Contents of this article
Where can you find good stocks?
If you invest in stocks, you have surely come across questions like “What should I buy today?” or “Which stocks are you holding?” more than once. There are many ways to find promising stocks, or at least to build yourself a high-quality watchlist.
Investment ideas are extremely important
Before moving on to more advanced analytical techniques, we have to solve a basic problem: the investment process requires us to select a handful of attractive-looking stocks from more than 1,700 tickers listed in Vietnam (as of 2021). Below are some simple methods for screening stocks effectively.
Observe everyday life – This may sound simple, but believe me, it is one of the best ways to develop stock ideas. All you need to do is keep your eyes and ears open and observe the economic activity around you. Watch what people are buying and selling, see which products are being consumed, and keep an eye on your neighbourhood to see what people are talking about. In fact, Peter Lynch, one of Wall Street’s most celebrated investors, championed this approach in his book One Up On Wall Street. I have personally used this method to pick some of my investments – QNS, the company that owns my favourite soy milk brand, Vinasoy, or HPG – after learning from a close friend in the building materials business that construction steel prices were rising sharply.
Stock screeners – A stock screener filters stocks based on parameters you define, helping investors narrow down quality stocks. For example, you can use a stock screener to find stocks with ROE above 20%, or EPS above VND 5,000. A screener is a useful tool when you want to pick a few investment ideas from a large basket of stocks. Many websites and brokerage firms offer free stock screeners.
Macro trends – this is a great way to identify good stocks, but it requires a fairly broad perspective. For example, the COVID pandemic pushed the economy into recession and required the government to use many measures to stimulate recovery, typically through loose monetary policy and public investment. Pumping money into the economy while traditional industries could not yet run at their former capacity caused surplus money to shift into other investment channels, indirectly driving exceptional growth in sectors such as securities and real estate in 2020–2021.
Industry trends – These are trends within specific sectors. We need to follow sectors to identify emerging trends and the companies that may benefit from them. For example, the growing preference for organic products benefits food and beverage companies that catch the trend. My advice is to focus on industries you understand, or that you work in directly. The principle is simple: don’t stray outside your circle of competence.
Special situations – This is a slightly more complex way to generate stock ideas. The idea is to follow companies, company news, corporate events and so on, and come up with ideas based on a special situation. A friend of mine made a profit of more than 40% on GTN stock after learning that VNM was planning to acquire the company.
Searching for and screening potential stocks should be an ongoing process, updated as the market changes. Personally, I review and update my stock list once a quarter (every 3 months), usually in line with companies’ financial reporting cycle.
The Moat
The moat (or economic moat) is a term popularised by the legendary investor Warren Buffett. It refers to a company’s competitive advantage over its rivals. A company with a strong economic moat has its long-term profits protected. Of course, the company needs not just a temporary competitive advantage, but one that lasts for a long time. A company with distinctive characteristics (such as a better brand, pricing power and larger market share, or stronger R&D capabilities) will be more durable than the rest, and competitors will find it very hard to take market share from it.
Think of VNM with its No. 1 brand in the dairy industry, HPG with its superior steelmaking technology, or MWG with its scale and coverage across every province. Once you have a list of potential stocks, ask yourself: “What sets the company I’m interested in apart from the rest?”
Happy trading!
