How to determine when a company’s strength is correct, so you can buy

(This is post features Orlando Antonini.)

What criteria should you look for to determine if a company is a reasonable and secure investment?

There are three main evaluation issues.  It’s like a three-legged stool: if any one of the three legs is missing, it won’t stand up.  Likewise, the stock will not maintain its value.

The first criteria – Does the company have sufficient cash reserves so they can get through a down turn and/or expand when appropriate.  Even more important, for you the investor, does the company have cash funds to buy back its own stock in a down turn of its value, therefore creating more value for you?

The second criteria – Good management.  What does good management mean?  It starts with the Chairman of the Board, the Board, a CEO, a CFO, and goes beyond that to other key employees.  If the Company has a high turnover, or if people retire, it may affect the management team’s effectiveness.   Another important issue to look for, the Chairman of the Board and the Board cannot be controlled by the CEO.

The third criteria – Is the product or service the Company is offering to the public desirable?  Does the public perceive the product as reliable in quality and a necessity for personal or business use?  Will these products or services be needed in the future, as the future will be different from today?

These are the criteria you use to evaluate when to buy the stock and it is the basic bench mark to use for evaluating when to sell.

When you evaluate the stock using the above method, you also have a baseline of the cost or value of the stock.

Most important, there is the ongoing monitoring of all three criteria to see if one has changed, requiring you to sell the stock.

Stocks, on average, held for more than ten years have a return of more than 11%, dividend and growth per year.

Conversely, when you try to time the market and buy and sell, the average return is less than 4%, dividend and growth per year.

If you are repositioning stocks based on the criteria above, it is prudent and a wise decision providing there you are truly monitoring and evaluating changes based on the three criteria.

We can help you with the analysis and ongoing evaluation so you have the knowledge to make the correct choices based on your criteria.



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