hey YouTube I'm Jimmy in this video I'm
gonna walk through how to research a
company and ways we can learn to become
a better investor
I plan on starting with the very basics
and I'll give ideas along the way for
how we can take our investing game to
the next level so I've been investing
for over 15 years and I started
investing shortly before I went into
college then I got my bachelor's degree
I got my master's degree and I'm
currently working towards my doctorate
of Business with a specialization in
finance but my real love for investing
came from when I was young and my father
worked on the floor of the New York
Stock Exchange and that was really my
early introduction to investing that
being said I understand that investing
can seem intimidating for people who
have never been around it who I've never
done it for the first time or if you're
just starting out the process itself can
seem cool you know quite overwhelming so
what I'm hoping to do here is I'm gonna
break down the actual process I go
through whenever I analyze a new company
and I believe that if we follow this
process we can all get really good at
analyzing companies and ultimately
picking companies to invest in so if
you're not a hundred percent confident
on how to read financial statements I
think that this book is a fantastic
place to start
it's called Warren Buffett and the
interpretation of financial statements
and I got an Amazon link in the
description below but I like it because
it's very simple I that's really the
reason I love this book and as you can
see it's quite a small book and it's
super easy to read now i think that mary
buffett she's one of the authors i think
that she used to be married to or she
still is married to i'm not sure i
married to warren buffett son and and
although this is called warren buffett
and the interpretation of financial
statements I can safely say after
reading it that this is not a shortcut
for thinking like Warren Buffett thanks
as far as investing goes but I'm not
even saying that's why I would like the
book what I'm saying is that they do a
fantastic job of making it very very
simple they walk through different key
ratios different pieces of each of the
financial statements and I think it's an
amazing place to start if you want to
learn how to read financial statements
like Buffett does
then Ben Graham's book security analysis
is the place to go but I read that book
and I love reading about this stuff and
that is a really tough book to read that
book took me over a year to read this
one took like you know a couple hours I
mean it's really quite simple okay so
now let's pretend that you're
comfortable with the basics of financial
statements and you could probably move
on to these next steps even if you have
just the very basics they're just a very
basic understanding of financial
statement analysis and I put the links I
put links to the videos that we created
on each of the financial statements in
the description below and you could
probably get away with just that for now
but I think the key to really becoming a
good researcher and ultimately a good
investor is being able to analyze a
company's business or understand the
business itself so now let's look at how
we can learn about the business and if
you're wondering this is the these are
the exact steps I go through for every
company that I research either for work
or for when I'm making a video however I
do it these are the steps there's eight
steps in general that we go through
okay so let's pull up any company how
about we start the next company that I'm
going to cover for the Dow 30 analysis
Goldman Sachs so the first step is to
pull down the most recent annual report
which is called the 10k now 10 KS are
required to have a certain amount of
information in them one of those
sections one of the requirements is that
they have a business description in it
so whenever I start with a new company
or even if it's been a while since I
last analyzed the company I always start
with the business description this is
the business description for Goldman
Sachs and here they break out the
segment's they break out what the
company does and this one's about twenty
some odd pages and they're all usually
in that area call it fifteen to twenty
pages so this isn't your typical they
throw a description out there they do a
really good job at least Goldman did in
this example of explaining what the
business does and how they make money
now many times when I first start
researching a company this may be as far
as I get if I get through this section
and I don't like the business itself or
it's too complicated or I question how
many prospects they're going to have
over the next few
years then I could just stop here and I
think that this is an important point
because you can bail out on a company at
any time you don't need a thousand good
investments all you need is a handful of
great ones and you can make a killing
with your investments so I think we all
need to be very picky about the
companies that we elect to ultimately
put our money in okay now we know what
the business does so now we're on to
step two now we're going to read the
most recent management discussion and
analysis section from their most recent
filing if it was their annual filing the
same place we got the business
description great otherwise you have to
pull down the quarterly filing which is
called a 10-q now the business section
is usually only in the 10k but the NDA
section is usually in every one of their
quarterly and annual filings now
sticking with our Goldman example
Goldman's annual report was filed on
February 26th of 2018 it's now November
so it's a bit outdated but their last
quarterly report was filed just two
weeks ago so we know the business
section is from back in February and the
MD&A section is just from two weeks ago
so in the end DNA section we're gonna
learn a lot about the business what
management what the management team is
trying to do with the business what
their plan is they might talk about the
industry or maybe what different trends
that are happening in the industry
they're likely to break down the
financial performance for each of the
sector's and basically they're gonna
talk about how the business as a whole
is performing now I bring up the dates
because I think it's important to
remember if you're reading the business
section and it was from almost a year
ago just keep that in the back of your
mind you know you might want to update
those numbers in your head as you're
reading through the quarterly MDNA
section okay and this kicks us right
over to step three which is on to the
financial statements and I highly
recommend that we pull those financial
statements directly from the latest
quarterly and Anna reports because these
financial statements come with the
footnotes and the footnotes can be key
to understanding the financials often a
company does something unique with a
particular line item and in the
footnotes they explore
what they're doing and why they're doing
it so if they were ever going to let's
say change an accounting rule or adopt a
different accounting rule well we should
probably just Google what that
accounting rule change is and I think
that this type of practice can get us
really good at exposing ourselves to
different types of financial statement
analysis and I think that the more we
look at the actual financial statements
not something off of let's say Yahoo
Finance or whatever it might be go to
the actual source and if you have a
question about a particular line item
look at the footnotes
they'll probably explain it there now
step four is get the company
presentations and recent earnings calls
now steps two three and four can really
be pushed together or swapped around
because for me on a personal basis after
I read the business section assuming I
still like the company well I go ahead
and download everything from steps two
three and four all at once because each
of these are often interdependent and
sometimes they say the same thing in
each of them so I think it's a great a
bit faster just to download them all at
once and start going through them
together now up until this point we've
made no attempt to value the company all
we're doing at this point is getting to
know the firm understanding what they do
how they make money where their margins
what is their growth rate look like do
they have free cash flow how does free
cash flow look what's management's plan
do we think that their plan is
reasonable things like that during steps
two through four those are the questions
your time you're trying to answer okay
now in step five now we need to find
competitors so in thereat MDNA section
or maybe in the business section or
maybe in the earn an earnings call well
we would have come across hopefully
something about the industry and now we
need to identify competitors ideally two
or three of them if we could do that I'm
happy now at this point we know the
company well and you know what they do
you know what they're planning to do you
understand where they're going and now
once we find competitors what we want to
do is we want to read a little bit about
each of the competitors and try to
understand what their plan is what's
their growth rate like what's their
margins like what business line are they
trying to go into and sometimes if let's
say you see a big difference in
margins between one company and another
you could look at well why is there such
a big difference sometimes this reveals
a competitive advantage that one company
has over another so now once you
understand the very basics of what the
competitors do you pick two or three and
we move on to step 6 now we want to try
to value our company now assuming that
we still like them of course now
sometimes you'll come across one of the
competitors and you'll say I like this
one better maybe I'll switch over to
that company to that competitor because
maybe they have a competitive advantage
that we identified so what we do is we
start this exact same process over with
them but this time imagine how much
easier it's going to be to understand
that business read the management
discussion over there because now we're
going to know that business so much
better we're going to know the industry
we're gonna understand the language so
much better
so the second the third the fourth time
we do this for similar companies the
easier this is going to get but now
let's imagine that we still like our
company so now what we want to do is we
want to try different valuation methods
maybe we tried dis kind of cash flow or
p/e multiple or Evie de vida there are
lots of choices and the more experience
we get with different types of companies
and different types of valuable
valuation methods the better we'll get a
to Singh which one is appropriate for
that particular situation now this is
also where you want to compare the
company with their competitors compare
the ratios also compare the company with
themselves from prior years if
management says that they have a
particular plan in mind well how long's
that plan in place are they actually
working it can we see it in the numbers
and for me I think you can learn a ton
about a company with this type of
analysis digging into the differences
from year to year or from company to
company can really point out a lot
personally this is also where I like to
find industry associations often these
types of groups can do a great job of
explaining the industry explaining the
potential of the industry maybe the
projections or the future of the
industry and I think that this is great
to identify what our company does what
their competitors do where they fall
overall in the industry now if you have
access to analysts research this is a
good place to pull it all down I like to
see what valuation methods are
using what does consensus say about
revenue about earnings and personally
what I like to do is I start with
consensus for revenue let's say or even
for earnings per share and then I read
their investment thesis and I say you
know what I'm either more bullish than
their or I agree with them I'm right
line with what they're thinking or I'm a
bit more bearish than they are and then
I can adjust their expectations in one
direction or another if I think it
should be higher I can move it slightly
higher slightly lower or much higher
maybe they're not accounting for
something I also like to look at which
valuation method they're using are they
using PE or EVT Buddha and if I have
access to a few different analyst
reports that could be useful to see how
each of them do it so I can look to see
at least what's popular among analysts
from a valuation perspective don't
forget they in theory specialize in
these types of companies so in theory
they should know which type of valuation
method is best and this ties us into our
next step step 7 see what the stock is
doing now we also we've calculated our
fair value we know what we believe this
stock should be worth where's the stock
actually trading so sticking with
Goldman here's a recent chart from
Goldman Sachs looks like they're trading
right around two hundred and seven
dollars but here's the point of this
step this isn't necessarily to see where
the stock is right now look at this drop
right here what happened how about this
drop or what made it move higher in this
spot and in each of these we want to
pull down the news from that time period
to see if we can identify what was
happening either with that company or
with the industry to identify what moves
the stock pretended with Goldman Sachs
that every time a big headline comes out
about rising interest rates are falling
inflation or whatever it might be and
when that news comes out while the stock
goes crazy in one way or another that's
good information for us because we want
to know what is a driver what does Wall
Street or what do investors believe is a
driver of this stock you can usually
tell that by looking at big movements
and what put it there usually its
earnings but sometimes it could be more
than that now it almost doesn't matter
what you're over there
we now have an idea of what to look for
going forward plus if we
similar headline come out one morning
let's say a month from now after we've
done all of our research well we
probably have a good idea of how the
company will react and this brings us to
our last step step 8
look for a buying opportunity okay so
now I know what the company does we know
what their plans are and we know what we
believe they should be trading at we've
looked at some recent news and now we
need to determine what our personal
margin of safety is so if we like the
company but maybe we think that there's
a lot of risk well we want a large
margin of safety using the Goldman chart
as an example so if we think that this
stock is really worth let's say 230
based on our calculations well maybe
down here at 207 maybe that's good and
that's plenty of margin of safety for us
but if we think the risks are larger
maybe we don't want to get into it
unless it's at 190 or maybe below 175
that's going to depend based depending a
lot of different things could be your
portfolio could be your level of risk
tolerance could be your confidence in
your projections whatever it might be so
now going back to the news for a second
one thing that I really like to see if
there's a company like this that maybe I
wanted to get below one ninety one thing
that I really like to see is let's
pretend earnings come out and they miss
by a penny and the stock drops you know
nine percent because of it well that
could be a pretty dramatic drop for
something that over the long run doesn't
change a lot unless the fundamentals of
where we think the business is going or
management changes our plans or
something like that that could be an
enormous opportunity I look for
something like that as a buying
opportunity to get this stock back
within my margin of safety so if I want
to below 190 or below 175 whatever might
be that looks like an ideal opportunity
to me don't let everybody selling off
scare you away from your analysis do you
need to update the analysis but don't
let them scare off if you're confident
with what you've done with the research
that you've done so at the end of the
day if you like this company well we can
go on buy it simple great that's easy
but maybe you want to wait for it to get
below 190 or 175 or whatever fine what I
like to do is I have a bull pen of
stocks where I just put it over there
and I wait for them to get there and
then what I do almost immediately is
move on to the next company
this is the key point to remember with
this whole process that the idea here is
that the more you read about companies
the more you analyze different
industries and how different companies
play different roles the more ideas
you're going to come up with and the
better you're going to get at analyzing
companies and ultimately coming up with
great investment opportunities so if you
have any questions or if there's
anything that you would do when
analyzing a company that I didn't
mention here please post them in the
comments below and thank you for
sticking around all the way to the end
of the video and if you haven't done so
already hit the subscribe button and I
look forward to seeing in the next video
thanks