“Ok, so if I’m looking to start investing… how do I go about finding shares to add to my portfolio? What should I be considering?”
We hear this question a lot from people who are in the early stages of learning about investing. It’s a perfectly valid question, so we put it to members of our investing team to discuss.
RYAN: Scott, how do you go about finding shares for your portfolio? Is there anything in particular you should be looking for?
SCOTT: Yeah, great question Ryan. So, at the end of the day, if you’re buying shares, for the vast majority of people, you’re buying them because you want to achieve an investment return. And generally speaking, an investment return that beats the market. There are so many low cost ETFs out there, if you just want the market return, buy an ETF, go fishing, we think that’s great. If you want to beat the market at an even better return, which is what we think you should do if you buy individual stocks, that’s the starting point.
You want to look for things like the quality of the business that you’re buying. You want to look for things like the long growth runway that business has ahead of it, and you want to make sure the price you’re paying is a reasonable price, given those other two components.
Now, that’s not as difficult as it might otherwise sound, but you do need to be a little bit careful. You don’t want to be paying a super high price for a very boring, no-growth company. Equally, you’re okay to pay up for a high growth business, bearing in mind there’s probably more risk that comes with that. So, quality of the business, so in other words, what are its economics, what are its fundamentals? How does that business come together?
You want to look at the quality of the leadership, the people who are running the business, hopefully they’ve got some shares in the business themselves. They care a lot about our returns as individual shareholders. And you want to look at the the price you’re paying. So we talked about the P/E in a previous video, and the case of the value of the business, a little bit hard to
necessarily nail down, it does take a little bit of extra work. If you’re buying stuff that’s not necessarilythe white bread stuff, you’re buying the white bread stuff, you’re buying Woollies or Coles, or you’re buying CBA or CSL, you can probably do a reasonable estimation, using the P/E. Other companies you have to use some different valuation methodology. But broadly, you want to buy, as Warren Buffet would say, “A great business, at a reasonable price, not necessarily a reasonable business at a great price.” So price is important, but secondary.
Now, fair to say, for what it’s worth, we run investment services so, if people want some extra help with that, we can do that. Now if they want to buy our services, we’d love them to, but if they don’t, that’s okay too. But what’s important is you have either your own understanding of what you want to buy, or someone who you trust to help you make some of those assessments… particularly, while you’re learning.
You will make mistakes, by the way, so get ready for that, be used to that. We don’t want people to make one mistake and then give the whole thing up if they’re not going to do well. Myself at the service, I run, Motley Fool Share Advisor. We have a strike rate of about six out of 10. that’s good, according to some of the best fund managers who have lived and have talked about the topic, so, we will make mistakes, we do make mistakes. Moreover, if we do pick the right stocks and enough of the right stocks, the returns you get, the gains you get from the winners, will far offset the losses from the loser and that’s certainly been our experience thus far.
So, if we’re a solution for people, then that’s great and we’d love to have them. But otherwise, just be mindful of those things. The quality of the business and frankly, the price you’re paying, as well as the growth runway ahead as you think about the valuation.
RYAN: So on last check, I think there were about 2, 300 listings across the ASX. Some of those aren’t even proper operating businesses. How do you go about actually narrowing that list down to, I guess, a select pool of investment opportunities?
SCOTT: Man, that’s such a good question right? And there is no single answer, right? Because, even at the Motley Fool we have such a broad, diverse range of investment styles. Anirban, who we work with, is looking for high growth, higher risk businesses. Ed and Chris, who work on our Dividend Investor service, want dividend paying stocks that have market-beating potential. At Share Advisor, we kind of sit somewhere in the middle of that. We’re looking for growth businesses at reasonable prices. Dividend not so important but we’re also not taking the same risk as Extreme Opportunities but we possibly won’t get the same sort of return. So, its kind of a ‘how long is a piece of string?’ question.
For me at Share Advisor, which is our kind of our most central, kind of moderate service, if I can put it that way. What we’re looking for is, we’re looking for quality companies, we’re looking for businesses that we understand so, you know, do I know what X Y Z company does? If I don’t, just give it a miss. Warren Buffett has a famous ‘Too hard basket or too hard pile.’ If you don’t know it, put it in the too hard pile.
Look for businesses that you know, you understand, you can assess the future of. At least have a decent sense of what the future might look like. That’s a really solid place to start. If you don’t understand it, don’t buy it. Just start with again, what Buffett would call a ‘Circle of Competence.’ If you have expertise in an industry, as a consumer, as an employee, as a business partner, as a whatever. That’s a great way to start. And also look for businesses that are profitable, ideally, if you are just getting started, because you want to be able to know there is some solidity for the business. And businesses that ideally you can really get your teeth into and you feel like you have a decent chance of understanding well, before you buy the shares.
RYAN: And one word that I just want to hone in on that you’ve mentioned many times in the past couple of minutes is business. So what we are really focusing on is businesses rather than actual ticker codes that just move across the screen.
SCOTT: I’m so glad that you mentioned that. And that’s really important. Like, we take it for granted and I just did and I suppose that’s a point that I’m glad you made because, we’re not just buying, you know, we’re not looking at a chart and saying ‘oh, it looks like its going up, it looks like it’s going down, or it’s going down, maybe it’ll go up or, it’s going up, maybe it’ll go down.’ Chart reading is for other people and, good luck to them. It’s incredibly difficult but, good luck to them. You’re right, we are investing in businesses for the long term. Not just tickers and stock prices that may or may not fluctuate over the next couple of weeks or years.
RYAN: Great. Thanks Scott.
SCOTT: Thanks Ryan.