Investment success is much larger than any one measure or signal. It would help if you looked at the bigger picture to make successful investments.
If I were to make you a meal while providing you with a list of ingredients, would you be able to replicate the same meal?
In addition to the ingredient list, you would need detailed directions on how to prepare the dish. What temperature to set the oven, in what order to add the ingredients, and all the other steps involved in creating the dinner.
Creating a final product is more than just knowing the ingredients that go into it.
Investors need to have a plan if they want to make money. They need to know what they’re looking for and how essential each ingredient is. They need to look at the whole picture, not just one or two individual factors.
So, what is a recipe for success when it comes to investing in companies?
For long-term success, we need to look at a company’s financials, technical analysis, evaluate earnings, and insider activity.
We first need to at least look at a company’s financials to thoroughly understand the company’s valuation, return on equity, cash flow, and relative financial strength.
Consider the following financial ratios on a 1 to 10 scale by importance:
Companies sometimes lie, but the numbers don’t. Understanding the cash that comes in compared to the cash that goes out is a straightforward metric that anyone can look at. If a company has plenty of free cash flow, it operates in a favorable position.
Understanding the technical movements of the stock can pay huge dividends. You only want to pull the trigger on opening a new position in a company if the price signals suggest a favorable movement.
Consider the following when looking at technical patterns:
- Relative Strength to Market = 5
- Price Trend = 6
- Elliot Wave = 9
- Volume = 8.5
We want to ensure that the trend is moving in the direction that aligns with our trade, as well as a move that it’s likely greater than the overall market.
Understanding Elliott Wave analysis is vital for predicting levels at which markets turn and when momentum is building up.
The trend should also consider the strength of volume. Low volume typically indicates a loss of momentum and a market about to change direction, while high volume indicates an escalating momentum.
Understanding the charts can help traders pinpoint the exact moment to jump into a trade.
Every investor should clearly understand a company’s earnings and how those earnings will affect the stock movement.
Consider the following earnings factors:
- Earnings Growth= 10
- Earnings Consistency = 10
- Projected Growth = 10
- Earnings Trend = 8.5
We want to see consistent and growing profits from a company. Earnings performance is key for a stock to succeed. We also want to invest in companies beating Wall Street’s expectations.
A company’s earnings report and future projections give investors exact metrics on how they perform at that moment.
Finally, we need to recognize how company insiders feel about their stock. This can be open for interpretation, but why somebody is buying or selling with inside information can indicate what’s really happening within the company.
Consider the following Insider factors:
- Insider Activity = 7
- Share Buy Backs= 7
- Short Interest = 9
- Industry Strength = 6.5
If a company is buying back its shares, that’s a good indication that the stock is cheap compared to how the company feels the stock price should be based on future endeavors.
If, on the other hand, we see insiders liquidating their stock, that could be a sign that the company’s future could be in jeopardy.
The bottom line is you must thoroughly investigate a company before putting your money to work. The more factors that check out, the better investment and the higher the probability of making money.
The above process, when used correctly, can make investors huge profits and save them from a possible financial disaster.
If you don’t understand how to investigate a stock thoroughly or feel this process isn’t for you, you need to develop an investment strategy or find somebody to do the research for you.
The small fee research companies charge is oftentimes a drop in the bucket compared to a loss that could’ve been avoided in the stock market from making a bad investment. At Option Strategies Insider, we use a combination of the tools above to win around 90% of our trades. Get your free membership by clicking here.