Do you want to be a successful independent investor? It first starts with doing your homework…

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Learning is a continuous process. Just because we’ve graduated from school, that doesn’t mean we won’t be learning anything new in the next stages of our lives. Whatever career path we’re taking, there will always be an opportunity for us to gain new knowledge and expertise. However, learning something new comes with a price: Doing your “homework.” In the concept of investing, there’s this phrase, “Buy and Homework,” which means doing research on individual stock picks. Keep reading to know why doing your homework is important in helping you achieve your investment goals and guiding you towards making good investment decisions. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Do you want to be a successful independent investor? It first starts with doing your homework… “Buy and homework” is a phrase popularized by former hedge fund manager and TV personality Jim Cramer. This concept is based on the idea that a “buy and hold” strategy is a losing one and that investors should actively stay informed about their holdings by spending at least an hour a week to research each stock position on their portfolio. According to Cramer, people who are taking a passive investing approach are asking for trouble. Why is that so? It’s because for him, investors must be prepared to make strategic decisions and react to market changes or unexpected fluctuations in stock prices. This is where the “buy and homework” strategy comes in. As an investor, if you spend at least one hour a week researching each stock in your portfolio, then you will be equipped to respond to various changes in the market. While the “buy and homework” strategy sounds like another buzzword, its underlying philosophy makes sense: It is always a smart idea to do your homework before making critical investment moves and to keep doing your homework to ensure your original investment plan remains unchanged. So, instead of betting your opinions based on limited knowledge, you must choose to continually learn as an investor. In fact, the greatest stock market traders conduct their own due diligence until they know what investment moves will pay off in the long run. Let’s dive deeper into doing your investment homework a.k.a. researching stocks and choosing good investments… If you’re like most people, you wouldn’t make a major investment on a particular product without doing some research first. Example: You wouldn’t simply buy a car without first researching your preferred brand and model, its price, value, and closest competitors. The same concept applies to stocks. You shouldn’t invest in one without knowing or researching something about other stocks in the same industry. How do you know what documents you should research? Publicly traded companies are required to file a number of financial documents for the US Securities and Exchange Commission. One of these documents is the Form 10-K, an annual report that shows the balance sheet, income sources, revenues, and expenses of a particular company. As an investor, you should take a look at this document too because this is available to the public and can provide you with insights into a company’s status about competition, market conditions, and other useful information. Here are some key areas to focus on as you read through a company’s annual report: Revenue - This refers to the money coming into a company. Net income - This pertains to the amount of money left after deducting expenses and taxes. Earnings and earnings per share (EPS) - This is a company’s profit on a per-share basis. Price to earnings ratio (P/E) - This is a company’s stock price divided by its earnings per share (EPS). Return on equity (ROE) - The profit generated per dollar of shareholder investment. Return on assets (ROA) - The profit generated from a company’s own money. Here’s a tip: If you’re having trouble reading financial documents and annual reports, you may consult with a financial advisor for interpretation. This might cost you money, but the knowledge you’ll gain will pay off many times over because you’ll be able to make sense of the report in making smart investment choices. Another common stock picking and investment method is Value Investing. The idea behind this approach is to look to the health of a company to gauge a stock’s value. Value investing was started by one of the investing giants, Benjamin Graham. He came up with 7 factors to help find undervalued stocks or those that are priced well for their earning potential. This allowed him―and many investors who used this approach―to gather hundreds of millions or even billions of dollars in investing! Warren Buffet was also one of those who greatly benefitted from Graham’s Value investing approach. Here’s the bottom line: Doing your homework in investing is an important discipline you should develop as an independent investor. Remember: You’ll do just fine and invest just fine as long as you regularly research about the stocks picks that will do you and your family good in the long run. Hope you’ve found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Wednesday’s The Independent Investor! Those who make their decisions in line with Niebuhr's musings would likely be smarter, more emotionally aware, and ultimately more successful investors. Learn more about how famous words of this spiritual person can help you on your investments on next week’s The Independent Investor!