Finding great shares to buy is not always (if ever) easy. Some cheap-looking shares are cheap for a reason. Meanwhile, other companies that look promising in business terms can be priced so high as to make them unattractive from an investment perspective.
When hunting for shares for my portfolio, here are three things I take into account.
1. Long-term outlook
When considering potential shares to buy, I ask myself how well I expect the business to be performing five, 10, or 20 years from now.
Realistically the answer can never be clear. Even great businesses can run into unexpected problems that fatally undermine their investment case, after all.
But I still find this a useful discipline as it focuses my mind on the long-term outlook for a company.
While short-term speculators may seek to exploit the difference between a firm’s share price today and next week or next month, that approach is not for me. Instead, I am looking for outstanding businesses I think can go from strength to strength for decades to come.
2. Glass half empty
Like a lot of investors, I can get excited when I find shares to buy for my portfolio that I think could offer a great opportunity.
But if the shares look unusually cheap, usually there is a reason for that. Maybe I think it is valid, maybe I do not.
As an investor, however, I need to weigh both sides of the situation. Rather than just getting excited about the potential bull case for a company in which I may invest, I also need to assess seriously the bear case.
My investment in Superdry illustrates the point. With a strong brand, director share buying, and small market capitalisation, the shares could seem like a bargain. Then again, maybe the brand has had its day. A small market capitalisation can always get smaller still, after all.
So whenever I find what look to me like great shares to buy, I ask the opposite question. Why do the people selling them at the current price think they are great shares to sell?
3. Forward focus
Superdry might turn out to be an example of a company that battles occasional hardships and moves on to greater successes. After all, the City once wrote down Next in the way now seen at Superdry.
Then again, it could turn out that the Superdry brand is in terminal decline. I think it is hard to know. Indeed, that helps explain why investors often look to the past performance of a business rather than its future potential. One is known fact, the other is mere projection.
That is one of the key investing lessons I have learnt over the years: as an investor, one must always look forward. Past performance can provide useful information in many ways, but it is not necessarily an indicator of what to expect in future.
So when looking for shares to buy for my portfolio, I am focussed on what is coming down the line – and how I might profit from it.
