How to select stocks for long term investments

Many investors face dilemma again and again about selecting a good share which can give them a great return in a long term. One can surely find a share which can move upwards from one’s buying price in a short term but it might reverse and return to the starting point (buying price). Therefore finding a good share for long term is little tricky. It requires a lot of fundamental research, patience and belief on stocks so that it can perform in a long run. From time to time your share will test you by providing poor quarterly return or bad news; if you have thoroughly researched it and have belief in it then only you will be able to wait with patience. The bad time will pass and long term investors will use this bad time to increase holding in their shares.

If you are keen as to what to look forward in companies and how you can be better in selecting a share for a long term; you need to keep below points in your mind and need to thoroughly follow them:

1. Select Great Business: Always remember you are not just buying a share; you are buying a part of the company and you are becoming a partner of that company. As a business man would you like to buy a bad business or debt laden business or weak balance sheet business; if the answer is NO then why to buy a share of such company. A long term investor should always think like a business man while buying a part of the business and to act like a business man you need to understand the business well. A good business usually has good products with growing sales and profit in the longer run, probably in shorter run they might face few difficulties and that is the best time to buy those businesses as market might have devalued the shares of such business.
2. Sound competitive advantage: As the great value investor Warren Buffett says: select those companies which have good Economic Moat. The economic moat is defined as competitive advantage a company has over other companies in the same industries. To identify how wider the economic moat a company has; you must check their brand power, pricing power and technology advantage. These type of companies have power to sustain themselves in the bad economy.
3. Management Quality: As an investor you must check the management quality with hawk’s eye. As a good business run by bad management or dis-honest management can completely ruin the good business. Therefore you must check the management quality by considering the below points:
   • Efficient and professional management
   • Not issuing or issued any unfair warrants or preferential shares
   • Honest management
   • Ethically disclose all the decisions
   • No misuse of companies capital for themselves or else.
4. Invest in an industry which you understand: A long term investor should always invest in an industry or business which he or she understands. As you can definitely find few companies in that industry which are worthy enough to be invested. A long term investor buys shares of few businesses and allocates big amount in these businesses. You can analyse the future prospects of the business if you understand it well. As Warren Buffett remarks that we should always invest in our circle of competence. It increases the return and decreases the risk associated with it.
5. Analyse the surrounding with respect to the products you love: In our daily life we use and see different products. Start observing them and your behaviour with respect to them. If you find the product has good demand in the market and many people love it in comparison to the other brands; this is the share which you must check and research on. You must first check which company owns this product and then you need to figure out how much revenue this product contributes to company’s revenue. If its countable like say 30% or more then you can go for checking other fundamentals of the company. If you find all things in line with your parameters checked, then you can put this share in your buying list.

I believe Investing is more like an art rather than science. While buying a share you need discipline, belief, patience, courage, emotional control etc. to become a successful long term investor. Always stick to your basics and circle of competence to succeed in investing.