The mass of investors buying stock every day do it on emotion. They got a tip at a party. Or somebody at work says "my broker is E.F.Hutton and he says" to buy a certain stock. Mercy!
When buying a stock you are buying actual ownership of the company represented. You own a small piece of the action. If the company is successful, the stock will rise accordingly and you will get rich (the proper representation is rewarded, possibly rich). The question is how do you decide which company to buy?
Imagine if you can, that you had enough money to buy any company you wanted and that you would own 100% of all the stock. "Make believe" that you become the CEO (chief executive officer) and will direct the company. It is yours. You can build it, mold it, treat employees as you'd like to be treated and pass the company on to those ungrateful little offspring that feel they are entitled to everything. That last comment wasn't necessary but it felt good.
If you are spending big bucks to buy a company, you would want great products. You would want products with potential for good growth. You would want a marketplace that was expanding. You would want stong profits with opportunity to improve them. Of course as CEO, you would want to be rewarded for the risk you are taking in buying the company. Big salary!
Buying stock is just that simple. Of course you are only CEO in your mind, but you look for potential of markets, products and profits. You also should take a long term perspective of 10 years or more.
So in my mind, I imagine what companies I would be proud to own. I love Johnson and Johnson. It makes bandages, aspirin, and baby powder. It makes stents for artery reconstruction. What is not to like? It helps people. It grows at 12-15% per year. It pays 2% dividends and has increased dividends for 25 years straight. It is international and 2 billion Chinese will soon benefit from my products. I would be proud to collect my $3,000,000 per year salary and then get my $10,000,000 bonus. Because I would be a benevolent dictator, I'd share my success with my employees. Johnson and Johnson passes my CEO test. I'd love to run it. I'd buy the stock.
There are some companies that are profitable and would be fun. Hershey Chocolate! Disney! ebay! Google! They pass my CEO test. When somebody would say to me "what do you do for a living", I could respond with I'm CEO of Hershey. Women would swoon at my feet?
You get the idea. Follow the money. Profits and more profits. Opportunity to grow products and profits. Forget the emotional bullshit. If you can feel you'd be proud to own a company and to become it's CEO, then it probably is a good stock.
Even good companies fail in our worldly environment of uncertainty but good companies represent opportunity to navigate the rough waters.
Good stocks picks could make you rich. One lady profiled in Money magazine had continued to buy Schering Plough stock over her lifetime. With all the splits and growth, she left her nieces and nephews $9,000,000 when she died at age 91. Her failing was that she was frugal. She got her coats at the Salvation Army. Come on! The fun of making money is to spend some of it. It her case she lost perspective but she demonstrated what picking a good company can do.
Actually you are the CEO of your own life. I will save that dissertation for another day.
Love,
Dad(Just Chas.)