Dear daughter,
One of the ways to start investing in the stock market is stock picking. This is about answering the question of what to buy in the stock market? My daughter, let me tell you that stock picking is not for everyone, but it can be very profitable.
Let me explain to you why.
Stock picking refers to choosing what company, or stock, to buy in the stock market. It is a long process that some investors call doing due diligence.
Some things you have to do when you picking stocks
See below a few things that you should do/answer to pick a stock:
- Read and interpret at least 10 years of financial statements.
- Investigate the management team. What is their experience? How did they perform in previous years? Are they visionaries? Are they leaders or bosses? What is their vision of where the company should be in the short, medium, and long term? After you know them, will you entrust your money to them?
- From the financial statements, can you identify a durable competitive advantage?
- What type of stock are you looking for? Are you investing to get regular income? Or you are comfortable without a regular income and making your money grow in the long term because now you have another source of income?
- Is the stock underpriced, fairly priced, or overpriced?
- What are the odds of you losing your money if you buy that stock?
- Can you calculate the risk of investing in that stock?
- Do you really understand the stock?
For you to get the answer to these questions, and others, you need to do a lot. It is very hard work and, most important, it must be constant and consistent.
Looks like a lot, isn’t it?
Stock picking is hard work. It is one of the things that professional investors do.
I will say it is the thing that makes professional investors, who know what they are doing, have bigger returns on investment.
Most people don’t have the time or just don’t want or feel like doing this hard work. For them (and also for you), there are other ways of investing in the stock market. it is usually called passive investing. I’ll explain later what the other possibilities are so I don’t make this letter unnecessarily long.
Stock picking as a job
If I had to redefine my career, I would like to be a professional investor. Like the ones who do stock picking, among other things.
Imagine how nice it will be if your work is to allocate money. That’s all you do! You go to your office, or your home office, or a front-view beach apartment, you sit down, study companies, and decide how to allocate your money. I don’t know you, but for me, this is awesome.
I already did one stock picking. When I started, I didn’t know anything about it. So, I started studying, went to a short course on accounting, so I can learn the language of business, and read everything that came close to me and was related to the stock market or investing.
I was studying investment and accounting at the same time I was studying businesses.
Soon enough, I realize how much I was learning. It was extremely gratifying.
You learn about different business models, what they do, and sometimes how they do it. There is so much knowledge out there that can be yours if you just pay enough attention.
As you know, I also like numbers. This facilitates a lot of the understanding and interpretation of financial statements.
As you can see, stock picking is not for everyone. Some people are not willing to put in the hard work. And that is fine, they are usually working hard on other things.
So, what do you think?
Is stock picking for you?
Love you, Dad.