S01_E20 - Basic Principals of Investing in Individual Companies

https://www.patreon.com/Jellyman_Investing
If you haven't researched Index Funds, I suggest you start there before investing in individual companies. Should you be brave enough and willing to do the work, you can invest in individual companies. Long term they can potentially provide significantly higher rewards. But remember. With higher reward, comes greater risk.

What do you look for in a potential partner and how do you go about assessing those things? Do you give a questionnaire on the first date? Maybe an online survey? Do we interview her family members?
Don't do any of those things. Those ideas are exactly why I do finance and not a course on finding love.
When selecting individual companies we have to understand a few key concepts. We invest in individual companies because we'd like to make more money. But more money than what? We need to couple risk and reward.
If you had two investments both with identical returns, yet one had much more risk than the other. Which would you choose? It's a no-brainer. We choose the one with less risk as it has a higher chance of paying off.
To apply this, we need to benchmark the investment against something. Index funds are the way to go. A wide market index fund such as Vanguard Total U.S. Stock Market which mirrors the S&P500 in the U.S. can typically grow somewhere between 7-11% each year with a 2% dividend. It is a relatively low risk by the very nature of it being an index fund.
Therefore, when selecting an individual company it needs to have equal or less risk (or volatility) than that of the Index fund whilst providing significantly more return. Otherwise, why take the risk?
Next, we need to think about specific aspects that make an investment attractive long term. The key word is 'long term'. That is because we want enough time for Compound Growth to occur.
If you're not sure about Compound growth there's an article on my Patreon that goes through it.
If a company has little chance of making it into the future, our money will not grow. This leaves us with fewer options to choose from. Primarily strong, robust companies that have a good track record. We're not interested in newcomers that have yet to prove themselves. This track record also shows us that they can consistently generate profits and manage their business well.
Next comes competitive advantage. Would you drink any other Coke than Coca Cola? Do you always buy an iPhone no matter how much it costs?
Companies with strong brands and a competitive advantage can increase the price of their products with inflation. Those that can't are typically industries where it's a race to the bottom. These include airlines where the cheapest flight wins. Petrol and Gas stations.
The next factor is consistency. We want to see consistent performance. This can be done several ways as the internet has made it very easy. We look at earnings, revenue, profit, debt, cash flow and more. We want to ensure no erratic behavior.
Finally, we want to ensure we understand the company and the industry it's in. If you're an accountant who knows nothing about fashion, don't invest in fashion brands no matter how good the previous factors look. Reason is that when things change in the market in that industry, or the company itself has dropped in the share price, you won't understand why.
Whereas investing in areas you understand, gives you such an edge that you can smell false news a mile away.
Conclusion

These are just some basic things I look for when starting to research potential companies to invest in.