Episode #3- Investing In High Quality Stocks

Wealth Decisions Podcast Transcript for Episode #3- Investing In High Quality Stocks

Listen to this episode on Apple Podcasts or Spotify

You know, they say that the biggest risk of all is not taking one.

I took a lot of risks early on in my investing life.

And what I hope that you'll all get from this episode is some tried and true wisdom on what to do and what not to do.

Early on in my investing life, I always tried to find, you know, the next Amazon, the next Netflix or the next Microsoft.

You know, I'd found stocks that maybe did well in the short term.

I chased momentum growth stocks.

I got wrapped up into the tech bubble and crash of 2000.

And sometimes I would even try to find smaller companies thinking that I could make a quick buck or get rich quick on a small company because it was low in price and I could buy a lot of shares.

But hindsight is 2020.

But investing in quality stocks with favorable risk reward, solid fundamentals, competitive moats and strong management would have been a much more profitable endeavor over time than investing in small startups with no earnings or companies that were the stock of the day.

In this week's episode, we're gonna be talking about investing in high quality stocks.

You know, Warren Buffett's philosophy is not to pick stocks, it's to pick businesses.

When a business does well, the stock usually follows.

His favorite holding period is forever.

Warren Buffett would say you shouldn't own any stock for 10 minutes if you don't feel comfortable owning it for 10 years.

He also said you should invest in what you know and invest in quality companies with competitive moats around their businesses.

Today, I have a process for picking stocks that I developed back when I was in the investment club at St.

Cloud State University in 1996.

And I've refined that process over time.

It's called the momentous prudent process.

You can find more information out about the momentous prudent process at my website.

Under the services tab, you'll find a link to stock investing.

But what I want to talk about in this episode is five stock investing rules to make you more successful over time.

So rule number one, avoid story stocks.

Sometimes we hear about the next big thing, like a revolutionary tech company set to change the world or a biotech firm on the brink of discovering a groundbreaking new cure.

They all sound pretty alluring, but investing in story stocks can seem like an enticing prospect.

The hype built around a lot of these companies, most of the time is based more on speculation and dreams and dare to say smoke and mirrors, rather than rock solid financial grounds.

So it usually comes down to a game of luck on whether the story of a high fast growth stock transforming from fiction to reality.

Now, don't get me wrong, some stories do have a happy ending, but more often they don't.

And a recent example of a story stock was GameStop.

You probably saw it on the news if you watched the Business Channel.

In fact, I think it was even on the local business news.

GameStop was a story stock and there was a lot of hedge fund managers that were shorting it.

And the power of the people on Reddit caused this on the brink of going bankrupt company to go from basically $4 a share to almost $400 a share at the top.

And there's stories of some of the few that cashed out near the top for huge gains.

In fact, they actually made a movie out of it called Dumb Money.

But most investors wrote it all the way back down.

We've seen it countless times.

These overhyped gems usually fizzle out like many of the dot coms in the 2000 tech bust.

So avoid story stocks and also avoid penny stocks.

Those are stocks that trade under $4 per share.

Penny stocks have had an average negative annual return of 25% and about 90% of penny stocks fail.

I don't know about you, but those odds don't sound very good.

So avoid story stocks and penny stocks under $4 per share.

Rule number two, research before you buy.

There's some great news sources out there for researching stocks like Google Finance, Yahoo Finance, and you can even go to sec.gov to find out good quality information about a company.

You need to know what's going on in a company.

And if you don't know how to read financial statements or analyze stock reports, there's some great services out there.

Two of my favorites are Investors Business Daily and Vector Vest.

They give you a nice summary of valuation metrics, earnings growth, and other things that are important when trying to identify a good company to invest in.

I truly believe if you're not going to take the time to research a company, and we're not talking about 10, 15 minutes, we're talking about hours of research, then you probably shouldn't be investing in individual stocks.

And you certainly shouldn't buy that stock until you've done some of your own due diligence.

Rule number three, diversify in different industries.

I'm sure you've all heard the saying, don't put your eggs in one basket.

It applies when talking about investing in stocks.

Investing is not just about picking winners, but also about managing risks.

And one great way to manage risk is industry diversification.

When you look at industry diversification, every industry reacts differently to different economic environments.

So you want to have some money in technology.

You want to have some money in healthcare.

You want to have some money in financial stocks.

You want to have some money in consumer discretionary, as well as industrials and potentially energy stocks as well.

You know, right now, there's a huge appetite for technology stocks.

When you look at the artificial intelligence boom, there's a lot of companies that are benefiting from that.

And a lot of them are getting very richly valued.

When you look at past history, and you look at other times when technology stocks got a little frothy, look back to 2000 when a lot of.com names, a lot of technology stocks were trading at all time highs.

A lot of those stocks during that tech bust went down 60, 70, 80%.

So you don't want to have all your eggs in one basket.

Diversify in different industries so that you can mitigate some of those risks.

Investing in stocks requires a level head and a little bit of understanding of behavioral finance and how and why we do things we do as human beings.

After all, the stock market is just a collection of human beings that want to buy a stock or sell a stock.

And somebody's right and somebody's wrong.

I'm sure at some point all of us have thought, oh man, if I had just invested in Apple when they were trying to figure out how to add color screens to iPods, I'd be sunbathing in Bora Bora right now.

But let's be clear, stocks like that are usually more an exception rather than the rule.

It's not as easy as it sounds, and it's crucial to keep your expectations in check.

You know, just because you buy a stock, it's not gonna just go up just for you.

Sometimes when you buy a stock, it goes down first before it eventually goes up if you've picked a quality company with good earnings prospects and a good competitive moat around their business.

It's pretty much like expecting your favorite sports team to win every single game.

It sounds amazing in our heads, but we all know that is not gonna happen.

Investing in stocks is identical.

You can't expect to always pick a winning stock.

There's an old adage that says that if you buy five stocks, one is gonna go up quite a bit, two are gonna go up a little bit, and two are gonna go down.

So expect to have some stocks that don't go in the direction you want them to.

So rule number four, keep your expectations in check.

Rule number five, don't be greedy.

Warren Buffen often said, be greedy when others are fearful, and be fearful when others are greedy.

It's very easy when you have a stock that goes up 100, 200, 300% to think that, well, if it went up another 100 or 200%, I could have this amount.

And you have to constantly evaluate the companies you own and make sure that it hasn't gone too far, too fast.

Don't be afraid to take profits, even if you have to pay short-term capital gains.

I've made some mistakes over the years investing in companies and looking at my tax liability as the reason I didn't want to sell it, because I didn't want to pay short-term capital gains.

But I got greedy and I made the mistake a variety of times over my 30 years.

Investing in quality stocks can be very, very rewarding to build your wealth over time.

In fact, some of the wealthiest individuals that I've worked with over the years have owned one or two things.

They've either owned real estate or they've owned quality companies that they've hung on to for a long period of time.

I do believe that most individuals should start by building a solid base of investments in their retirement accounts in low cost, mutual funds and ETFs before investing in individual stocks.

I think you should have at least 50,000 saved in a taxable account and have six to nine months of expenses saved for emergencies before you start investing in individual stocks.

You wanna be able to buy at least 10 companies diversified in different industries.

There's some great dollar cost averaging programs out there if you don't have $50,000 to invest that allow you to invest a set amount on a monthly basis to start building a portfolio of high quality companies.

At Momentous Wealth Advisors, I use a process for picking stocks that I call the prudent process.

And it's something I go into in depth on my website under the stock investing page.

It starts with an advanced screen using the rule of 40 as the first two parts of the criteria.

And the rule of 40 is looking at your net profit margin of a company plus their revenue growth.

And if that number equals 40 or higher, that's the first sign of a good company.

And if you'd like to learn a little bit more about the momentous prudent process for picking stocks, there'll be a link in the description in this podcast.

Feel free to go to the site, look around, there's some great tools on there as well.

And that's it for today's episode, investing in quality stocks.

If you'd like to schedule a discovery call with me, you can go to my website at momentouswealthadvisors.com and I'll spend some time to get to know you a little bit and find out if I might be able to steer you in the right direction or help you with your financial future.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Always consult with a qualified financial professional before making any investment decisions.