Hi, I'm Jimmy in this video we're looking at how we can pick great long term stocks.
I'm going to try to keep this process simple and hopefully we can use it to confidently
pick great long term stocks that ultimately get us closer to our personal goal of financial
freedom.
Okay.
Now let's jump right in.
So there are two main steps to picking great long term stocks.
Step one is to identify some potential companies.
And step two is narrowing down those companies to the best long term stocks that we can find.
Now, one way I'd like to find potential companies is to do a top down analysis.
So basically, here's how that would work.
So we start with the broader economy.
What does growth look like?
Where are the opportunities?
Where are the weaknesses?
Where do we think that economy is going to be in the next five, 10 or 20 years?
Now, if that outlook is good for that particular economy, whatever, analyzing, that's probably
a good place to look.
But given that the world is, we can get so much information, some from so many different
places around the world.
If in our home country, there isn't a great opportunity.
Well, it might make sense to look in other countries.
Now, let's imagine that we're looking at the US and we think that there's some long term
opportunities in the US.
Next, we want to look at what sectors are there and where the potential opportunities.
So here's a list of sectors and maybe we think the information technology sector has some
opportunity in it.
After all, technology has been really pushing the world forward over the past few decades.
And maybe we think that will continue to happen over the next couple decades.
Well, if we break down the information technology sector now, we could look at what do the industry
groups look like.
Now, I could easily make a case for any one of these three industry groups.
So maybe after we narrow down a bit, we look at some of the industries within those industry
groups, then just for some additional color.
I also threw in the sub industries in there.
Now one sector can really lead to a ton of potential companies.
For example, Microsoft and Oracle both fall in these systems.
Software sub industry, meanwhile, and perhaps surprisingly, Visa and MasterCard fall into
the data processing and outsourced services sub industry.
So there could be a huge variety of companies that would fall into one information technology
sector and those companies can oftentimes be quite different.
So looking at a sub industry like data processing or Visa and MasterCard are sitting well, how
far out can we reasonably project?
Well, based on the fact that less and less cash is being used or at least more and more
transactions are being done digitally.
Well, I would feel comfortable saying that this industry is likely to be far larger in,
let's say, 10 years than it is today.
And I'm assuming that companies like Visa, MasterCard and similar companies are likely
to get a bigger portion of that growth over the next few years.
And using this very simple sort of logical process, I would bet that we could be reasonably
confident that this industry is going to show some growth in the coming years.
Once we're confident that this in this particular case is southern history has shown some growth
potentials.
Well, now it makes sense to try to find great long term stocks within that sub industry.
And by far the most important part of any company analysis is to truly understand the
business.
I'm sure that many of us have heard Warren Buffett say things like we need to stay within
our own circle of competence or we need to truly understand any company that we want
to invest in.
And for me, this is one of the most important parts.
After we identify an industry that we believe has some growth potential or at least the
growth potential, we can logic that out.
Well, for me, the place to start is to start with the companies individual business section
from their annual report.
As an example, if we like companies like, let's say, Visa or Microsoft, which are two
companies I'm actually a big fan of.
Well, then reading the business section of their annual report should give us a much
better understanding of what the company does.
What drives the business with the potential growth is with the potential weaknesses are
and for anybody who's watched any of my company analysis videos on this channel.
Well, you may have noticed that oftentimes I look at the segments of a business and then
I try to understand the history behind those segments, what where the revenue is being
generated, perhaps where the profits are being generated.
And the goal of that is ultimately to get a better understanding of where the company
is heading.
And the better we can do that, the better we can project where the business is heading,
the better we the better understanding will have as to whether or not this is truly a
good long term company.
Now, you may notice that up until this point, I've yet to talk about the numbers of the
company.
How much revenue do they have?
What's their growth rate?
What's their annual dividend?
These are all great questions.
But frankly, the goal of identifying great long term stocks is a very difficult thing
to do.
It's a difficult thing to quantify that simply, since the answers to these questions can vary
from investor, the investor.
The importance of the answers can vary from investor or investor.
For me, I'm a big fan of long term investing and different types of companies serve very
different long term investing goals.
For example, I'm a big, big fan of dividend stocks and with dividend stocks, I want a
reasonable, reasonable amount of revenue growth and I want a consistent amount of profits
and free cash flow that can at least cover the dividends that a company is paying up.
But then if I'm looking at growth companies, while the growth companies, obviously we want
more growth than we might require in our dividend companies.
But for me, I also like to see a decent profit margin in those companies.
Since companies growth companies at least tend to be younger companies and they generally
have some sort of competitive advantage and hopefully they have decent margins.
And as time goes on and competitors eventually catch up while margins will almost always
shrink.
So if a company has decent margins or above average margins now, well, when they solely
give away some of that competitive advantage, as will surely happen at some point, at least
their margins are likely to continue to produce growth for the long term investor.
For me, that's the I.T. ideal type of growth stock.
And then there's the long term value invest.
So pretty much any stock can be a value stock.
It's simply a matter of staying disciplined and paying less than our calculation of fair
value.
And for me, the most important part of this whole thing is paying less than our calculation
of fair value, even if that means sitting on the sidelines and waiting for a long time
for the right opportunities.
And at the end of the day, I think it's a combination of value and either dividend or
growth or in some cases both that make for a great long term stock.
If we buy a great deal in stock and it pays a dividend reliably and a gradually increase
that dividend and we bought it at a very good price.
And guess what?
They also were in an industry that has a reasonable outlook.
Well, why would we ever want to sell that stock?
And the same is true on the growth side.
If a company is growing and we bought it at a great price and their prospects are great
and perhaps the industry, perhaps that company has some sort of competitive advantage in
their industry.
Well, for me, this makes for another great long term buy.
If we buy it, perhaps stay.
That growth stock is overpriced right now.
But a year off now, the stock market crashes and we jump in and buy it then.
Well, this might be a stock we hold for many, many years to come.
Assuming its business stays on track.
And I think that this is one of the reasons that it's so important to simply focus on
the understanding of the industry and the business itself.
If we focus on finding great businesses and then trying to value those businesses as objectively
as possible, then it's only a matter of time until we eventually come up with a handful
of great long term stocks that we truly have a great understanding of.
Now, this is one of the reasons that I try to do so many company analysis reviews on
this channel.
I figure if I can review a whole bunch of investment opportunities that could be good
companies or could be great long term stocks to buy something that we could each analyze
further on our own.
Well, I created this playlist.
If you're interested in cruising through it and seeing what companies might meet your
personal investment criteria.
So that could be a good next in video playlist to watch.
If you're curious, there's a link right here and this link in the description below.
And I want to thank you so much for stick with me all the way end of the video.
I really appreciate it.
Thank you.
And I'll see in the next video.