I get asked a lot by friends, coworkers, and of course readers what kinds of stocks we should be looking for to invest in. Unlike a lot of personal finance people, I love dabbling in individual stocks. While good growth stock mutual funds make up a vast amount of my retirement and investing portfolio, I really enjoy trying to pick stocks to invest in. I have even gone so far as to join the free website, UpDown.com, which pays members to play a free stock market game and try and beat the S&P 500. You can earn real money for beating the S&P 500 Index. You should give it a try! Look for me on the website and let me know how you are doing picking stocks. Can you beat me and the S&P 500 index?
So, back to the real point of this posting…what should you look for in picking individual companies’ stocks to invest in? Well, I personally look for companies that have a great balance sheet. You should look for companies who treat their balance sheet like you treat your own balance sheet (AKA your budget).
Positive Cash Flow. You should bring in more money every month than you spend. Sounds like common sense, right? American corporations that you invest in should do the same. They should generate significant amounts of money and spend that money wisely. And, they shouldn’t spend it all in one place. Our grandmas were right!
Cash Is King. Companies should have a significant safety net just like you should. We call our safety nets “Emergency Funds” or savings accounts. Corporations call theirs “Retained Earnings”. Corporations that you are considering investing in should not spend all of their money. They should keep some safe for a rainy day. And, it never fails…there are always clouds around the corner in one respect or another. You should look to invest in companies that have a lot of cash on the books.
Managing Their Debt. Like our own personal balance sheets, investors should look for companies that are managing their debt well. It is usually unreasonable to think that a large corporation will not have any debt. Many Americans think that mortgages and education loans are a form of good debt. The delineage between good and bad debt may be true for companies as well. And, the companies that are keeping debt off of their balance sheets are extraordinary and should be rewarded with our investment dollars in most cases.
So, what should you look for in picking individual companies’ stocks to invest in? I look for companies that are run like my wife and I run our household budget. While we may not have the fanciest investments or the flashiest assets, we are doing quite well with the safe and tried and true balance sheet with little debt, positive cash flow, and a strong safety net. You should look for companies who treat their balance sheet like you treat your own.