The decision to buy stocks for long-term investment, by nature, investors will take a long time to study the information, especially the fundamental analysis. They must consider the past data as many years as possible to find information, including stock evaluation and advice from estate analysts.
The reason for doing this is because investors are deciding to invest that stock for many years. The stocks that will be put in the investment portfolio must be consistent and capable of paying dividends every year. If the investor buys it and does not want to sell it, this reflects that investors trust this stock. In other words, people often say that you "must find a stock that will make you sleep comfortably.” Due to the fact that good stocks will result in a consistent return on investment portfolios when it is time for the stock market to reduce the price or fluctuate, it will reduce the risk of loss.
To determine which stock is trustworthy, use the method called “5 Forces Model” or 5 pressure factors to analyze the business analysis model, industrial structure and competitors so that it can be used in planning strategy for competition.
The inventor of this model is Michael E. Porter, an expert in competitive strategy. He said that the profitability of each business depends mainly on the intensity of competition within that industry. Therefore, if you want to invest in a business with high profitability, you must analyze the competitive conditions of the industry in which the business is located.
1. Competition within the industry
If there are many businesses in the industry, it shows that there is a lot of competition, causing the business to be less profitable. Therefore, shareholders will receive only a small amount of dividend as well.
2. New competitors
If new competitors enter the industry easily, it results in an increasing number of competitors in the industry. This may lead to price cuts between each other, thus, reducing profitability.
3. The bargaining power of buyers
If the buyer has high bargaining power, it results in profits being reduced.
4. The bargaining power of raw material suppliers
Which company has the power to negotiate with the suppliers of raw materials will result in low production costs, resulting in higher profits.
5. Replacement Products
If any industry has many substitute products, it causes the competition to be higher, an increase in market share and increases in profit sharing. This is due to the fact that consumers or customers have more choices.
Analysis of the 5 Forces Model helps to understand the structure and trend of business operations, as well as various factors that affects the ability to make profits. This results in discovering the strengths and weaknesses related to the industry and competitors, and know which company is stronger or being regressed.
When analyzing the 5 Forces Model, you will found out that strong stocks with long-term growth potential will have constant growing performance from the past to the present. Moreover, is likely to continue to grow, which investors can see from earnings per share (EPS Growth) if there is continuous growth showing that the business is strong.
In addition, it can be considered from the cost and revenue management. The companies that are strong in business operations, profit margin will grow steadily, in which those rate is a measure of competitiveness, especially during the economic recession or crisis. If the company has a good gross profit margin, it indicates that the executives has the potential to manage expenses, which basing on income and net profit, must grow continuously.
Meanwhile, you can consider the return on equity ratio (ROE), which reflects the ability of executives to manage, resulting in a return to shareholders and investors. Companies with high efficiency, ROE values will be at a high level when compared to competitors in the same industry.
Furthermore, stocks that can invest and make you sleep comfortably, the management team must be honest and fair, have good governance, operate openly, and managed with integrity, as well as having no history of prosecution and do not interfere with the trading of shares for speculation.
These factors are the characteristics of the good and reliable stock. So, if investors find such stocks and decide to buy, they can be successful in the long-term.
These factors are characteristics of good and reliable stock. So, if investors find such stocks and decide to buy, they can be successful in the long-term.