Without a repeatable, proven process, picking stocks can take hours. For beginners especially, this can be frustrating – it’s not much fun spending hours looking at a stock only to have to say a reluctant “no” to it. The big danger with a slow decision-making process is that it becomes tempting to relax your decision-making process to speed it up. When this happens, the quality of your decisions goes down – as does the quality of your investments.
Below, we’ve detailed a decision-making process that will help you make quicker, better decisions. This is useful if you have limited time for making your investment decisions, or if you are becoming frustrated and want to speed up your process.
Remember, just because you can decide on a great investment in 1 hour, doesn’t mean there isn’t value in doing deeper analysis and you may want to spend longer investigating some decisions. Over time, you should get a feel for how detailed a process you need to achieve an acceptable level of understanding.
How to Choose Good Investments Quickly
By limiting the time you spend on each investment and following a set process, you can quickly compare and choose between investments. Use this six-step process as a model for your own decision-making and adjust as necessary to suit your personal style:
Step 1: Start With An Industry and Business Model You’re Familiar With
If you’re unfamiliar with an industry or business model, you’ve got a steep learning curve before you can even begin to assess the viability of a stock. It might be fashionable to invest in Crypto and AI, but if you don’t know much about these areas, you’ll either need to invest lots of time or start taking punts.
Instead, choose an industry you understand, either one you’ve worked in or access regularly as a consumer.
Step 2: Get Quick Ideas For Stocks
If you’ve chosen an industry you’re familiar with, it’s likely you think of a few stocks to investigate off the top of your head. An easy way to add to this is to check leading ETFs and filter for ones that invest in your specific area of interest; you can do this online at websites like ETF Daily News and Market Updates.
Another way to generate ideas is to carry a notebook during the day: when you come across a stock you might want to investigate, note it down for later.
Step 3: Assess Whether The Stock Is Undervalued or Overvalued
To make strong long-term investments, you first need to find stocks that the market has undervalued. Luckily, the information you need to figure this out is largely available online. Companies are required to file quarterly and annual reports with the Securities and Exchange Commission (SEC): SEC form 10-K (annual) and SEC form 10-Q (quarterly).
Use the information in these reports to assess the value of the stock using your normal methods. For example, it’s quick and easy to check for a low price-earnings ratio (P/E), a high current ratio (current assets to current liabilities – look for above 2 to 1), and a low debt-to-assets ratio.
Step 4: Assess The Long-Term Potential of The Stock
Ocen you’ve found a stock you believe to be undervalued, you next want to consider its long-term potential. Are revenues and earnings increasing or decreasing over time? Do you believe the company has the right long-term strategy for growth? What are the threats to the company?
Annual reports will include a business’s own assessment of their long-term potential, and by picking an industry and stock you already understand you should also have some ideas of your own.
Step 5: Other Factors To Consider
You may also want to consider:
- Leadership – how do you rate the capability of the leaders at the firm?
- Risk – what is the risk of the investment? If you are evaluating quickly, choosing lower risk stocks may reduce the chances of an expensive mistake
- Dividends – stocks that pay dividends consistently are normally lower risk and more stable.
Step 6: Make Your Decision and Repeat
By this stage of the process you should have all the information you need for a decision, and you can then move on to the next stock. Trust in your process and make your decision based on your data and analysis.
How to Use This Method Quickly
By applying a methodical approach to your investing, you can speed-up your decision-making considerably. Carefully consider if an investment is a “no” at each step of the process – if it is, drop it.
For example, if you come across an interesting stock, but its business model is something you don’t understand, you should either reject it outright or put it aside until you have more time to investigate. Similarly, if you assess a stock as being overvalued in Step 3, there’s no reason to do Steps 4 or 5; as soon as you know it is a poor option, you should move on to the next stock.
You may also save time by formalizing your process into a checklist that will enable you to stay on track and stick to your established investment criteria. Of course, your process is only as good as your own analysis and understanding. Review your checklist periodically and consider if there are any new questions or new analysis that you might want to add to your process.