I use four main indicators to help me when I am deciding where to invest. The fourth indicator I look for is unique to today’s market, as usually I would not put much emphasis on that one quality.
1. Cheap
The stock has got to be cheap. I would never go shopping and look for the most expensive thing to buy. A great analogy to buying expensive stocks is if you think about shopping for clothes. When you see a sign in the window that says, “50% off,” then you’d probably be more likely to go inside and buy something. But, what if you saw a sign that says, “Everything 50% more expensive than normal?” Well, you’d be crazy to go buy… but that’s what a lot of people are doing right now.
2. Unpopular
I try to look for things that are unsexy, boring or just plain hated. We can look at a lot examples today such as corn, wheat, coal, uranium, or really any major commodity. These commodities have been crushed (mainly from a strong dollar), but we all know that those things are not going to go away. So now is a great time to buy.
3. Trending up
Just because something is cheap doesn’t mean you should buy it. ‘Catching a falling knife’ is exactly what you’re doing if you buy a stock that is cheap and still falling. I wait until there is confirmation that the stock has turned around and starting to go higher. Of course I may miss the bottom, but it’s much safer to miss out on a little bit of profit than it is to risk it all trying to time the bottom.
4. Debt
This is something that I have really started to look for. Many companies throughout the world have stacked on an enormous amount of debt. In the past this hasn’t been a big concern because debt often allows a company to leverage itself into higher production and profits. However, many companies are struggling to make profits and are going into further debt. How will this debt be paid off? Well, for many companies it won’t. They will have to file for bankruptcy or significantly restructure their business. Not a good thing if you’re a share holder.
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Of course there are many things to look at when deciding which stock to invest in. Unfortunately, we are in a time when patience and caution should be used more than ever. Our market are extremely leveraged and shaky right now, which should make investors very weary as to what is going on.
Even though I am proceeding very carefully right now, there are some great buys out there. There are some companies selling for unbelievably cheap prices, but they are so out-of-favor that nobody wants to look at them.
