Psssst. Want to hear my best stock tip for the upcoming year?
I can't give you the next Google
Do your own homework.
Sorry to disappoint those of you hoping for the next hot IPO, or the second coming of some cutting-edge technology. The best and only tip I can offer anyone is to perform your own due diligence. When investing, always remember to invest in the company, not the stock.
Research, research, research
The recent housing bubble notwithstanding, most reasonable people perform some sort of due diligence before they buy a home. For example, they'll give the surrounding schools, proximity to shops and work, and quality of the neighborhood serious consideration. Purchase price and potential appreciation value also weigh heavily on the buying process.
You should apply the same patience and discipline when you invest in companies' securities. And you should never invest in a company without having first read its annual report. Regardless of whether you are investing $5,000 or $500,000, if you don't at least feel the need to read a company's latest business activities, you are odds are better in Las Vegas than in the stock market. Ben Graham himself says that an investment is something you undertake "after thorough research and analysis." And considering that some of the greats, including Warren Buffett and Walter Schloss, learned from Graham, his advice is probably worth heeding.
The annual report is your starting point. But unlike Warren Buffett, who had to pore over 10,000-page Moody's
In addition, our very own Fool discussion boards and commentaries give investors the opportunity to hear thoughts and opinions from fellow investors. Companies themselves have investor-relations websites that generally offer an archive of information on that company and its management.
In addition to reading the annuals, I also like to listen on a few conference calls to get a feel for the quality of management.
Learn from the best, and then do your own due diligence
One good way to generate sound investment leads is to examine the portfolios of the best money managers. Any professional money manager who oversees more than $100 million must disclose his or her holdings each quarter in a 13-F filing. However, simply buying a stock because it's part of someone else's portfolio is not as bullet-proof as it might seem. Sure, you gain comfort in knowing that a top manager has performed due diligence, but that should aid in your research and not replace it.
Unless you are prepared to buy every single stock in someone else's portfolio, you don't know whether you will pick the multibagger or the loser. And even if you did replicate the portfolio, odds are quite low that you would duplicate the cost basis and the portfolio allocation.
In the end, however, your goal as an investor is to understand your investment process and capitalize on your abilities over time. If this is not your goal, then you are better off placing your hard-earned assets under the stewardship of a good investor and spending your time doing something else instead.
Simple, but not easy
Investing is a simple process. All you really need to do is to find a few good ideas that you understands and then attempt to buy them at reasonable prices. You really don't need to invest in a deeply undervalued business to do well either. Buy great companies at fair prices, and over a period of five to 10 years, you will do quite well. The hard part is rolling up your sleeves and doing some homework. Yet without it, you are merely speculating with your money.
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Fool contributor Sham Gad is the managing partner of the Gad Partners Fund, a value-centric investment partnership operating in similar fashion to the 1950s Buffett Partnerships. He has no stakes in the companies mentioned. He can be reached at firstname.lastname@example.org or by visiting www.gadcapital.com. Yahoo! and Moody's are Stock Advisor recommendations. Microsoft is an Inside Value recommendation. The Fool has a disclosure policy.