As an investor there are only two things we can control; what we buy and the price we buy at. Everything else is beyond our control so we need to double down on these two areas we do control.
This article will focus on the what to buy while you can find the what price to pay here.
When buying a share for a long-term portfolio the theory is simple, buy the absolute best stocks in the best sectors. Far too often we buy losing stocks in beaten dying sectors in the hope that one day things will improve and our stock will go through the roof. It may but most often it won’t and we’ll end up with a portfolio of deadbeats.
Instead we should be buying the best, but identifying that best is often the problem.
Here I use a few techniques to help me identify those best quality stocks for long-term investing.
Mostly I use something called Porter’s Five Forces from a management strategy book published in the 1980’s. If we run these five forces against any company we’re looking to invest they quickly reveal themselves to be the best or not.
We can also do a traditional SWOT analysis (strength, weakness, opportunity & threat). However, I feel Porter’s five cover the SWOT.
Another possible option is the PESTEL analysis. This is a quick tool to determine macroeconomic factors that may impact a sector while others use the Boston Consulting Group (BCG) portfolio matrix.
All have pros and cons and importantly have to well understood to really use them.
Having gone through the process of identifying the company we like there are two important steps left. Firstly, make detailed notes of your reasoning because in years to come you will have forgotten them. Secondly, determine the price you are happy to pay and then sit back and wait for the stock to be at your preferred price.
Below is a video link going into detail with examples using Porter’s Five Forces.