Everyone interested in the art and science of successful stock market investing should probably take a page from - or a whole book about - Warren Buffett's investment strategies. Said to be the most successful investor of all time, Buffett started an investment partnership with only $100 and has netted many billions since. His approach to investing is simple, straight-forward, and eminently doable. R. Hagstrom, a senior v.p. with a capital management firm, wrote a book around what he identified as Buffett's basic tenets of stock-market investing.
According to Buffett via Hagstrom these consist of questions you must ask yourself about a potential stock investment. 'Is this stock from a business that's simple and understandable?' If you understand the business you're investing in, you'll be positioned to recognize both opportunities and problems as they occur. 'Does the company have a consistent operating history?' Or is it like those jinxed-location eateries we've all seen that are open for a year, then closed for two before once again reopening.
'Is the management rational?' This one is really big in Buffett's reckoning, and rightly so. 'Is management candid with shareholders?' A manager who readily admits any mistakes is ipso facto trustworthy. 'Does management resist the institutional imperative?' In other words, does the manager stand up for what he knows is right or cave in to pressure re. not rocking the boat?
'What's the return on equity?' This tenet swings way wide of the usual ratios. "What are the profit margins?' If a company sells its product(s), but doesn't profit, it's a failure, plain and simple. Likewise, in Buffett's view, a business with large expenses has undisciplined management and that's an issue that risks the company's existence.
Obviously, Buffett favors homework, buckling down to research and taking the long view. There are others (admittedly less successful) who approach the stock market with a little less gravitas. In their view, if you're getting tips on the stock market, you must evaluate the tipster. Spam email goes right to "trash." An experienced investor, on the other hand, is at least worth listening to. Listening doesn't mean you have to do it that way.
Decide what your investment goals are before you evaluate the fundamentals of the stock. If you aren't a gambler at heart, you don't want to invest in unverified stocks. If you're close to retirement, unproven stocks may not be your best choice. Investing in stocks always carries a risk, but acting on stock market tips concerning established, stable companies cuts that risk down to size.