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Creating A Stock Watch List

Once you hammer into your head that stocks are fractional ownership interests in real business enterprises, you've learned the path to true stock market wealth.


You know the best way to create a solid foundation for your retirement is to accumulate as many shares as possible of great business enterprises.

But in order to travel successfully down the path to stock market wealth, you still need to answer a few more questions. Starting with...

How do you identify a great business?

Good question.

It's all part of a process, and it starts with brainstorming...

Brainstorming a Stock Watch List

At this point, your purpose is to uncover the best publicly traded business enterprises so you can look into acquiring small pieces of them. In time, this will lead to the accumulation of rock solid wealth to fund your retirement.

So how do you discover these great businesses? In stock reports written by Wall Street analysts? Newsletters? Magazines? The Internet?

While each of these resources offers great supplemental research, the best place to look is your daily routine.

That's right. Your daily routine.

And the brainstorming process starts when you change your mindset and continually ask the question, "Is it publicly traded"?

Let's illustrate with a fictional example. We'll call him Bob.

Each morning, Bob wakes up wide-eyed and brimming with life. Just like you, right?

Right off the bat, he wanders into the bathroom where he shaves with his Gillette Mach 3 razor (Proctor & Gamble). Next, he brushes his teeth with the New Reach UltraClean toothbrush (Johnson & Johnson) which, of course, he covers with Colgate Total Advanced Whitening toothpaste (Colgate-Palmolive).

After that morning ritual, he engages in another, pouring himself a bowl of Rice Krispies (Kellogg) and opening some Yoplait yogurt (General Mills).

And once his hunger is satisfied, he hops in the shower, where he enjoys his Moen handheld showerhead (Fortune Brands), Dial soap (Henkel), and Axe (Unilever). Of course, he does this in the same shower he cleaned the night before with his Mr. Clean Magic Eraser (Proctor & Gamble) and Clorox Disinfecting Spray (Clorox).

After throwing on his Signature 3-Button Wool Suit (JoS. A Bank Clothiers), he jumps in his 1.5 Liter 4-Cylinder Hybrid Prius (Toyota Motor Corporation)and drives to the local gas station/convenience store where he fills up with Exxon Regular Unleaded (Exxon) and picks up a USA Today (Gannett Company), a Monster Energy drink (Hansen Natural), and a Quaker Chewy Granola bar (Pepsi).

And on and on and on...

Starting to see how your daily routine is fertile breeding ground for investment ideas?

Stick with What You Know

A substantial list of potential investment opportunities pass right under your nose on a daily basis. Make it a habit to read the packaging of the products you regularly purchase, familiarizing yourself with the manufacturers.

Are they publicly traded?

If so, this is a great starting point for further investigation.

Keep track of these companies in a spreadsheet or somewhere you can review them from time to time.

This is your Stock Watch List.

This is the starting point for all your research.

When compiling your Stock Watch List, stick with what you know.

Stay with the products you actually use and the businesses you understand best.

This is a winning philosophy.

In his books "One Up On Wall Street" and "Beating The Street," storied Fidelity fund manager, Peter Lynch, gives the same advice...

"If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."

And Warren Buffett, widely considered the world's greatest investor, makes the same observation:

"The only time to buy that which you don't understand, is on the day with no 'y' in it."

In short, if a company's chief source of revenue is a technology that's over your head or its business model just doesn't make sense, then stay away from it. If you can't understand how the company makes its money, how can you make a reasonable assumption you'll ever see a dime as a partial owner?

Remember, your goal is to own great companies. That doesn't mean you have to run them, or engage yourself in their day-to-day operations. But you need to maintain an intimate familiarity with and understanding of each business you own.

After all, it's your company!

So unless you've taken the time to learn the strengths and weaknesses of a business, then don't take the time to buy in as a partial owner.

Always Ask Questions

So how do you uncover a company's strengths and weaknesses?

You ask questions.

Read everything you can get your hands on. Read the company's annual report. Read analyst reports. Read what people in The Motley Fool CAPS Community are saying. Read the Value Line Investment Survey's overview.

Learn about the company inside-and-out, and ask questions.

You don't always have to find answers to your questions. Just ask them.

Imagine future outcomes for the business. Use your best judgment and common sense.

Will the company's products be obsolete in ten years? If so, what does it plan for an encore? How does the company stack up against its competitors? Will possible government regulation interfere with the company's operations?

Ask. Ask. Ask.

No one else can do this for you. You're the potential business owner. You're responsible for knowing the potential pitfalls and windfalls, and you're more than capable.

Only by asking questions can you reach a point where a company meets your highest criteria for investment...

A willingness to invest your entire net worth in the company and follow up that action with a 10 year vacation.

Once you're willing to put everything on the line for your business (just like the owner of a local restaurant), then and only then, are you confident enough to make a long-term investment commitment.

But remember, this is just a starting point. You're not ready to become an owner yet.

Just a Starting Point

Just because a company seems strong and profitable, that doesn't make it reality. And even if a company is great, that doesn't justify paying any price for it.

What you're looking for is a great company selling at a great price.

To find out if a company on your Stock Watch List meets that standard, you need to kick the tires. You need to look under the hood and make sure everything looks just as good on the inside as it does on the outside.

And you do that by examining the company's financial statements.

The more exhaustively you examine the financial statements, the better. But here's a list of the six key factors you need to examine...

1. Does the company exhibit consistent and increasing earnings?
2. Does the company have a high return on equity (ROE)?
3. Does the company have a low debt to equity ratio?
4. Does the company generate high free cash flow?
5. Does the company pay a regular quarterly dividend?
6. If so, what is the dividend payout ratio?

Outside of your own personal judgment, these six factors are the strongest and most numerically objective indicators of a company's relative strength or weakness as well as its ability to generate reliably strong investment returns.

Unsure what these mean?

Let's delve into these six factors and learn how to uncover the truth about a company on our Stock Watch List...

Learn About Factor #1 - Consistent and Growing Earnings >>>


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