How I made 114% ROI in 2 Years of Stock Investing
And how you can too.
Tired of the 0.01% interest on your Chase Savings account?
In this piece, I explain the method I use to select stocks, beating the S&P 500.
Step 1: Choosing a Company
Invest in what you know.
What services and apps do you use? What shops do you frequent? What’s your job? The answer to these questions should help you decide which company or industry you want to focus on.
In Practice: Snap Inc. ($SNAP — $12.31/share at time of writing)— As a long time user of Snapchat, I have witnessed its initial adoption, growth, and, as of late, its user churn. As something I have frequently been exposed to and as a user myself, I am direct witness to a pattern of reduced Snapchat activity among my friends and myself. I was able to see the public outrage directed at the Snapchat redesign of 2018. It doesn’t take me reading a 10-Q form or listening to an earnings call to know and predict that their DAU/MAU (Daily/Monthly Active Users) has significantly dropped, and, therefore, a company I would stay far, far away from at this time.
As you can see, by engaging only in companies and industries that you are exposed to, you have an inherent advantage in understanding the climate, public sentiment, and consequently, an effortless pre-screen of potential candidates.
Now choose a few companies and follow me along this exercise!
Step 2: DDD (Do Due Diligence)
What’s a 10-K and why do I need to read it?
A Form 10-K is a public comprehensive annual summary of a company’s financial performance required by the US Securities and Exchange Commission. It contains important information and numbers that, when understood, provide a spine to a novice investor.
Now open one up!
How do I interpret this?
The most important sections of the 10-K are as follows:
Item 1. Business
The business section allows you to view the entire scope of the company’s ventures.
In Practice: Chegg Inc. ($CHGG) —I have used Chegg for textbook solutions for a long time and have associated their name with textbook solutions. Without explicitly searching for more features, I wouldn’t know the range of other services they offer unless I read the Business section of their 10-K. Chegg also offers live tutors, textbook rentals, Q&A, and even owns EasyBib.com.
Item 1A. Risks
Read these thoroughly. Most risks are negligible and standard, but, unusual risks, such as the majority of revenue coming in from only a few customers, or dependence on another company’s product, may be red flags.
Item 3. Legal Proceedings
Self explanatory — if you see any legal issues that suggest a significant detriment to the future of the company, look into it and make a decision. A resolved lawsuit stated in this section may also explain some unsavory metrics in Item 8.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This is management’s space to discuss what happened in the past year, including scope of products, observed trends, and forward-looking statements. Similar to Item 3, this may explain unexpected numbers in Item 8.
In Practice: Amazon.com Inc. ($AMZN) — Amazon’s management states in Item 7 that they plan to invest heavily in technology, informing investors that the future increase in operating expense is for good reason.
Item 8. Financial Statements and Supplementary Data
Find ‘Consolidated Statements of Cash Flows’ and look for “Cash and cash equivalents”. Is it improving over the years? Ask the same question regarding “Net income/loss”. Ask the same question about yourself. Be introspective. Just kidding. That’s a different topic.
In Practice: Chegg Inc. ($CHGG) — Cash and cash equivalents is consistently improving each year, as you can see below. This suggests that Chegg is consistently able to generate value for its shareholders.
If you come across any significant problems after your fundamental analysis, it might be time to consider a different company.
Step 3: Statistics
Hold your horses, buddy. I know you’re excited, but we still have a little more work to do.
Open up Yahoo Finance, enter in your stock ticker, and click on “Statistics”. There are a couple ratios and numbers we are going to a look at. As for each of these following metrics, they are useless in isolation and should be compared to those of other companies in the same industry and the industry median. This is not an exhaustive list; just ones I use often.
- PEG = (Price / Earnings To Growth ratio) — lower is better
- Enterprise Value < Market Cap = company has more cash than debt
- P/S = (Price / Sales) — lower is better
- P/B = (Price per share / Book Value per share) — lower is better
- ROE = (Net Income / Shareholders’ Equity) — positive is better
- Beta = (Covariance / Variance) — if > 1, high volatility. if <1, low volatility
If several of these metrics don’t fit your bill, it might be time to consider a different company.
Wow! If you’ve made it this far, then you’ve come across an attractive investment opportunity. Look at you! Open up a Robinhood account and go get em’, you financially responsible individual!
Step 4: Maintenance
OKAY. You’ve bought your shares. Now what? You may get antsy, checking your portfolio every hour, like I used to do. STOP. You need to realize that the intraday movements are usually just inconsequential noise. You’ve done your due diligence; be confident that you’ve made an informed decision.
What I like to do is listen to the earnings call every quarter. This call allows the company to discuss the financial results of the last quarter. This allows you to stay current with the company’s performance and helps you decide if you want to offload your shares, or, maybe, buy more.
And that’s it!
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” — Warren Buffett
Disclaimer: Investing comes with risks. Only invest what you can afford to lose (…though this probably won’t happen). The purpose of this method is to allow you to avoid panicking the moment your precious baby inevitably takes a fall out of the shopping cart as part of inherent market volatility. Prices change every day. I am arming you with the faith and clemency you didn’t know you needed to trust that your portfolio, despite the inexorable ups and downs, is bound to become worth your time and money.
Thank you for reading. If you enjoyed this and would like more, you can let me know by bookmarking, clapping, or following me! :-)