A good investor should never buy or sell stocks based solely on the numbers. This is a mistake most investors make.
The question is, what do you look for aside from the numbers?
The answer is the 4M Checklist.
As an investor, you need to look past the numbers and look at the business, the industry, the competition, and the leadership. The 4Ms of investing were coined by Warren Buffett and further employed by numerous other top investors, including my mentor, Phil Town.
The 4Ms of Investing = Margin of Safety, Meaning, Moat, and Management
Here is a video on the 4Ms.
1) MOS (Margin of Safety)
MOS is the foundation of value stock investing. As discussed in a previous article, value stock investing is the strategy of buying On Sale stocks that are a significant discount off the fair value. Fortunately, Tykr does all the hard work for you when it comes to the MOS. You can quickly see if a stock is On Sale, Watch, or Overpriced.
Now move on to the Meaning…
Do you understand the business? Do you understand the industry? Do you understand the sector? Warren Buffett has stated that an investor should never invest in a business they don’t understand. In my case, I would say I’m very knowledgeable with tech stocks, having over 15 years of experience in software engineering. On the other hand, I know very little about pharmaceutical stocks. In this case, I avoid pharmaceuticals. As you can see, I only invest in businesses I know.
Now move on to the Moat…
Is the business easy or hard to duplicate? Does this business have a lot of cash on hand? Does this business have a strong brand moat (Coke, Visa, and Apple are strong brands)? A business that is hard to duplicate and has low competition is typically a wise investment. In other words, it has a wide moat.
Now move onto the Management…
The management requires you to be a good judge of character. If you are someone with high integrity and character, you can usually see through the BS pretty quickly and understand someone’s true intentions. Some key identifiers to pay attention to… Does the CEO take the blame for mistakes, or do they point fingers? Does the CEO cause drama on social media, or do they remain relatively quiet? Does the CEO make wise decisions or poor decisions? A good leader owns their mistakes, has high integrity, and makes great decisions for their customers and shareholders (you and I). An investor should invest in businesses that are run by great leaders.
How to Apply the 4Ms to Stocks
Here is how you apply the 4 M’s to determine the difference between a value stock, growth stock, dividend stock, or speculative stock.
Value Stock: A good Value Stock is a stock that passes the 4Ms. A business passes the MOS criteria if it’s On Sale. A business passes the Meaning criteria if it’s within an industry that will most likely be around in the next 10 years. A business passes the Moat criteria if it has a strong competitive advantage. A business passes the Management criteria if it’s led by a CEO with a track record of growing revenues, profits, and share price.
Growth Stock: A growth stock is a stock that passes 3 of the 4Ms. The only M it does not pass is the MOS. In other words, a growth stock will pass the Meaning, Moat, and Management criteria, but it will be classified as Watch or Overpriced within Tykr.
Speculative Stock: A speculative stock is a stock that fails all 4Ms. In other words, a speculative stock will be classified as Overpriced and it will fail the meaning, moat, and management criteria.
Dividend Stock: A dividend stock is easy to find. Any stock that pays a dividend may be classified as a dividend stock but keep in mind any dividend stock may also be a value stock or growth stock. Most speculative stocks won’t have the cash on hand to pay a dividend.
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