Asking 2 questions will help you pick winning ASX shares

How do you turn the noise on short-term distractions? One expert reveals a simple way to focus on the long term.

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Long-term investors are always told to "turn down the noise" in order to not be distracted by short-term developments and share price volatility.

But among the information overload, which metrics are the best indicators of long-term bullishness, and which numbers are to be ignored?

US buy-and-hold expert Brian Feroldi had a suggestion in a recent newsletter to his subscribers.

When 'noise' causes a 15% plummet in share price

Feroldi took the example of US software stock MongoDB Inc (NASDAQ: MDB), which reported its financial results on 8 March earlier this year.

"The company — which provides a next-generation database for software developers — saw its stock fall 15% in response to the results," he said.

"The culprit: MongoDB has a usage-based model. The more its customers use the database, the more it gets paid. And because MongoDB's biggest customer base — tech companies — were cutting back on spending, MongoDB's growth fell sharply over a short time frame."

But, at the time, Feroldi and his team uploaded a YouTube video to explain why they weren't worried about MongoDB shares.

It was because they sat back and asked two questions about the company:

  1. Would demand for MongoDB's product go up or down over the next decade?
  2. Does MongoDB have a moat?

Ignoring 'noise' can make you a long-term winner

Boiling down the business to just those two simple questions allowed Feroldi to mute "the noise".

Firstly, his team deduced that demand for MongoDB products would increase in the next 10 years.

"The proliferation of data means organising unstructured bits of information will only become more critical in the years ahead."

Secondly, Feroldi's team certainly thinks MongoDB has a competitive advantage.

"The switching costs become onerous once a software developer starts using MongoDB's platform."

So, despite the massive short-term plunge, they held onto MongoDB shares.

Now, Feroldi and his team have huge smiles on their faces with the stock rising more than 118% since 10 March.

"Holding through the short-term pain has — so far — proven to be the right move."

Feroldi admitted the above two questions are not the only way to measure long-term worthiness.

But they do much of the heavy lifting.

"Many other factors — valuation, execution, competition — all impact whether an investment pays off in the long term," he said.

"But we'd argue those two questions carry at least 80% of the freight."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended MongoDB. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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