What constitutes a good stock investment today? If you follow the actions of legendary investor, Warren Buffett, you jump in when there is a “sale.” Buffet’s Berkshire Hathaway investment group made far and away it largest purchases of stock when the market fell last week. Remember that Buffett is a protégé of Benjamin Graham, who pioneered the concept of intrinsic stock value. Investors like Buffett view a good stock investment as a stock with intrinsic stock value and a margin of safety. Intrinsic stock value is the projected earnings of a company compared to the current rate of return on AAA bonds. A margin of safety can be cash in the bank or unencumbered assets such as property or physical plants. Conservative investors will commonly scout out a good stock investment based upon fundamental analysis of a company’s hard assets and prospects. Then they will wait for a good price opportunity. In this case a good stock investment is a secure stock that holds the promise of forward looking earnings but is, nevertheless, underpriced in the current market. Or, a good stock investment is a stock that is secure and profitable but just took a beating when the entire market collapsed.
Although a good stock investment may come as a “tip” from a friend or your stock broker you need to always investigate before buying. This has to do with doing your own fundamental and technical analysis before every buying a stock. Great deals typically do not last very long in the stock market. When someone discovers a good stock investment that was previously overlooked the rest of the market commonly catches on and bids up the price of the stock. Thus, a stock tip may have been profitable yesterday but, unless you are truly a unique person on the inside track, nearly everyone else will have heard about the stock in question and already have bid the price up. At this point investors need to remember that they do not lose money by not investing. Trying to get in to a market rally at the very end in order to eke out the last few cents of profit is commonly a way to lose money. Unless you have a large staff researching investment opportunities for you it is wise to stick with what you know when looking for a good stock investment. Investing in beer may not require a taste for beer but will require knowledge of brewers and their markets. Investing in gold does not require an eye for fine jewelry but rather the willingness to follow the factors that drive the price of the precious metal.
A good stock investment might be investing in oil if you believe that the world’s current economic doldrums will rectify themselves and that global manufacturing will pick up in the next year or so. Any stock and any market sector is a possible money maker. The key to finding and exploiting a good stock investment is hard work, study, conservation of capital, and timing.