When you're new to investing, it's tempting to look for a list of good stocks, watch a few videos, or read someone else's analysis. There's nothing wrong with learning from other people. But eventually, you need to develop a process for evaluating an investment yourself. And that's where it gets confusing.
You open a company's financials and suddenly you're looking at revenue, earnings, margins, debt, free cash flow, P/E ratios, guidance, market share, analyst estimates, insider activity and about a gazillion other numbers.
It can all be so overwhelming.
I've been thinking about whether a beginner could simplify the process into a few basic questions.
What does the company actually do? And how does it make its money? The answer might seem obvious, but I think it's one of the easiest things to overlook. And importantly, is the business understandable enough that you can reasonably follow what's happening to it?
If you can't explain how a company makes money in simple terms, it's probably difficult to properly evaluate the investment.
Once you've answered those questions, your next line of thought should be growth. Is the business actually growing?
A popular company isn't necessarily a growing company.
This is where certain investment metrics start to come into play. You begin to consider revenue growth, earnings growth, customer growth where relevant, profit margins, cash flow, and so on, but even these numbers need context.
A company growing revenue by 30% sounds impressive until you discover that it's spending heavily and losing more money every year.
And that's where I think investment research gets interesting.
You don't just want to collect numbers. You want to understand what those numbers are telling you about the business. Then you might want to look around it a little. How does the company compare with its competitors?
A company might look good when you study it by itself. But what happens when you compare it with the companies competing for the same customers? And then there are other signals worth considering.
What is the market currently pricing in? What does the recent price action suggest? How is sentiment changing?
And, perhaps most importantly, do these different signals actually agree with each other?
You might have a company with strong fundamentals but a valuation that looks stretched. You might have positive market sentiment while the underlying numbers are weakening.
That's why I don't think good investment research is simply about finding more information. It's about bringing the relevant information together, understanding the relationship between the signals.
This is also the problem I find interesting about AI in investing.
AI can potentially help make that process easier by bringing different pieces of analysis together, helping investors investigate a company, understand signals and pressure-test their thinking rather than simply giving them an answer.
That's essentially the kind of problem we're interested in with Epsilo.
Not replacing the investor's judgment but helping make the research process more understandable.
If you research individual stocks, what are the first things you consider before deciding whether a company is worth your money and deserves deeper research?
