The Game Plan

It is football Sunday and the team that wins is the team that has properly prepared throughout the week, put together the best game plan on both offense and defense, and executes that game plan when it is game time.  I believe that these principles carry over to most things in life, including investing in corporate America.  After reading my first post I realized that I forgot one important item, my game plan.  Especially when you consider this blog is titled Man with a Plan.

The first step of my plan is research.  When I say research at this point I do not mean researching companies to invest in, I mean researching the best brokerage company to use for my portfolio.  Since I am operating with limited funds I don’t want my portfolio to be eroded by high transaction costs.  High fees are the greatest enemy to growing a strong and profitable portfolio.  In the past I have used Sharebuilder.com and TradeKing.com, but I will need to research this further as I have seen some advertisements for other firms that have low transaction fees.

I will then move on to developing a set of criteria that I will utilize in my initial screening of companies to invest in.  At this point, I have not nailed down exactly what I will be searching, but in the past I have used things like stock price, industry, price to earnings ratio, current ratio, and debt coverage.  Most of the online stock screeners use the most recently released financial statements for the data source and this will help me narrow down my list of potential investments.  Hopefully, I have set the criteria at a point where the stock screener will return ten to twenty companies to research further.  If not, then I will have to adjust my settings.

With my list of companies narrowed down to around twenty, it is time for a more detailed and comprehensive review of these companies.  In the past to complete this step I used an Excel template that I created to analyze the large amounts of data that I will be working with.  This spreadsheet is set up to review the past ten years’ worth of data and will automatically calculate the different ratios I find useful.  At this point I am looking to narrow my list of potential investments to five at most but ideally I would like to see the list to be two or three.  With a limited amount to invest I would prefer to put all my eggs into one or two baskets to avoid the fees associated with multiple trades and will only be looking for three companies at most to invest in.  Also, by paring my list down to this limited number of companies, it allows for the final and deepest step of researching these companies.

At this point I start to read everything I can find on the remaining companies on my list.  I usually start by reading the most recent quarterly or annual report.  I also like to read the miscellaneous releases that companies file with the SEC.  I don’t limit my reading to just official releases by the companies; I also look at stories published by credible financial sources.  Articles from the Wall Street Journal, Morninstar, and Motley Fool have all helped me in the past.  The last time I tried my hand at the market I even reviewed different blogs and message boards.  With reviewing all of this information I am looking for little things that might give me some insight on how an investment will perform in comparison to another possible investment.

So far I have researched, researched, researched, and researched.  All of this research means nothing unless you are willing to step to the plate and swing for the fences.  With all of this analysis a person could get bogged down and suffer from analysis paralysis.  Fortunately for me, I have never had an issue with this.  If all goes as plan I will be making my initial $400 investment into at most two companies followed by $50 automatic monthly investments and investing whenever I have “found” money.  By setting my investment plan up this way it will allow me to dollar cost average my holdings and investing at too high of price.

To conclude, fully researching a company is the most important step, but it is not the only step.  You will also have to research the brokerage firm you are working and you will have to make the trade.  All that work you did means nothing unless you are willing to act on your findings and take that step of becoming a shareholder in a corporation.