The Art of Finding Great Long Term Stocks

Hi, I’m Jimmy in this video we’re looking
at how we can pick great long term stocks. I’m going to try to keep this process simple
and hopefully we can use it to confidently pick great long term stocks that ultimately
get us closer to our personal goal of financial freedom. Okay. Now let’s jump right in. So there are two main steps to picking great
long term stocks. Step one is to identify some potential companies. And step two is narrowing down those companies
to the best long term stocks that we can find. Now, one way I’d like to find potential companies
is to do a top down analysis. So basically, here’s how that would work. So we start with the broader economy. What does growth look like? Where are the opportunities? Where are the weaknesses? Where do we think that economy is going to
be in the next five, 10 or 20 years? Now, if that outlook is good for that particular
economy, whatever, analyzing, that’s probably a good place to look. But given that the world is, we can get so
much information, some from so many different places around the world. If in our home country, there isn’t a great
opportunity. Well, it might make sense to look in other
countries. Now, let’s imagine that we’re looking at the
US and we think that there’s some long term opportunities in the US. Next, we want to look at what sectors are
there and where the potential opportunities. So here’s a list of sectors and maybe we think
the information technology sector has some opportunity in it. After all, technology has been really pushing
the world forward over the past few decades. And maybe we think that will continue to happen
over the next couple decades. Well, if we break down the information technology
sector now, we could look at what do the industry groups look like. Now, I could easily make a case for any one
of these three industry groups. So maybe after we narrow down a bit, we look
at some of the industries within those industry groups, then just for some additional color. I also threw in the sub industries in there. Now one sector can really lead to a ton of
potential companies. For example, Microsoft and Oracle both fall
in these systems. Software sub industry, meanwhile, and perhaps
surprisingly, Visa and MasterCard fall into the data processing and outsourced services
sub industry. So there could be a huge variety of companies
that would fall into one information technology sector and those companies can oftentimes
be quite different. So looking at a sub industry like data processing
or Visa and MasterCard are sitting well, how far out can we reasonably project? Well, based on the fact that less and less
cash is being used or at least more and more transactions are being done digitally. Well, I would feel comfortable saying that
this industry is likely to be far larger in, let’s say, 10 years than it is today. And I’m assuming that companies like Visa,
MasterCard and similar companies are likely to get a bigger portion of that growth over
the next few years. And using this very simple sort of logical
process, I would bet that we could be reasonably confident that this industry is going to show
some growth in the coming years. Once we’re confident that this in this particular
case is southern history has shown some growth potentials. Well, now it makes sense to try to find great
long term stocks within that sub industry. And by far the most important part of any
company analysis is to truly understand the business. I’m sure that many of us have heard Warren
Buffett say things like we need to stay within our own circle of competence or we need to
truly understand any company that we want to invest in. And for me, this is one of the most important
parts. After we identify an industry that we believe
has some growth potential or at least the growth potential, we can logic that out. Well, for me, the place to start is to start
with the companies individual business section from their annual report. As an example, if we like companies like,
let’s say, Visa or Microsoft, which are two companies I’m actually a big fan of. Well, then reading the business section of
their annual report should give us a much better understanding of what the company does. What drives the business with the potential
growth is with the potential weaknesses are and for anybody who’s watched any of my company
analysis videos on this channel. Well, you may have noticed that oftentimes
I look at the segments of a business and then I try to understand the history behind those
segments, what where the revenue is being generated, perhaps where the profits are being
generated. And the goal of that is ultimately to get
a better understanding of where the company is heading. And the better we can do that, the better
we can project where the business is heading, the better we the better understanding will
have as to whether or not this is truly a good long term company. Now, you may notice that up until this point,
I’ve yet to talk about the numbers of the company. How much revenue do they have? What’s their growth rate? What’s their annual dividend? These are all great questions. But frankly, the goal of identifying great
long term stocks is a very difficult thing to do. It’s a difficult thing to quantify that simply,
since the answers to these questions can vary from investor, the investor. The importance of the answers can vary from
investor or investor. For me, I’m a big fan of long term investing
and different types of companies serve very different long term investing goals. For example, I’m a big, big fan of dividend
stocks and with dividend stocks, I want a reasonable, reasonable amount of revenue growth
and I want a consistent amount of profits and free cash flow that can at least cover
the dividends that a company is paying up. But then if I’m looking at growth companies,
while the growth companies, obviously we want more growth than we might require in our dividend
companies. But for me, I also like to see a decent profit
margin in those companies. Since companies growth companies at least
tend to be younger companies and they generally have some sort of competitive advantage and
hopefully they have decent margins. And as time goes on and competitors eventually
catch up while margins will almost always shrink. So if a company has decent margins or above
average margins now, well, when they solely give away some of that competitive advantage,
as will surely happen at some point, at least their margins are likely to continue to produce
growth for the long term investor. For me, that’s the I.T. ideal type of growth
stock. And then there’s the long term value invest. So pretty much any stock can be a value stock. It’s simply a matter of staying disciplined
and paying less than our calculation of fair value. And for me, the most important part of this
whole thing is paying less than our calculation of fair value, even if that means sitting
on the sidelines and waiting for a long time for the right opportunities. And at the end of the day, I think it’s a
combination of value and either dividend or growth or in some cases both that make for
a great long term stock. If we buy a great deal in stock and it pays
a dividend reliably and a gradually increase that dividend and we bought it at a very good
price. And guess what? They also were in an industry that has a reasonable
outlook. Well, why would we ever want to sell that
stock? And the same is true on the growth side. If a company is growing and we bought it at
a great price and their prospects are great and perhaps the industry, perhaps that company
has some sort of competitive advantage in their industry. Well, for me, this makes for another great
long term buy. If we buy it, perhaps stay. That growth stock is overpriced right now. But a year off now, the stock market crashes
and we jump in and buy it then. Well, this might be a stock we hold for many,
many years to come. Assuming its business stays on track. And I think that this is one of the reasons
that it’s so important to simply focus on the understanding of the industry and the
business itself. If we focus on finding great businesses and
then trying to value those businesses as objectively as possible, then it’s only a matter of time
until we eventually come up with a handful of great long term stocks that we truly have
a great understanding of. Now, this is one of the reasons that I try
to do so many company analysis reviews on this channel. I figure if I can review a whole bunch of
investment opportunities that could be good companies or could be great long term stocks
to buy something that we could each analyze further on our own. Well, I created this playlist. If you’re interested in cruising through it
and seeing what companies might meet your personal investment criteria. So that could be a good next in video playlist
to watch. If you’re curious, there’s a link right here
and this link in the description below. And I want to thank you so much for stick
with me all the way end of the video. I really appreciate it. Thank you. And I’ll see in the next video.

31 thoughts on “The Art of Finding Great Long Term Stocks”

  1. Here was my process. I looked @ all 11 sectors, then top 5 of each sector. Narrowed it down to top 2 picks out of 5 and BOOM 22 stocks in portfolio. Great video Jimmy very useful information

  2. My only one way to pay you back what you do for me (i only have 6 months investing on the market place and zero knowledge of it) is watching each one of your videos, not skipping advertising and clicking to them… thank you again

  3. Jimmy, can you consider doing a video on asset location. I feel like it is a topic not often covered, but can have a huge impact on future tax expenses, especially in the case of long-term investors, such as those that you tend to market your videos toward. Just insight into the best type of accounts to place your assets, such as growth stocks in a Roth IRA, dividend stocks in a taxable account, and so on. Thanks for the videos.

  4. I think it's great to have companies with a promising future with a possible recession on the horizon. 😉

  5. Great Video. If you could do a video on good renewable energy companies, like wind, solar, biomass…or even one video for each, that would be awesome.

  6. Great video like always!
    Have you read Phil Towns book “Rule One”?
    If so, what’s your opinion on his valuation method?

  7. Thanks for sharing these principles. They provide a comprehensible path toward narrowing a group of candidates for further analyses.

  8. I doubt you'll answer my question, Jimmy but do you really think your investments will ever consistently best an S&P 500 index fund over the long term?

  9. Is there a site that shows which companies are a part of which industries? I want to compare stocks to their industries but im having trouble finding the data.

  10. Mastercard and Visa could grow a lot in the future, or maybe they won't… I don't like they have a ridiculous dividend, there are much better stocks out there now, so not a buy for me (unless they get on sale, of course! :D).

  11. Hey Jimmy nice video as always! But i wonder that it would be nice if you do a video about your stock portfolio. It would be interesting. Much love for youre videos!

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