Peter Lynch, the legendary investor, famously advised investors to spend at least as much time researching a stock as they would choosing a new refrigerator.

But all too often, this doesn’t happen.

For a fridge or whatever household appliance, the process is often something like this: thinking of top sellers in the area, comparing between different brands in the market, shopping around for the best deal… and then finally buy.

You don’t have to be a refrigerator expert to buy a fridge. But most people take time researching before getting to the “buy.”

For many people, though, it’s different for stocks, even though you spend on buying a stock more than you spend on a fridge and the potential for loss is much higher.

It usually works something like this: Uncle Joh’s friend’s colleague’s neighbor said the shares of XYZ company might go up… then you quickly click buy.

Part of the problem, why some most people don’t take Lynch’s advice, is that it’s difficult to know where to start when researching a stock and what questions to ask.

So, what follows are 3 questions to begin with when you’re thinking of buying a stock to start you off:

1. Is the company has “Meaning” to You?

What do we mean when we say invest in something has meaning to you?

It means something you understand. Warren Buffett calls this “Circle of Competence”.  You have to focus your attention on industries you understand and that you are comfortable with.  May be you ask, how can I find a business I understand and in my circle of competence?

There are different ways, look around you, look at the products in your fridge, look at the products and services you use at your home and work.  There are many well-know and well-established companies behind these products, you may consider them as an investment opportunity.

Or you may ask yourself, what do you love to do?

It should have some relation to your passions in life, your talents, what businesses that you will enjoy researching and following.

For example, if you’re a biochemist, you might understand what a pharmaceutical company does in a way that most people can’t. If you’re a financial analyst, reading a bank’s balance sheet might be easier for you than boiling water.

Use whatever special insight and expertise you have to your advantage. Whether you’re a rocket scientist or a truck driver, stick to what you know and what you can understand.

Warren Buffett has a folder for companies that are too difficult. You should have a folder like that in your mind.

He said once: “It is a terrible mistake to believe that you need to have an opinion about everything. You only need to have an opinion about a few things.  You need to imagine that you have a punch card with twenty holes. And that is all you can invest in throughout your life. You don’t even need twenty. You just need four or five to make you very rich throughout your life.”

2. Is the company has competitive advantage “Moat”?

A Moat is water around the castle, but in business terms is a durable competitive that company has to protect it from other competitors.

Moats take different types such as brand, secret, price, patents. Also, you can look at few metrics that can give the company a moat, such as growth in sales and revenues, earning per share net income and operating cashflow. The consistent growth in these metrics give the company a wide moat.

3. Is the company has reliable “Management”?

A company is only successful as the people running it, you would not board a ship with a captain you do not trust.  Similarly, you shouldn’t invest in a company whose leadership you do not trust.

You need to check on the leader background, paying close attention to the integrity and success of their prior decisions, listen to how the management talks about the successes of the business.

We want to make sure that they have reliable, experienced management, because their decisions can make or break our investment.

These questions or the 3Ms (Meaning, Moat and Management) are only the first steps in figuring out whether a stock is worth adding to your portfolio.

After all, a fridge will keep your food stay fresh, but won’t make you money. A good stock, though, could make you enough money to buy a lot more fridges.

 

If you’re interested in learning more about investing in the stock market and want to be successful investor, then you should check out my FREE EBOOK that features the top books every investor should read.

Click here to download the Top Books That Every Investor should read