Is it possible to just go and buy shares of Apple or Meta? Or stock CFDs? Theoretically possible. It is not a problem to pass verification with a broker after opening an account, even if you close your eyes to numerous commissions and taxes. Does it make sense to spend time on analysis if these papers always go up with rare exceptions? Or not quite rare, if we recall the Facebook data breach scandals. Or a much more striking example of industrial giants who have gone into oblivion. For example, General Electric, General Motors. Such companies have a name – “zombie companies”. Do you think you are protected from the risks of investing in them? If you close your eyes to Enron, then there is a much more vivid example – Tesla. Despite the corporation’s seeming successes, its multipliers leave questions. And where is the guarantee that you will not buy shares of a future bankrupt? For this, there is a comprehensive analysis of the company before buying shares.
Macroeconomic analysis of the company
The algorithm presented in the review is not universal. This is one of the possible options that can bring ideas to a potential investor. Therefore, we hope it will be useful.
Psychology is at the heart of investing. A person who buys shares of a company becomes its minority shareholder – a partial owner of its profits and debts. From this angle, it would be quite logical to get acquainted with the asset being bought.
A comprehensive analysis of the company before buying shares includes:
- Macroanalysis. The cyclical nature of the company’s work relative to the overall business cycle.
- Fundamental analysis. Evaluation of the overall performance of the company, its efficiency, sustainability, competitiveness.
- Deep analysis of the company. Analysis of financial statements, multipliers.
All key indicators are considered exclusively in the complex. This review will address the first two points. Analysis of EBITDA, P/E multiples is the subject of separate reviews.
Principles of investment portfolio formation:
- Asset diversification. The stock investment portfolio must contain protective assets. Gold, currency. Stock assets can also be diversified: stocks, bonds, ETFs.
- Diversification by country. Purchase of shares of the USA, CIS, Asian market. Even the purchased shares of three companies from different regions can be called diversification.
- Share diversification. Not more than 5% per issuer.
- Refusal to use leverage, shares are bought exclusively with their own money.
- Refusal to buy overvalued companies.
Macroanalysis. Much depends on the sector in which the company operates. The business cyclicality of industrial, technology or energy companies is fundamentally different, as it depends on the seasonality of demand, including the regional aspect.
Also plays a role and the cyclical use of the product. For example, a company manufactures a durable product. If the country’s economy is falling, then it is logical to assume a strong drop in demand for this product, since people in a crisis primarily buy essential goods. Investors put their expectations into the price of shares.
The current macroeconomic situation can be judged by the following indicators:
- Dynamics of GDP. A key indicator of the state of the economy, the disadvantage of which is the publication with a delay. True, the decline in the quarterly value of GDP does not mean an automatic collapse of the entire stock market. But if there is a trend for several quarters, there are problems.
- The state of the labor market. The unemployment rate is a key leading marker. Rising unemployment means that GDP values will fall.
- PMI business activity index. The median value of the index is the level of “50”. The higher the PMI, the stronger the growth of the economy.
- demand for loan products. Indirectly, it depends on the discount rate, the reduction of which stimulates lending. But rates cannot go down forever, because the benchmark is still directly the volume of lending. Subject to the growth of the deposit base and the high quality of loans (because the growth of lending in 2008 in the United States turned into a collapse of the entire global economy).
- Quantitative easing programs. They are also considered stimulating. But in the long run they can lead to inflation.
If you buy stocks with a horizon of 10 years, then the cyclical nature of the economy does not play a role. In accordance with the wave theory, the economy recovers over such a period even after a deep crisis. But if we are talking about short-term investment, it makes sense to buy paper at the bottom of the next cycle.
Technology can also play a role. For the short term, it does not play a role, but it can significantly change the profitability of the long-term portfolio. This is shown by the examples of zombie companies already mentioned at the beginning of the review. On the other hand, venture capital investment carries high risks. But here we can cite as an example the words of Buffett, who considered the main criterion for buying shares to be the company’s competitiveness in 10 years.
Fundamental microanalysis of the company before buying shares will be discussed in the next review.