The most exciting point of investment is selecting a stock to buy or a currency that will rise against another.
Behind you is a careful determination of your fitness as an investor. You have set your objectives. You have made contact with the man who win be your agent and confidante in all transactions. You know the market place in which you and he will be operating, and you have fundamental knowledge of the types of securities available to you.
All right, what do you buy?
Whether you want income, growth, or safety, your challenge now is to survey the field and narrow it down to the stock that seems best to meet your requirements. This means research.
You will feel like the amateur you are at first.
There are experts of every description who have a big lead on you in wisdom and experience. There are sober scholars who have made a lifetime specialty of rails, oils, utilities, or steels.
There are bushy-tailed tipsters offering tempting morsels that, in all truth, turn out well enough just often enough to be most disconcerting. And there is information and advice millions of words of it streaming from hundreds of sources and ranging in substance from half-sheet flimsies to Graham and Dodd's great keystone volume, "Security Analysis."
It is perfectly acceptable procedure to let these sources (except the tipster) help guide your selections. Unless you expect, first crack out of the box, to uncover a bonanza overlooked by the professionals, you probably will end up buying a pretty well-known and predictable issue, anyway.
Still, there is virtue in going as far as you can in marshalling your own facts and reaching your own conclusions. To be on the safe side, you may wish to check the results of your research with your broker. But conducting your own selection process will give you valuable insight into the technique and discipline of security analysis.
Discipline need not eliminate the fun, and it can be a healthy balance to an overly romantic view of stocks. You may love airplanes, movies, and bourbon, but that doesn't necessarily mean that aircraft, entertainment, and distillery stocks are a good buy at the moment.
At the outset, let it be said that a full-fledged security analysis is a painstaking, highly specialized bit of business. Essentially, it is an effort to predict a company's potential earning power and, hence, the present value of its stock as an investment.
The analyst's raw materials are statistics. He studies earnings reports, balance sheets, stock-market records, and the various ratios that can be derived from them. He considers the company's long-term debt schedule, its expansion plans contemplated or under way—and its tax position.
He compares the company with its competitors, and checks the performance of its industry group against that of other groups or of the economy as a whole. All of this data, of course, is history. But if the analyst is diligent, his study will turn up statistical patterns and trends that reveal a great deal about the company's consistency, stability, and vigor, and suggest more than a little about its basic quality.