Screening out for potential good companies to invest in can be tough. Especially if you are a novice investor, you might find it harder to find a starting point, to begin with. While it is inherent to stay within your own circle of competence, being curious and observant in your daily lives helps widen the selection of investment ideas. A preliminary guide before deciding to do further research is assessing the 4 M’s of a company.
Nothing beats this, because you have to understand the business and operations of the company before investing in it. In fact, you should understand all your investments. The easiest way to do this is by paying a visit to the company’s official website. From there, you can have a look at the section on “about us,” as it is the cheapest and most accurate way of finding out what a company does. Doing your own research does not have to only involve superior data or via a complicated technical analysis. Knowing what the business does and if it aligns with your long term plan and values are essential. This will come in handy as you assess if the company has that potential to be the “one” that can last over the next few decades.
Well established companies (like the FAANG) often come with a strong moat to help them sustain long term growth through various economic cycles. Just like a medieval castle, a moat protects it from invaders. A company with a durable and competitive economic advantage can weather through challenges and rise above. You can read more about moat in my previous post here.
Assessing management quality before investing is vital because strong management with good leadership forms the backbone of a successful company. As a captain of the ship, these key individuals are the ones that decide on the strategic decisions of the firm. It’s necessary to look out for any red flags that could lead to fraudulent reporting, related party transactions, and accounting manipulations. Although the stock price is not always a reflection of good management, it is useful to consider the percentage of ownership, remuneration to key executives, and their length of tenure.
- Margin of Safety
As the term suggests, it is a principle when an investor only purchases shares when the market price is significantly below the intrinsic value, in which the difference will be the margin of safety. In accounting, it calculates how far can sales fall before a business reaches its break-even point. Having this system in place provides cushion against errors in valuation because valuing a company’s intrinsic value is highly subjective and often requires various assumptions.
As always, this is not a comprehensive guide or checklist that you should only adhere to. A company that ticks all these checkboxes might still fail at the end. While I don’t speak for all investors, I find these 4 M’s easily applicable.