It is important that you do your own research, that you investigate before investing. Understanding what makes a company successful is vital. How does the business work? What is its performance over time and how does that compare with competitors? What stimulates sales activity? What pressures might prevent a growth in sales?
In answering these types of questions, you increase accuracy in judging why the company is currently out of favour and whether a poor situation is temporary, or the company will be consumed by it.
Both John Templeton and Warren Buffett spent a great deal of time studying an industry, the competitive position of the firm and personal qualities and competence of the management.
Home-in on the key value drivers for the industry, e.g., with miners it is reserves, with retailers it is profits and competitive strength.
When researching a company spend as much time researching its competitors as the company itself. Indeed, the best information comes from competitors rather than directly from the company. Competitors put a great deal of effort into competing and thus develop a deep knowledge of the weakness and strengths of the opposition. Ask various company executives which company in their industry they would invest in, other than their own. They are generally optimistic about the prospects for their own firm and so may give a less than frank assessment. But if you ask about a competitor within thirty seconds you’ll have a fulsome analysis.
An indicator that the firms in a particular industry are under-priced is an increase in merger and acquisition activity; if they are buying each other at bid premiums of 50% or more perhaps share prices are too low.
Also, companies buying
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