Private investors often find it very difficult to select the right stocks or build their own portfolio. However, with a sensible strategy, you don’t have to be a professional investor to find solid and promising growth stocks.
• Competitive advantage is crucial
• The simpler the business model, the better
• Megatrends create new growth stocks
Private investors often find it very difficult to make long-term investment decisions and are often too afraid of losses. However, once your own stock portfolio has been opened, you don’t have to be a professional investor to find the right growth stocks and achieve a respectable return.
Basic rules for private investors
Private investors who want to be successful with their portfolio in the long term should follow a few basic rules. This primarily includes a long investment horizon of at least ten or even up to 15 years. “If you’re not willing to hold a stock for 10 years, you shouldn’t think about owning it for 10 minutes,” said Warren Buffett when it comes to an investor’s investment horizon. During this period you should be able to completely forego the money you have invested, so you can avoid having to liquidate individual positions after a crash.
In addition, it is advisable for private investors to only purchase shares in companies whose business model you understand and can support. This would make it less difficult to ride out a dry spell for the share or company without having to think about selling it early. “Never buy a stock if you can’t live with the price halving,” is one of the most legendary words of wisdom from star value investor Warren Buffett. Furthermore, as a private investor you should not worry too much about the optimal time to invest, as perfect timing is usually almost never achieved and does not play a role in the long term.
Another characteristic that distinguishes successful private investors is their resistance to recommendations from supposed investment experts, short-term stock market hype and apparent insider tips from friends.
6 criteria for good stocks
Investors who want to find a good company or a good growth stock should work through a kind of checklist with various criteria when making their selection, which can then help them make a good investment. Such a strategy can protect investors from investing in a company with fundamental problems. Because Warren Buffett also knows: “The stupidest reason to buy a stock is because it is going up and the stupidest reason to sell a stock is because it is falling.”
Business model and competitive advantage
A good growth stock not only has an understandable and comprehensible business model, but also a competitive advantage or moat. Only if you as an investor really understand how a company makes money can you estimate what future development is most likely. In order to further assess a stock, it is also important to know the exact positioning of the company within the industry. A look at the EBIT margin quickly reveals whether the company operates in a profitable industry or in a sector in which volume or mass determines sales.
Basically, the more modern industrial sectors such as the IT, pharmaceutical and biotechnology sectors are among the more profitable sectors, while the competitive pressure in the telecommunications sector, for example, ensures that individual providers can only have very small margins. In principle, however, margins can fluctuate significantly even within an industry.
Sales growth and cash flow
One of the biggest prerequisites for a rising share price is long-term, continuous sales and profit growth. Companies that have shown in the past that they have been able to sell more of their products or services year after year are very likely to continue to do so in the future.
In addition to sales and profits, investors should also keep an eye on the development of cash flow. The development of the cash flow allows direct conclusions to be drawn about the quality of the investment or share.
Management and industry
As a private investor, it is certainly not easy to judge the management of a company. However, if the board of directors of a company has been in office for several years and the company has consistently recorded increasing sales and profits, this naturally speaks for the competence of the group management. However, even the best CEO is of no use with a questionable or outdated business model. Accordingly, investors looking for growth stocks should focus exclusively on growth industries.
Growth stocks operate in growth industries
Investors find sectors with plenty of growth potential, especially if they can be compatible with the megatrends of the future. Megatrends describe transformative forces that will influence the development of the global economy in the future. Such trends produce new innovations and business models and thus influence our lives in a fundamental way.
Investors who are now looking for new growth stocks should focus primarily on these megatrends, as they promise promising growth over a long-term period. Furthermore, these trends will develop independently of short-term economic fluctuations and are therefore suitable for a long-term investment strategy.
12 megatrends that will create growth stocks
Future-oriented investors should therefore not focus too much on the fundamental analysis of individual companies that operate in industries that will no longer play a major role in ten to 20 years, but rather look at the development of the global economy at a macro level.
The absolute megatrends of the future include: Digitalizationartificial intelligence, robotics, cybersecurity, healthy food, sustainable energy, forestry, recycling, health, urbanization, premium consumer goods and water. Investors in particular who focus on these trends can succeed in identifying new growth stocks that offer great potential in the future, for example by sustainably changing people’s lives.
However, as an investor you should always keep in mind that even the best business model takes a lot of time to develop and must be accepted by society. Amazon shares hovered below the $100 mark for almost 13 years until online shopping reached the mainstream.
Pierre Bonnet / editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.