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3 Ways to Conduct Stock Research

Andrew is a self-educated business owner and entrepreneur with plenty of free advice (which is worth exactly what you pay for it!).


Don't Get Overwhelmed

I remember being daunted, looking out at the vast universe of stocks, and wondering how I'd ever find any interesting companies to own, priced at a reasonable value. Like many other issues I've encountered vis-à-vis the market, Buffett once again came to the rescue, reminding me that it's far, far easier to disqualify stocks by putting them in the "too hard" pile (or maybe into the "too expensive" pile!), and move on quickly to the next research candidate.

Following a checklist helps tremendously, and when a stock passes this initial screen, it may be time for some more thorough analysis. Utilizing the value investing resources I've collected can help you identify great candidates and determine whether the stock is a good bargain right now or not, and while this investigatory phase is important, what follows are three different methods you can use to conduct your own study of a particular stock. Let's dive right in.

Method 1: Due Diligence

The due diligence phase is probably what comes to mind when you imagine learning about a stock. The process is twofold, as I've already alluded, and this two-step process ensures you don't get mired down in the bog with hundreds of candidates, wasting endless hours studying a candidate that's clearly awful for your portfolio. It works like this:

  1. Start by running a stock through a quick screen, so you can determine if it's even going to be a candidate worthy of doing further research (here's a good example of a fast filter you can use).
  2. Conduct a much more intensive study of the company's business, its stock value, and future prospects.

The real key to this process is that you'll only have to do both steps some of the time, so you won't end up wasting countless hours chasing down unpromising leads. In other words, look for an obvious reason to disqualify the stock so you don't have to do any more work! If your stock fails the initial screen, count yourself among the fortunate since you won't have to conduct much more thorough research.


Method 2: Paper Trading

A second way to learn about a stock is to do some paper trading, or acting as though you own a stock without actually owning it. If you've ever participated in any role-playing games, you already get this concept. The idea is to "purchase" the security and create a mock portfolio, so you can track how your thesis is bearing out.

Paper trading is a way to test whether you're any good at picking companies to buy without running the risk of losing real money, and it can help you gain some confidence in order to prepare yourself to invest a chunk of your cash, especially if you're not quite ready yet.

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Mainstream websites like Google Finance will allow you to track a basket of stocks if you just follow them, so you don't have to look up each individual stock, and you can even save multiple portfolios (paid resources like Seeking Alpha will also do this for you, with notifications whenever news pops up about the companies you're following).

One quick word of caution is warranted: Just because you're successful in paper trading doesn't necessarily mean that you can conclude you've made good investing decisions, and conversely, just because your portfolio does poorly, it's not safe to conclude that it's because of major mistakes in your buying process.

Instead, you need to consider whether there were some macro headwinds, like rising interest rates or a geopolitical event that nobody was expecting, or perhaps a technical reason like a supply or demand issue with the stock itself (like with Gamestop circa January 2021).

Regardless of whether tailwinds or headwinds are the reason your stock performed well or poorly, following along can give you a much better understanding of how price movements might come together with your investing thesis. In other words, practice makes perfect (or, rather, practice makes you confident).

Method 3: Own to Understand

Walter Schloss, one of Buffett's original Superinvestors, often opined that it was a great idea to own a stock in order to understand it. Why? The general idea is that if you have some of your own money in a stock, you're going to be much, much more likely to be motivated to do the proper amount of research in order to understand the stock and its underlying business!

You can think of this concept as an extended version of paper trading, but for obvious reasons, your emotions will play a much greater role when you really own something. This is important since emotions are at least half of the story when it comes to successful investing. After all, most individual investors perform far worse than simply following an index fund, and it's largely because they panic and sell at exactly the wrong times.

Take the time to invest a small amount of money in a stock you're interested in, just to see how you feel while the stock is moving up or down. Are you still able to make rational decisions, or do fear and greed take turns in the driver's seat? You need to know the answer to this.

Study, Paper, Own

Studying and researching a candidate for your portfolio is a fantastic (and necessary) step toward deciding if you should buy a given stock, and you can think of this as the easy part (disqualifying stocks quickly that are overpriced or poorly run businesses) and the harder part (due diligence).

So-called paper trading can help you track your performance with real data, so you can get an idea of how good you are with picking out stocks; just be careful not to draw false conclusions by considering the whole picture. Finally, actually owning a little bit of a stock can tell you something else: how you'll behave.

You are the unknown variable in this final step, and you need to make sure you're not your own worst enemy. Taken together, these steps can help you gain the confidence you need to level up in your stock investing journey. Take your time, but don't be afraid to dive in with some paper trading (and even with some real money) as soon as you're ready.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

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