Editor’s note: This article was first published in August 2010. Its General Motors example reflects that month, when Ed Whitacre was GM’s CEO and announced he would step down; Dan Akerson succeeded him on 1 September 2010.
When it comes to investing in the stock market, Warren Buffett and Arthur Rock are two good guides for analyzing a company’s stock before investing in it. While Warren looks more at the technical side and the numbers of a company, Arthur gives more weight to the company’s management. Arthur invests in a company’s CEO, not in the stock itself. So if we combine both approaches, we get the perfect analysis of a company before investing.
I don’t want to write a long, boring article, so in short: right now General Motors has a dilemma. If its new CEO, Ed Whitacre, decides not to stay with the company next year, investors won’t invest in it. If he decides to stay, General Motors will be a stock that US brokers strongly recommend, because its new CEO has taken GM to profits of $3 billion in this first quarter of 2010, figures GM hadn’t seen in decades.
That is the Arthur Rock side of the analysis. In this particular case, Warren Buffett’s view is unknown, since the company has only just returned to the stock market after going bankrupt some time ago.
What you need to know about a company before investing in it
You need the company’s financial statements for at least the last two or three years, to see whether its profits have been growing or its earnings have been shrinking.
You need to analyze the sector it belongs to and find other companies in the same sector, so you can tell whether the problem is that the sector is entering a bear market (and why) or simply that this particular company is going through a bad patch (and why).
Analyze the share price in the same way: the highs and lows it has reached over those three years and, above all, in the year you want to invest. Remember one thing:
A stock that was at €57 three years ago and is at €4 today isn’t necessarily a bad sign. It may be the best moment to invest, as long as you look beyond the financial statements at the company’s projects and future expansion plans.
In short, when you come across a company whose shares have fallen that much, you shouldn’t just analyze the stock, the company, its financial statements and so on; you should also analyze the market as a whole.
When we say that investing in the stock market isn’t gambling, we mean it literally, because a good investor analyzes all these points and, as a result, rarely loses money. Even so, there’s the example of Warren Buffett, who recently made a bad investment in a company whose shares have lost 60% of their value. Still, Buffett hasn’t ruled out turning the company around, since as its largest shareholder he’ll be making management decisions. In this case, not all is lost yet.
Now you’re probably wondering where to get all this information. As you may know, brokerage firms sell it. Brokers themselves will sell you a dossier with the company’s financial analysis and its stock market history, but these days you don’t need to buy those reports to get started, because Yahoo offers a free tool.
On Yahoo Finance, you can enter the ticker symbol of the company you want to invest in and get, for free, the company’s financial statements and how its share price has moved over the last few years. It’s in English and may seem a bit complicated at first, but once you get the hang of it, you’ll find it quite simple and useful.
I’ll leave you with a few related articles on stock market investing, especially on the most common and serious mistakes investors make, which you should avoid at all costs.
Further reading
- The most common investor mistakes
- Serious mistakes to avoid when investing in the stock market
- How to invest in the US stock market: simple and profitable
- The only secrets to getting rich
Featured image: Andreas Poike, CC BY 2.0, via Flickr.
