Impulsive buying and overpaying for stocks that are getting attention in the media or on social media is why many investors get sub-par results. But that doesn’t mean you need to become a financial analyst, poring over company balance sheets every night.
According to a New York University study, the typical small investor spends just six minutes, on average, researching a stock before purchasing it. Most of that time is spent looking at a chart of the stock’s recent price performance.
Two research strategies small investors can use to improve long-term returns…
Remember you aren’t just purchasing a stock— you are becoming part owner of a company
Here’s the very least you know about any business you own…
- What it does and what problems it solves for its customers.
- Is it a high-quality business, growing profits each year and maintaining enduring advantages over competitors?
- How long top management has been in place, and has it had success?
- Where the company is going in the next several years.
- Where the company is in its cycle now—every business has up and down cycles—and are its valuations historically cheap?
“Position size” your investment
Stock buyers in the NYU study spent less than 1% of their research time determining how risky a stock was. When professionals invest, they often use an incremental approach. They purchase a starter position in a stock—say, 60% of the full amount they intend to invest. After watching the company perform for several quarters, deepening their understanding of the stock and listening to company earnings calls, they may add another 20%. After a few years, if they are confident that the company can meet long-term growth expectations and become a core holding in their portfolios, they add a final 20%.
