061 How to Pick Winning Stocks

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Most people think they're investing when the reality they're just gambling. And you know what? Their whole financial future is on the line. Welcome to this episode of the affluent entrepreneur show. And in this episode, I'm gonna walk you through the specific way I look at companies to get the best investment possible and stop gambling. I'll see you in the episode.

This is the affluent entreprene entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent entrepreneur.

Welcome to this episode of the affluent entrepreneur show. And like I said, most people think they're investing and all they're doing is really gambling, and they're gambling away their future. Well, it's time that we stop that. Listen, I get it. I get it. It takes time. It takes work. It takes even educating yourself to start to understand what do I look for in a company? What do I look for in a business? What I look for in a stock? How do I know if it's a good stock? How do I know if this thing's going to go up, going to go down, going to go sideways? What do I do? But here's the deal. Your future, your family's future, your legacy is dependent upon you doing the work.

And so why not do the work? Let me give you the recipe to make that happen. Listen, I remember back in the day, my mom and my dad, my dad used to love to go to the horse track, and the horse track was close to where my dad worked. And so my mom would go down there and they would go to the horse track and they would get the program for the horses. And mom effectively would decide which horse she was going to bet on based upon how she liked the jockey's outfit, the name of the horse, or the colors. Now, it's a strategy for sure. Is it a good one? No, not at all. Sometimes she won very rarely. Okay, most of the time she lost. Now dad, on the other hand, dad was an engineer. So dad was a data dude. He looked at the, at the program, he looked at the history of the horse, he looked at the history of the jockey, he looked at the history of the horse on this type of a track, and he analyzed and he worked through it and he decided which one was the best one to put the money on. Now, who do you think had a better win record? Now, I'm not saying that investing in the stock market is like gambling at the racetrack. And I certainly would never want anyone to think with a gambler's mentality when we talk about investing. But I just want you to understand that if we're going to get a higher degree and a higher probability of success, we need to do some things. So we're making decisions and choices that make sense based on what's there. And so what we need to look at is how do we analyze a company? Now, there are two ways to analyze a company that you'll see. And the first is this idea of what we call fundamental analysis. Now fundamental analysis is typically the analysis that most people are doing for investments. When I talk about investments, I'm thinking long term.

Three years minimum, typically five years and beyond. Okay, long term. So I'm. What I'm looking for is a company that has got good standing, that has good financial status, good story that has it. I'll walk you through exactly what I do and show you exactly what I do. But when we talk about investing, it's a long term view. Then there's a group of folks that are what we call traders. Many traders are much shorter term view. They do a different kind of analysis. They'll look at fundamental analysis and I'll explain what the differences are. But they do something called technical analysis. But let's start off with fundamental analysis and let's start to understand what is fundamental analysis. Because this is what I want you to at least get a flavor for to do. Because now you're going to start looking at a company, you're going to get under the hood and try to see what is. In order to do that, I'm going to take you to my iPad. So let's just take a look. So the first type of analysis is this idea of fundamental analysis. And what is fundamental analysis? Well, the fundamental analysis focuses on what, what's called intrinsic value. In other words, what we're looking for is we're looking at a company and saying, okay, there's the price of the stock of the company. Maybe, you know, I don't know.

AMD is a advanced Micro Micro Devices amd. Maybe it's trading at a hundred dollars a share. That's the stock price. That doesn't mean that's the value inside the company. Intrinsic value is implicit into.

The company. So we want to analyze it and say, wait a second, although the stock price is 100 bucks, I think this company is actually worth more. And this is one of the things that actually Warren Buffett does a lot of, is digging in to find that intrinsic value in place. And so one of the first things that fundamental analysis is trying to define and trying to get their arms around is what's the intrinsic value of the company. It's going to focus on the economic value of the company also. So what are the economics of the operations? What are the economics of what's going on with the company? The trends, the profitability, the numbers, the data. They're going to look at the operating performance. So you're going to look at financial statements. I know. Oh my God. Financial statements. At some point I'll do a session on exactly what to look at on those financial statements. I'm going to give you some statistics to look at, but I'll actually explain a financial statement to you in another, in another session, at some point, you're going to look at the operating performance. You're going to look at the industry, what's going on in the industry. Because a company isn't operating in a vacuum. A company is operating in an industry. It's operating in a geography. It's operating in a market. And that market, that industry, and that geography can affect the operations of, of the company. So they're looking at that. And then lastly, one of the things that they're doing in fundamental analysis is trying to better understand the risk exposure that they have. And so fundamental analysis is really taking a hard look at the things around the company and inside the company to figure out if there's any intrinsic value reason for the stock to continue to go up. Okay, this is what most investors focus on fundamental analysis. There's a second type of analysis which I'm not going to go into in any detail here. We'll do it on another session. And that's what we call technical Analysis. Now, technical analysis is really more based on movements and volumes. So they're looking at the stock charts, just like this chart back here, okay? They're looking at the stock charts, they're looking at movements, they're looking at what the pictures are telling them that's going to happen. They're spending the time with graphs and charts looking for patterns, a repeatable, recognizable pattern. And if they can see a repeatable, recognizable pattern and, and they see that it's setting up to do the same thing again, the expectations are that it'll do it again. The other thing is when you look at the patterns of the charts, what we're really graphing there is the psychology of the market. I mean, when you look at people that are, if you see a stock price that's doing this and it's going down really fast, why is that happening? Now part of it is maybe the company's fundamentals are bad. They miss numbers, that's that. But what's happening is that fear is taking over. And when fear takes over, people sell and versus if it's going up. So the psychology of what's going on is depicted in these charts. And so they're looking at it from that perspective, saying, what are the charts, what are the graphs, what are the things that are happening? Telling me, and they focus on things like trend lines and averages. So you'll hear people, commentators saying, oh, it just broke the 200 day moving average or it's hitting the 50 day moving average. And so what they're looking at is saying, typically when a company hits a certain level, it starts to fade or it starts to accelerate. And so what they're looking at is that over time the company has a pattern of trading. Technical traders spend their time looking at charts, looking at trend lines, looking at averages, looking at stats to make the decision based upon what's going on with the momentum and the volume with the stock. Fundamental analysts spend more time focusing on the intrinsic value of the company and looking at the company, looking at the industry and looking at all of that. Now I happen to to believe that there's a place for both of these and we should be doing both of these because what, what I think happens is that if I can find a good company and then I look at the chart and say it's telling me and supporting what I think is happening with the company now it tells me when I should get in and when I should get out. Okay? Now I would be remiss if I did not spend a little time talking about the risk of investing in a single company. And then I'm going to walk you through my fundamental analysis grid, the six things that I want you to look at when you're trying to look at a company. But here's the thing we need to understand. If I go to. Let me just get a page up and just go to the iPad. So if we look at what, what can happen is you. You can have a stock that's going up, going up, going up, going up, going up, and all of a sudden they announce earnings, okay? And the earnings aren't so good. So earnings are. Are negative. In other words, they didn't hit the mark that they said they were going to hit. What's going to happen? What typically happens is then all of a sudden it drops and it drops and it drops and it just peters out. Okay? And so what happens? And this is exactly what recently happened with Facebook. Facebook.

Did a face plant, okay? Facebook did a face plant because they were up at. At one point, they were up at 400 bucks a share, okay? They announced their. They did their earnings, and when they did their earnings, it wasn't what was expected. It was worse than expected. And their guidance, we'll talk about guidance in a second, was that we're unsure about the future and we got to get things reset up because of iOS 14 and all kinds of things. Well, they dropped immediately over, you know, over $100 a share and in fact, kept going down till they were down as much as like, $170 a share. Okay. Why I'm saying this is if you only have $1,000 to invest and you put $1,000 into Facebook, and now it tanks by 170 bucks a share, 150 bucks a share, you just took a big hit. This is why at the very beginning, what I tell investors to do is not to focus on individual stocks at the beginning, but to focus on ETFs and index funds. And I have a. Another video that specifically talks about ETFs and index funds and how to invest them. I'll make sure that I hook it up here and in the description so you have access to it and you can get a better understanding of it. But the bottom line is that ETFs and index funds will invest in a bunch of stocks, a bucket, a basket of stocks where maybe Facebook is only one of them. And so if Facebook tanks, but the rest aren't tanking, you don't get hurt as bad. This is a safer bet. When you first start out, when you invest in individual stocks, you're taking on more risk if it goes down. Hopefully that makes sense. So with that, with that, let's just talk about the fundamental analysis grid. What is it that I want to look at? What are the things that I look at in a company when I'm thinking about making an individual company investment? So the first is this.

The first is this. I'm going to look at the business in general. Okay. How do I do that? Okay, I'm going to pull something called their 10K. All right. And I'm going to, I'm going to take you through this. So you understand what is.

Companies, publicly traded companies are required to file an annual report every year. They're also required to file a bunch of different filings. They file quarterly reports. So there's a 10K is their annual report. It's what the SEC calls it. All that information is publicly available. And so what I want to do is I want to pull the 10k and the way I might do it. And it's, it's, it used to be harder, but it's, it's a lot easier. Let me see if I can make this, make this work for you. I'm going to try to go to here. I'm just. Bottom line is I'm on Yahoo Finance. Let's just play around with, with amd, amd, Advanced Micro Devices, because I said something about it, I'm going to bring them up. So Advanced Micro devices is at $120 a share. But you'll see here on Yahoo that we've got company outlook, we've got the chart, we've got statistics, we got historical data, we've got profile, we got financials, we've got announced, we've got a lot of stuff. But if I go here.

It starts to, and I click on it, it's going to give me a profile of the company and it'll tell me a little bit about the business and about the company. But then I can look at financials and it'll give me information on the financial information of the company to bring, bring that out. I can download it, I can look at it quarterly, I can look at it annually. But if I go back here, I can simply look at.

What'S going on with the company here. It tells me what the competitors are. This is going to come in right here where it says similar to amd, it's going to come in really important. At some point it gives me some data here. It tells me what's happening with analysts, it tells me where the company is. And then I can, I can access. If I go to. I'm just going to open up another tab and I'm just going to say, AMD Advanced Micro Devices. I can go straight to AMD's website. On their website, I'm going to look for investors. All publicly traded companies will have a section like this and says investors.

Now I can go in here and go to SEC filings.

And if I look at the SEC filings, there's all the filings that are in here. And now I can look for.

A 10k annual filings. I'll look for the 10k. Here's the 10k, here's the annual report. It's 118 pages and I can literally bring up the report and it will tell me. Now I'm going to say, this is not exciting reading, but if you want to understand a company, look, look at this. It shows me and tells me about the business, about the risk factors, about if there's legal issues going on. And all I got to do is click on it and it takes me there and it tells me about it. This is, this is the kind of stuff that we need to do to really start to understand it. So I'm gonna pull the 10k to. To start to understand a company. It's one of the first things that I'm gonna look at is 10k. I'm gonna look at the competition. And the way I'm gonna look at the competition is if I go back to Yahoo here.

You see where it says similar to amd, there's Nvidia. I can click on Nvidia, I can click on Intel, I can see what's going on with them. What you'll find is a lot of times companies in the same industry have the same chart patterns. They're doing similar things in that. And then the last thing that I'm going to start to look for is what are the inherent risks in the business. Here's the beautiful thing, okay, I'm going to go back to their annual report. Okay? If I look at the annual report, you'll see an item that says risk factors. All annual reports will have that. If I want to understand the risks, look at what they're doing, they're listing it out for me, okay? So this is the steps that I go through. These are the steps that I go through when I want to understand the business. Before I move forward.

With that, then I start to look.

At the second piece and that is, do they have an advantage? Do they have some sort of unique advantage or protection?

You know, Some people will call this emote, something that protects them. If you think about like Coca Cola and their recipe and their brand, okay. I look at Tesla even what Tesla was genius about when they started to release their vehicles is they spent a lot of time building out the charging infrastructure.

For the Tesla cars because one of the biggest objections is that my car can't go far enough and if I can't charge it fast enough then it doesn't make sense for me to use it. Now I happen to be a Tesla owner. I love Teslas. Okay. And, and yet they built out this infrastructure that, this web that allowed people to, to drive, get charged pretty quickly. And every, it's an amazing, amazing setup. But what they did is they created a bit of a protection from other manufacturers getting into the game because they had the infrastructure. Apple did the same thing with the itunes store, with the music. So are there ways that you see that they have a unique advantage or unique protections that, that will sustain them or protect them from competition or other, other elements? And this you'll find by analyzing company, by reading about the company, by seeing what they've done, how they've done in down times and how they've, they've dealt with challenges. Okay. Which then leads me to the third thing that I look at and that is their story. This is all about their, their reputation, it's about their long term viability.

So I want to look at their story. What is their story? What, what is it about them? Are they kind of the, the princess? Are they not like I think Facebook and I was an investor in Facebook, I got out okay, but I was an early investor in Facebook. But I think Facebook right now, honestly is the company to be hated. Not, I'm saying that. Not, I'm not saying that they should be. If you look at it, they've got such. There's a lot of people that you either love Facebook or you hate Facebook.

There isn't in between. And some of that was because the erosion of their credibility and their reputation during the time that, that at the election and the data and, and censoring and all these things that were going on and they didn't really necessarily handle it well. Okay. So I think that we need to look at it from that perspective and say, what's the story? Do I love the story of the company? What's the vision, the long term viability that come. I look at Facebook and I'm not giving advice here, but I'm looking at Facebook. They came out with earnings. The earnings had, weren't what they expected. They said their user base has flat or has, they've lost. They don't know if they've got an accurate count on users because there's a lot of fake accounts. They don't know if they're going to stay in Europe because of the privacy rules that are coming in place and they might pull out of Europe. So they came out and said, here's our story. A lot of uncertainty, we don't know, but the metaverse is going to save us. Well, you're investing in the story. Do you feel comfortable with it or do you not? That then moves us down to a more data driven elements of the analysis. Now I start to look at things that I'm going to look at the metrics of the company. This is about the financials. This is about looking at financials, their profitability, their balance sheet, their cash flow statement. Yeah, you're going to have to understand that a little bit. So you know what you're looking at. Here's some of the stats that I'm looking at though. I'm going to look at things like revenue growth. Okay. So I'm going to look at revenue growth, which is their top line growth, sales. But I think we've all learned, at least companies have learned, that sales growth without profitability is meaningless. So I'm going to look at their profitability. How much do they have at the end of the day? Okay. Because it's from that profitability that they can pay their bills, that they can pay their dividends, that they can buy back shares. All of that stuff comes into place. Then I'm going to look at what's called earnings per share, which is really their profitability divided by the number of shares outstanding. I'm going to look at that growth. Is the, are the earnings per share going up each year? I want to see continued growth of earnings per share on an ongoing basis. That tells me that their profitability is going up, their sales are going up. So they're a growing company. We want to invest in a shrinking company. I'll look at debt. Do they have a ton of debt? Because here's the thing that you'll see is that during times of increasing interest rates, increasing inflation, if we have a big debt load, we can't get out of it fast enough. We can't get out of it because we've got this debt load. And if the debt load is on variable rates, increasing interest rates is going to decrease the profitability. If it's going to decrease the profitability, really it's going to impact the earnings per share growth. You see how it all starts to play out. And then I'm going to look at a couple of data points, such as working capital. In other words, how liquid are they? If you look at some companies, like Apple has a ton of cash. You know, Warren Buffett's company, Berkshire Hathaway has a ton of cash. So they have a lot of liquidity. Why do I look at that? I want to make sure that they have solvency and liquidity to sustain themselves if there's a downturn. Okay. If there's an issue. And then we look at, I look at two statistics. Return on equity, which is their profitability against their equity, and their return on assets. This tells me how effective they are in generating profits. I know this is more technical than some of the shows, but I think this is important for you to understand what's going on in my head as I'm looking at this. I want to see returns, return on equity growing. I want to see return on assets growing. I want to be able to, to, to work through that. So now I've gone through those four elements. The last two elements I'm going to look at is this. I'm going to look at the guidance. What I mean by guidance, okay? What I'm going to do is I'm going to go back to the AMD side or I'm going to go back to the company site and I'm going to listen to the last earnings call. Here's what happens. Every time a company will release earnings, every quarter, they will do a shareholder call. So you can all listen in. It'll either be on Zoom or it'll be a phone call. It'll be whatever. But they do a call and you can listen. And that's where they announce their earnings. They tell them all this performance metrics. They talk about guidance for what they expect in the future. This is what happened with Facebook. So I'm going to listen to the last earnings call and from that last earnings call, then I have the ability to then say, oh, I like the story, I like the guidance they're giving me, and so I'm okay with it. And then the last thing that I'm going to look at is the industry.

What's going on with the industry? What's the outlook for the industry? What's, what are other companies in the industry doing and what are they talking about? What are they seeing as, as the risks? Yeah, I guess it, you know, you, you're, you're looking at and going God, Mel, this is a ton of work. It is.

If you want to do it right. However.

Isn'T your future worth it? Here's what I would do. Okay, so those are the six things that I'm going to look at. I'm going to understand the business, I'm going to look for advantages, I'm going to look at the story, I'm going to look at the metrics, I'm going to listen to the guidance, and I'm going to look at the industry. And based on that, I'll start to make a decision of is this a company or not? Here's how I do this, practically how I do this. So I'll take companies and I'll create what's called a watch list. And you can do this in any of your brokerage accounts. I'm going to take a watch list and I'm going to put the companies in there. You know, amd, you know Apple, you know Microsoft. I don't know. I'm just making up things. Do not go buying these stocks. Okay? Do not go buying these stocks. So I create a watch list and then I'll slowly just kind of pick them off and then I'll make comments and say, you know what, don't like this for this reason. And, and so I'll just, I'll end up crossing it off the list. Maybe I turn around and say, oh, let's watch it for a little longer. Let me wait till earnings comes out. Okay, so I'll create a watch list and then I'll start analyzing one at a time. There's no rush. Take your time, okay? Take your time and do it that way. So the resources that I will use, I have other resources that I use. But for you just starting out, honestly, start off with Yahoo Finance. It's free, the company's website, because that's where you're going to get the investor stuff. 10Ks earning calls the Yahoo Finance. You can get competitors, you can get information on a company and that type of thing. And then from there, if you want to dig deeper, you can. All these companies have what we call investor relations department, investor relations officers. So they want to make sure that their investors are taken care of. But if you truly want to look at a company and understand whether it's a good company to invest in, assuming that you're in a place in your portfolio that individual company stock investments make sense, in other words, I have a foundational portfolio. I'm not taking all of what I have into one company. Then this is the process I would go through. I will go through this before I invest in any company and then I'll do some technical analysis which will save for another time. But this will start to get you to start understanding what's a good company. It's one of the most often asked questions for me is like, what's a good company to invest in? Okay. And, and so here's what I do. This is what I look at. These are the things I look at to decide is it a good company? And then I decide if I want to invest in it and then how much. Now something else I talk about is that, remember, this is investing, so this is long term. But at the same time, before you get into a company, you need to ask yourself what would cause me to walk away from it if something happened? In other words, define the exit before you get in. Because when you get in, if the company doesn't do well for you and it doesn't do what you expect, your emotions start to go up and your judgment starts to go down. Okay? And we don't want to make an emotional financial decision. We want to make a logical, informed financial decision. So before I make an invest, so I look at the company, I like it, I think it's good. I'm going to make an entry. But before I make it, I say, if these things happen, I'm out.

I'm out. So I set my exit before I get in so there is no judgment or emotion involved later on. So hopefully that makes sense to you. A couple of things for you that I'm going to make sure you get. I'm going to hook you up like I said to how do you invest in index funds and ETFs if you're just starting out, I'd rather you look at how do you do that? Because it's more diversified, it's less risk than trying to invest in individual company stocks. And I'm going to, I'm going to hook you up with a, you know, what do you do with your cash? So you're using that to build the portfolio to start making the investments that you need. So let's, let's, let's do it the right way because your financial future depends on no more gambling. Let's do it the right way, let's do it informed. Let's do it with understanding. I get it. Some of this may be work, but your future is worth it. Your family's future, your legacy is worth it. Let's do the work. And once you develop these skills, no one can take it away. From you. Okay? Remember, I lost one third of my net worth in a Ponzi scheme, but these skills are the things that allowed me not only to recover it within 18 months, but to surpass it by three times. Okay? So with that, I hope that you found this of value. I hope that this was helpful to you. If you have comments, if you have questions, post them below. Send me a dm. Reach out to me somehow. Send me a homing pigeon, whatever it is, because I'm here to help. I'm here to support you on your journey to a new financial destiny. And I look forward to seeing in another episode, another video, or on the road. And until we do, always, always strive to live a life that outlives you. Cheers.

Thank you for listening to the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building your money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.