of profits the Way you would think of oil in your car Or the blood in your body so profits are Like the lifeblood of a company and it's Important again to see a company that is Actually turning a profit A lot of people make the mistake of Investing in a company and they don't Even know if it's profitable you this Would be actually a good question to ask Somebody if you're talking about Investing and they talk about a Particular investment ask them if They're turning a profit and uh you know What their P e ratio is and you're going to be Surprised how few people actually know Whether or not they're investing in a Profitable company So investing in a company that is not Profitable is very uncertain so like i Said first of all i look to see that a Company is actually turning a profit and Then the second thing i look for is that The company is seeing profits rising Over time because you want to make sure That their profits are growing so how do
You actually determine this you guys Should probably have a good idea of this By now but just for review one thing you Could do is look at the earnings per Share as well as the income statement to Determine whether or not profits are Rising and what are you actually looking For you're going to be looking for year Over year and quarter over quarter Growth and in most cases when i'm Looking at a trend i like to see three To five years of data so i would want to See three to five years of rising Profits over time to come to the Conclusion that the company is Increasing their profits that way i Would believe it is a trend at that Point now the second thing i look for in A good investment or the second Component of a great investment is to See top-line growth that is because Earnings can be manipulated with Creative accounting practices however Gross revenue or sales figures are a Great confirmation tool when analyzing The profitability of a company because It is much more difficult to fudge those Numbers And it makes sense that rising revenue Should be resulting in rising profits so Equally important to seeing rising Profits is seeing Rising revenue or top line growth and uh Rising profits or profits would be
Bottom line growth that's the difference There So you want to make sure that the Company is seeing top line growth as Well as bottom line growth so when i'm Looking at a particular investment i Always make sure that i'm seeing top Line growth in the Sales and revenue as well as bottom line Growth in the profits so if you guys are Trying to determine whether or not a Company has top line growth the best way To do that is to look at the total Revenue on the income statement And like i said before in order for me To believe this is a trend i like to see Three to five years of growth so if i'm Looking at top line growth i'm going to Want to see three to five years of Increasing total revenue now do remember That when you're looking at things like Profits and revenue you may see some Flat or declining quarters and you don't Really want to drive yourself crazy Because really what you're looking for Is long-term consistency so more year Over year growth there may be a few Quarters here and there where they're Not growing maybe they're flat or Declining you're just looking for a General upward trend And usually you're going to see that in The year over year growth calculations So the third component of a great
Investment is if the company has low Debt and they are a cash cow so how do You determine this this you will find Out by analyzing the balance sheet so Once you look at the balance sheet of a Company you should have a good idea of The debt load of a company and you want To look for a company that has Reasonable to low liabilities Now do remember that some debt is Healthy but you do not want to invest in A company drowning in debt so while some Borrowing is important for them to have Growing operations you don't want to Invest in a company that has really over Extended itself and they have taken on Too many liabilities Now another component of a great Investment is free cash flow for things Like acquisitions or just to get Themselves out of a bad situation having A free cash flow is a very good sign and Having Lots of cash around so that is why i Always look to invest in companies that Are a cash cow or at the very least they Have low liabilities or reasonable Amounts of debt again the cash flow Statement will tell you whether or not The company is a cash cow and by Analyzing the balance sheet you'll get An idea of the debt load of a company Now the fourth component of a great Investment in my opinion is dividends
And again this is more for an income Oriented approach if you are a growth Investor you are not as concerned with The dividends but if you are looking at An income investment dividends are very Important and they're also very telling Of the company operations and whether or Not they are making good decisions and What i mean by that is if the company is Restructuring dividends or they don't Have a consistent dividend growth streak That is not a sign that they know what They are doing when it comes to their Financials you want to see Rising dividends and consistent Dividends over time So what you are looking for in a good Investment is a long history of Uninterrupted dividend payments and do Remember that if there are any Abnormalities with the market there may Be times when a company stops paying Dividends just to the uh just to the due To the market conditions so one example Of that is I know back in 2008 the drug company Pfizer had to stop paying dividends for A short period of time something like That i wouldn't really care about that Much because of the Conditions of the market but if we are In a normal market and we're seeing Companies that are lowering dividends or Stopping dividend payments altogether
That would be a red flag in my opinion So again what you're looking for is a Long history of uninterrupted dividend Payments and then a long history of Rising dividends And again another thing to look at is The dividend coverage ratio because that Will indicate whether or not a company Can afford a dividend and again i just Want to remind you guys that while Dividends are important i'm going to Give you guys my old saying again of Don't be dazzled by dividends so i would Always say dividends are a secondary Item as far as looking at a stock you Know you want to make sure it's a good Investment first and then you worry About the dividends if you're too Focused on the dividends at that point You might be dazzled by dividends and do Remember that they are never guaranteed And companies can restructure them at Any time but if you are looking at an Income investment then dividends are a Very important component of a good Investment So component number five is industry Growth so if this company is part of a Cyclical industry make sure they are an Industry leader now this is a company That is a part of a defensive industry Make sure they are expanding operations What i'm getting at here is make sure That they have increasing sources for
Revenue so remember that cyclical Industries require an increase in Spending from existing customers while Defensive industries require more Customers because as we've said in a Defensive industry the demand for the Goods and services is relatively stable While in a cyclical industry the demand Is a result of an increase in the Consumer spending so for a cyclical Industry you need customers to spend More money while in a defensive industry You need to have more customers so one Of the most important things to look at Is whether or not the industry as a Whole is growing so especially if you're Looking at a growth stock in a cyclical Industry you want to make sure the Industry is growing and you also want to Make sure that this company is a leader Of the trend and not a follower so one Of the best things you can do is to Start by looking at the industries Themselves and identify a breakout Industry and then look for a great Investment within that industry but i Always try to invest in a company that Is in a growing industry so component Number six is a strong brand and this is Something that very few people actually Talk about and it's just so important so I feel that a strong brand is one of the Most important components of a great Investment and that is because consumers
Make purchasing decisions on a Subconscious level Oftentimes when we're out there deciding Where to go to eat or what things to buy At the store we're making decisions and We're not really thinking about them but We're making decisions nonetheless so Consumers are making Decisions on a subconscious level and That is a reason why a strong brand is Very important so one of the questions i Ask myself is is this a brand that People like or do we associate it with a Negative recent event because if Something has happened recently with the Company again think about our examples Of using united airlines or chipotle Where there was a negative recent event That really has Affected people's decisions when it Comes to whether or not they're going to Be supporting those companies so i think It is very important to invest in a Company that cares about the brand Reputation and has a strong recognizable Brand so this is one of the biggest Components of a good investment in my Opinion is the brand itself and like i Said before i always benchmark the brand To coca-cola to determine whether or not The company has a strong brand or a weak Brand the seventh thing i look for in a Great investment is the barriers to Entry so is the company protected by
Barriers to entry or could anyone Compete with them and this is a question You're going to want to be able to Answer before you make any investment And i just want to let you guys know That i never invest in a company that Has low to no barriers to entry and We've talked about the barriers to entry Earlier on so i'm not going to review Those again but always invest in a Company with high barriers to entry and I want to give you guys an example of a Company with low to no barriers to entry And that is blue apron they had an ipo Earlier this year and this is a meal Prep delivery service so this is a Company that has no barriers to entry There's nothing protecting them they Have no patents and it's a very easy Business to rip off and as a result they Have numerous competitors so this is an Example of a company that i would never Invest in just due to the fact that this Business has no barriers to entry So instead you want to look for a Company operating in a segment with high Barriers to entry and again a few Examples of this are research and Development any patents Infrastructure and again brand is a Barrier to entry because customers are Very loyal so if a company has a strong Brand they're going to have customer Loyalty but these are all great barriers
To entry that i look for in a company And like we said blue apron is an Example of a company that has no Barriers to entry and it's a business That anyone could get into if they had Enough money that is not something you Want to see in a good investment Component number eight of whether or not A company is a good investment is Whether or not the price is right and This is going to come down to your Fundamental stock analysis because the Truth is None of the other components matter that We've discussed so far nothing else Matters if the price is not fair and Reasonable because what it comes down to Is what you are paying for a piece of Ownership of this company so you're Going to use the value investing Principles to determine whether or not The stock is trading at a price that Makes sense based on the value and if The price is not right then it's not the Right investment so what you're going to Do Is look at indicators like the price to Earnings ratio or the price to book Ratio and compare them to the industry Average as well as the competitors and Just look at other things to determine Whether or not this stock is at a good And reasonable price because if the Price doesn't make sense it's just not
Going to be a good investment and this Is going to be the most important Component of a great investment is Whether or not the price makes sense and Then the final component of a great Investment involves technical stock Analysis And i will say that this is an optional Step because for some people Technical stock analysis just does not Make sense but if you are comfortable With technical stock analysis then i Would recommend analyzing the charts and Asking yourself the following questions Which we talked about earlier on but First of all Are the simple moving averages in order Are they in the correct order does the Relative strength index indicate the Stock is overbought and what i would Recommend doing is Once you've followed all these steps and You've identified a good investment i Would consider looking at the support And resistance areas and waiting for a Pullback before investing in a stock for A long-term investment to make sure You're getting it at the best possible Price But again this is something that is a Optional thing that you can do because Technical stock analysis is a great tool But it is very difficult for many people To understand so if you're not into the
Technical stock analysis then you can Just skip this step and this wouldn't be A component involved with your investing Process Now the final thing i want to leave you Guys with in this section is the skill Of patients because the number one skill You have to master as an investor is Patience because you might find a great Investment on your first shot or you Might analyze dozens of companies and Dislike them all And the main reason that this happens is Due to people finding a great investment But the price just doesn't make sense And this is largely due to the fact that The more overextended a bull market Becomes the harder it is to find value So remember that in a bear market Opportunities are everywhere and that's What we're going to talk about in the Next section is how to profit in a bear Market and how to unearth some value So understand that the right opportunity Will come and it's important not to Lower your standards just for the sake Of finding an investment i would much Rather hear that somebody has high Standards when it comes to finding an Investment because you don't want to be Investing in anything and everything Because at that point you have no Criteria and no real strategy so the Number one thing you're going to have to
Do Is be patient and keep on looking Because you will find a great investment Opportunity it just takes time but do Remember that during a bear market You're going to find opportunities Everywhere
