If you were going to learn how to hit a baseball, would you learn from some random person, or would you watch an instructional video from a professional athlete? Sounds simple enough, but when it comes to stock investing, so many people take such random advice from strangers. So let's do things differently. Let's learn from the investing genius Warren Buffett. By the way, Buffett is worth 66 billion dollars, so he's probably a good starting point. Buffett has a process and its elements are listed below. There are links in step two that go into much more detail, but here's the general overview:
Find a stock/business that has great management. This goes without saying, but leadership has a compounding impact on a business. Without selecting a great manager, the company will likely suffer over time. We have made an entire video to help you find and select a great CEO. That video is found in Course 2, lesson 18. You can watch that now, but we recommend that you start with the first lessons and build your overall knowledge first.
Next, Buffett tries to find a business/stock he can own forever. Now that might sound counter-intuitive to many day traders, but the purpose is very simple. A stock is nothing more than owning a business. Think of a stock like a mini-business. Owning 1 share is no different than owning every share because each share is proportional. As a result, you wouldn't want to buy a business on main street, only to sell it to another person the next day. That doesn't make any sense. Even if you were able to make a quick profit, you'll pay enormous capital gains for the sale. Investors who don't understand the essence of what a stock is - a real business - have a tendency to trade from day to day. Warren Buffett tries to buy companies he can hold forever because he doesn't want to pay capital gains tax - not to mention he wants to collect all the profits the business is making.
Buffett tries to find stocks that are stable and understandable. By implementing this rule, Buffett can generally assess the value of a stock because he can somewhat predict their cash flow and earnings power. For example, if you were going to buy a company on Main Street, would you consider buying a company that made un-predictable profits, or would you find the company that generally produces similar results from month to month? Seems like a simple question when you look at it from that perspective. When a company makes similar profits from month to month, you can assess how much money it will make in the long-run, and properly assess a price or value. This is why Buffett tries to find businesses that are stable and predictable.
You guessed it, Buffett determines a price that he thinks the stock is worth. Think about it like this; would you go and buy a business on Main Street without determining a value that you thought it was worth? Sounds like a crazy idea - right? Well, every time a person purchases a stock on the stock market without determining a value for what THEY think it's worth, they're doing exactly that. Buying a business with no expectation for it's value. In Course 3, lesson 35, we introduce the student to a method for determining the intrinsic value of a stock. We use a discount cash flow calculator - like Buffett. If you want to check it out (because you probably don't believe it's free) please do. With that said, we highly recommend you don't start here. There are many other things you need to learn first before having fun with that calculator!
If there's one thing I can't stand, it's being fearful. The last thing I want to do is sit awake at night worrying about my investments in the stock market. If this describes the way you feel about your investments, you might be suffering from a diet that calls for more stock investing knowledge. So when a person becomes more knowledgeable, the fear and worry disappears. With fundamental knowledge of what stocks are, how to find good quality businesses, and a proven process for selection, you'll find yourself checking your trading account a whole lot less. So this site teaches stock investing in three courses. There's no gimmick of getting half-way through the courses and then needing a credit card to pay for the rest. The entire site is 100% free. If you want to check it out (cause you probably don't believe that), then click on any of the three courses and check out all the content.
With a firm understanding of what the stock market is and how it works, you can then implement a process for selecting good quality businesses (or stocks). When you're finding companies that make good profits, minimize their debt, and continue to trend in a positive direction, you'll find yourself naturally having fun. And what's better than having fun and making money!
-Best wishes, Preston and Stig