It seems every man and his dog has an opinion on Commonwealth Bank of Australia (ASX: CBA) shares and Wesfarmers Ltd (ASX: WES) shares.
But at the end of the day, if you are paying someone to do some investing research for you all you are getting is their opinion.
But what if I can tell you, in just two minutes, a way that you can cross-check any of their investing ideas or even do it yourself?
Here goes…
An unbreakable share-picking checklist
If the investment ideas your adviser is pitching you can tick each of these four boxes you will be putting the odds of investing success firmly in your favour. That's according to the two men who developed it: Warren Buffett and his partner Charlie Munger.
It is super-simple to follow and anyone can use it.
1. Buy businesses you can understand.
Shares are just part-ownership in (most of the time) real businesses. They are not bitcoins or forex. If you are a shareholder, you are a business owner. Put another way: Think of the sharemarket as the business market.
If you think about it as a business it makes sense to only buy businesses which you can understand. Sure, you may not understand how Commonwealth Bank's accountants price their mortgages after 10 years. But you can ask yourself two simple questions to test your knowledge, such as:
- What is the company's core purpose? Commbank lends money for a profit.
- How does it do that? Commbank gets money from deposits and wholesale markets and lends the money as loans.
Check.
2. Does the business have favourable long-term growth?
Don't focus on the industry (e.g. supermarkets) but the company (e.g. Wesfarmers' Coles). One way you can do this is by asking yourself: Does the business have a sustainable advantage over its competitors?
Wesfarmers has long held an advantage in department stores, with its ownership of Kmart and Target, but those businesses are under threat from online stores. Fortunately, Coles and Bunnings Warehouse are Wesfarmers' two best businesses and impressive ones at that.
3. Is the company operated by honest and talented people?
Log into your brokerage account to find the per share profit of the company from when the CEO first started until now. Have the profits (per share) grown strongly? Wesfarmers' CEO is relatively new, so it wouldn't be fair to do it the same way. Instead, ask yourself:
- Has management been with the company a long time?
- What is their background?
"How do you assess honesty?" you ask. One of the best ways is to take note of how much money they have invested in the company alongside you and how their incentives are structured. These can be found in the Annual Report. You want more of their salary to come from long-term incentives and you want the managers to own lots of their own company's shares. They should: 'eat their own cooking' so to speak.
4. Are the shares priced effectively?
This is the tough one for most investors. But I showed here how anyone can run a very quick valuation of a mature company's shares using its dividend.
If you are paying an adviser, ask them a question about the valuation. I'd be willing to bet that 50% of 'the experts' who appear on television have no idea what a company is worth using proper valuation techniques. "What happens to the valuation if X". Take a handkerchief – their head could explode.
Foolish Takeaway
If you can identify a company that ticks these four boxes, you are well on your way to being a successful investor, in my opinion. As Warren Buffett said in his 1978 annual letter to shareholders, you are likely to identify, "a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action". It's Buffett and Munger's ability to exercise patience that sets their investing strategy apart from the crowd.
