Episode Transcript
[00:00:00] Speaker A: Hi there. Welcome to another episode of Investment Insight presented by McKay Wealth Advisory. I'm Bradley Covert sitting down Today with Brent McKay. Brent, food for thought. Question, how do you pick a stock?
[00:00:10] Speaker B: So, yeah, so it's very interesting. Recently we read an article and Wall Street Journal did it, about how the average investor only spent six minutes of research before they bought a stock. And what they typically looked at was the price action, the high and the low.
And the question is, what should you look at? Obviously this is mainly for long term investors.
We're not doing the Reddit forums or the day trading type actions. But for longer term investors, some of the biggest things to look at are future expected profit or forward pe, how much money the company expects to make, the price divided by the earnings in the future.
How much free cash flow do they have? You know, a lot of times a company will borrow money to pay dividends or they'll borrow money to keep stay in business. And we're looking for how much actual profit does the company generate in cash? You know, there's a, there's a very famous automotive company that has pretty much been borrowing an extra $20 billion a year to stay in business. Well, how long can you actually do that before you're going to go bankrupt and you're going to be in trouble? And then they even have shell companies or companies that are defectively dead, but they're still around because they're still allowed to borrow money. This is a prevalent thing where you're like these companies, famous companies like Enron and WorldCom, which were basically had more debt than value and they eventually go out of business. So when you're looking long term, one of the biggest things to look at is future expected profit. And that cash flow, the industry they're in, if you're in the industry of producing film for cameras, you know, that might not be an. Even if the earnings are really strong, that may not be an industry with a lot of future good growth potential.
[00:01:55] Speaker A: Right.
[00:01:55] Speaker B: Then you also got to look at competition. You know, we've seen a few years ago marijuana stocks were in vogue. Everybody's like, we got to get into marijuana stocks. Well, the problem was you and a million of your other friends all decided to start growing marijuana. Well the, or the synthetic marijuana. And so what that meant was the price went down. And so these, you know, these things became very cheap and there wasn't much value because it wasn't regulated. Or electric car companies, you know, for a while there, all these new electric car companies were coming out and that was going to be the future.
And it still might be the future, but so many people are building them that a lot of those companies went bankrupt, you know, because they couldn't handle it. And then people didn't want to eventually, in America at least, they've not bought the cars at the level that people had expected.
And so a lot of times, if you want to maybe be in that certain industry, maybe you do an industry specific ETF where you buy everybody in the industry knowing full well that some of the companies are out of business and some of the companies are going to thrive.
The other big thing to look at is understand financial reports. You know, investing is about a financial language and financial reports. And so you want to go in and know the language, know what's in there, know what's real. You know, I remember Hayden and I were working with a customer and the financial reports were very clear that they were kind of fraudulent and they weren't correct and there were some details there. And the company ended up having to restate their reports because of information we found wasn't consistent.
And so those are some things to look at in stock. Another thing is, hey, if a company has gone up really high and maybe they're trading at 100 times their profit, what is the likelihood that a $4 trillion company going to be an 8 trillion dollar company in the short term? Very hard based on current valuations. And so sometimes it's good to say, hey, I know this thing's done really well, but the value is so out of whack that it's time for me to sell. And that's one of the biggest things with buying individual stocks, if you're going to take that risk level, is make sure you set a price that you're happy to get your money out. If you're trying to make the, you're trying to sell at the very high and buy the very low, you. You're unlikely to consistently do that. So be satisfied with what you made. Everybody always thinks, well, if I would have held on a little longer, I would have had more money. Well, be satisfied with that. And of course, diversification is something that we believe in. And so if you are going to buy individual stocks, you still want to maintain a diversified blend of companies that don't mimic each other so that you're basically not getting caught up in one thing.
[00:04:25] Speaker A: Absolutely. Brent, thanks for explaining that to us. Thank you for joining us for another episode of Investment Insight. We'll see you next time.
