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Bulletproof Research Tips for Retail Investors

Great investors are scholars of the market; that’s true whether you’re talking about an experienced institutional investor, a venture capitalist, or a retail investor. Well-honed instincts are never a bad thing when you’re in the market, but the foundation of a great investor’s success is knowledge and research.

Research projects and information literacy aren’t commonly discussed aspects of the investment process, but they’re foundational to making sound decisions bound to pay off over a longer period of time. And as a non-professional investor, good research skills are particularly essential. To that end, your understanding of the market needs to be extra thorough.

Researching investment opportunities before you allocate your funds can be a demanding process (no wonder most VCs have people doing it for them). It requires you to look across financial markets, with all the associated signal-and-noise, and gauge opportunity and risk. You’ll have to carefully evaluate founders and financials and learn where to look for great tips as well as how to spot bad ones.

In other words, the key to successful retail investing is to think (and research) as though you’re a seasoned Wall Street trader. It can be a lot of fun and, best of all, it pays.

Research tips for getting a feel for the market

When it comes to investing, you need a thorough understanding of your market before you begin putting your money down. Good research at this initial stage will set you up for later success (or failure).

Read, connect, and learn

Start by becoming a voracious reader. Pay regular visits to sites and publications like the Fast Company, the Wall Street Journal, Forbes, Entrepreneur, and Money. Listen to great finance-focused podcasts like Street Talk and Next in Tech. This will give you a contextual understanding of the stock market and a basic understanding of what companies, trends, and ideas are exciting people. Aim to read no fewer than 10-20 magazine and journal articles per day. You can use tools like Heyday to easily find your way to insightful online resources featuring ideas worth remembering.

Next, peruse a few of the top equity portals. Your research aim here is to see where your peers are directing their attention and capital.

You can also consider shooting off a message to the LinkedIn connection you think would know the most about sound investment principles. This might be the CFO of a current or prior employer, your mom’s old friend who made a fortune during the Dot Com boom, or a great content pro who specializes in finance. Good sources of proven wisdom and mentorship are priceless when preparing to invest.

Develop a nose for speculative assets and market hype

Your research process will help you make great investment decisions, and it also needs to stop you from making bad ones. Speculative assets are a popular investment with a lot of hype and excitement surrounding them. They’re traded prolifically but aren’t tied to stores of intrinsic value. Meme stocks or altcoins like Dogecoin are good examples.

These kinds of assets are prone to volatility and represent riskier and less responsible retail investment opportunities. When deciding on an investment, seek to answer these key research questions:

  • Does this asset produce anything?
  • Does this asset appear to be overvalued?
  • Is this asset’s stock price highly volatile?

You run the risk of the kind of losses that’ll empty out your savings account by investing too exuberantly in assets like these (even if your initial investment was a small amount).

You’ll also find yourself less tempted to make risky decisions on speculative assets if you ration your time in social circles driven by market hype. Hype is the enemy of research. Communities like r/wallstreetbets have sprung up all over the place since the rise of Robinhood, and they can be great fun. Nevertheless, meme stocks can be dangerous, even for active traders. They often do not translate into serious, long-term portfolio items and can be based around high-risk practices not that far from gambling.

Stay wary of much-hyped stocks, and make identifying them part of your research process. Don’t be tempted to think short term, and never invest because of social media pressure (GameStop or no GameStop). As a retail investor, sustainable success comes slowly from a portfolio of well-researched and well-selected investments with high diversification among asset classes. This is true for all types of investors, but particularly for retail investors.

Be a lurker

Observing tech-oriented open forums on social platforms can be great for building research insights about ideas/concepts which have yet to achieve critical mass. You want to familiarize yourself with communities built around devs or specialists talking about specific projects and developments, not other traders.

Getting familiar with these kinds of deep-interest communities is particularly helpful if you plan to play the long game as an investor. What you learn may not be of immediate use but will shape your investing instincts as the years roll by. For instance, you’d be in a rosy situation now if you’d been hanging out in crypto forums around 2014!

Research tips for assessing company financials

We live in an era of hype, but make no mistake — successful retail investment is based on understanding how to vet a company’s financials like a pro.

Check a company’s S1 filing

Always check a company’s IPO literature as part of a pre-investment research strategy. Assess a company’s method of talking about itself; make a word cloud if it’s helpful. Companies that shroud their operations in vague marketing speak — what NYU Stern Professor of Marketing Scott Galloway memorably referred to as "yogababble" — often perform worse at IPO than companies that shoot straight and know what their purpose is.

Check a company’s P/E ratio

Assessing a P/E ratio is a cornerstone of financial research. The higher a company’s P/E ratio, the more overvalued it is. Consult an individual investment’s ratio against the industry average to figure out what a reasonable ratio for the company should be. For example, automobile companies rarely see ratios above 20. Tech companies, on the other hand, regularly see ratios between 30-90.

Companies that are within their industry band are safe bets, but beware of companies with preposterously high P/E ratios, such as Tesla, which has a P/E ratio well over 1,000. They’re more likely to see a future price correction, which means you’d lose out.

Decide if you’re a dividend- or a growth-minded investor

In many cases, paying dividends is the sign of a good company — it’s a sign a company values its shareholders and is a great driver of returns. It’s also great for you as a retail trader, as dividend payouts will provide you with passive income. But some dividend stocks aren't worth much, while blue-chip stocks like Amazon, Facebook, and Berkshire Hathaway don't pay dividends. This latter band is known as growth stocks, which only produce liquidity when you cash out but can grow at stronger rates. Decide which approach you prefer.

If you settle on a growth-stock or mixed approach, your next priority research focus will be looking intently for companies with CEOs who are great at capital allocation. These companies often don’t pay out dividends and instead opt to repurchase a lot of their own stock. They often produce unexpectedly huge long-term returns. CCB and Teledyne are two notable examples of companies that did this extremely well and secured huge upsides for their shareholders. Their former CEOs, Tom Murphy and John Singleton, were unheralded geniuses even among a lot of investors. Look out for opportunities like these!

And speaking of vetting founders and CEOs...

Research tips for evaluating founders and organization structures

VCs, hedge funds, and private equity companies put enormous focus on the founder profiles of the companies they’re considering investing in. That’s because founders with great credentials and track records are more likely to helm successful new businesses. You should take the same approach.

Check the founders

When investing in young companies, pore over founder’s interviews, LinkedIn pages, tweets, and personal blogs. Ask yourself, do these founders:

  • Have great track records in their field or with earlier businesses? (Good)
  • Display evidence of market focus, systematic thinking, an understanding of capital allocation, and altruism? (Good)
  • Tend toward hype, grandiosity, or yogababble? (Bad)

Don’t presume a founder is made of the right stuff just because they’ve received notable backing. No one’s judgment is infallible, as the esteemed Japanese entrepreneur Masayoshi Son found out when SoftBank put billions into Adam Neumann and WeWork. Trust your instincts and your data collection when vetting the people who’ll be responsible for your returns.

If you want to be really thorough in checking a founder’s business footprint, you can run a business registration check. This allows you to find out more detailed information about companies and founders with more obscure origins.

Check the organizational chart

Once you’re satisfied with the profile of your potential investment’s founder(s), go to the company’s LinkedIn profile or website and build an impression of its org chart. Assess its org size and arrangement against its development stage, its growth rate, and any available key metrics like DCF.

Companies that are large compared to their age and growth rate with bloated c-suites and centralized org structure are more likely to lose their adaptive flexibility fast. This is bad news for their growth prospects (and your shareholder returns), as they cannot operate by lean principles.

On the other hand, companies with lean, decentralized org structures with multiple employees at various levels who have a history at top companies and universities are a better bet as investments.

Buffettisms for retail investors

In a famous interview TV interview, Warren Buffett shows his host and his fellow guest his diary. The interviewer, flicking through the pages, is astonished. The schedule is virtually empty; the wealthiest man in the world, with unending demands on his time, has a diary full of empty space. What could Buffet possibly need all that free time for? The answer, he said, is simple. For reading, learning, and researching. Buffet has never been coy about the fact that his success — built on many good decisions and the avoidance of very bad decisions — is based on his hunger to learn.

As a retail investor, your hunger to learn ought to be equivalent. And once you’ve got your research methods nailed down and have selected your investments, remember another thing the Oracle of Omaha has said on many an occasion: the key to success as an investor is emotional stability. Don’t panic, trust your research, and just wait for the sound of pennies beginning to pile up on the doormat.

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