How I Research Stocks - Step-by-Step Fundamental Analysis

The Plain Bagel
23 Jun 202319:17

Summary

TLDRThe video details the stock research process of a portfolio manager, starting with screening companies based on growth and other metrics to narrow down ideas. It then involves understanding the business model, finances, management strategy, and valuation to determine if a stock is attractive. Additional steps include a final review, playing devil's advocate to challenge assumptions, and organizing findings for future reference when monitoring the investment.

Takeaways

  • 😊 The video provides a high-level overview of the presenter's stock research process as an investment analyst
  • 💡 He notes that stock picking is difficult and most people may be better off investing passively or hiring professionals
  • 📈 His process involves screening potential stocks, understanding the business and finances, evaluating strategy and valuation
  • 📊 Analysis involves qualitative business research and quantitative financial statement analysis
  • 🔍 He looks for competitive advantages, quality management, growth potential and reasonable valuations
  • 🤔 Conflicting opinions and playing devil's advocate helps validate assumptions and analysis
  • 🗒️ Taking detailed notes and summarizing research helps quickly get up to speed when revisiting a stock thesis
  • 📰 Keeping up with news and developments is an important part of ongoing research for invested stocks
  • 💰 The video is sponsored by Morning Brew, a free daily business and finance newsletter
  • 👍 The presenter welcomes feedback to improve his stock research process

Q & A

  • What is the main topic of this video?

    -The main topic is explaining the stock research and analysis process used by the video host in his job as a portfolio manager and investment analyst.

  • What are some key things the host looks at when researching a company?

    -The host looks at understanding the business and its operations, analyzing the financial statements and metrics, evaluating the company's strategy, assessing valuation, and reviewing competitive positioning and risks.

  • What framework does the host use to categorize information on the company?

    -The host uses the SWOT framework - Strengths, Weaknesses, Opportunities and Threats. This allows him to categorize information as either internal or external factors.

  • Where does the host find information to research companies?

    -Sources used include annual reports, investor presentations, earnings call transcripts, industry reports, news articles, and meetings with company executives.

  • What are some key ratios and metrics examined?

    -Key ratios and metrics looked at include revenue growth rates, profitability margins, liquidity ratios, return on capital and equity, EPS trends, among others.

  • What valuation methods are used to assess the stock price?

    -Valuation methods used include relative valuation (P/E, P/B, EV/EBITDA) and discounted cash flow analysis.

  • What happens if a stock is not attractively valued after the analysis?

    -If the valuation is not attractive, the stock gets added to a watchlist to monitor for future buying opportunities at better prices.

  • Why does the host say stock picking is difficult?

    -Studies have shown that most people are not able to beat market returns from stock picking over the long term. It requires extensive research and skill.

  • What investing style does the host tilt towards and why?

    -The host tilts towards value investing, which involves buying high quality companies trading at discounts to intrinsic value.

  • How can an investor determine if a company has a durable competitive advantage?

    -Look for characteristics like market leadership, switching costs, network effects, low-cost production, patents, and brand value as signs of an economic moat.

Outlines

00:00

😊 Intro and Disclaimers

The host Richard introduces himself and the Plain Bagel channel. He states that this video will provide a high-level overview of his investment research process as an analyst. He provides two disclaimers upfront - first, that he is not recommending stock picking for most people, and second, that there are different valid approaches to research apart from fundamental analysis which is his focus.

05:00

📚 Understanding the Business

Richard explains the importance of deeply understanding the business operations, including segments, revenue streams, geography, customers, suppliers, employees, regulators, management, KPIs, etc. He mentions relying on regulatory filings, investor presentations, analyst reports, and public information to build this understanding.

10:02

📈 Understanding the Finances

Richard details analyzing financial statements and metrics to understand the company's financial health, growth, profitability, liquidity, and solvency. He also compares to industry peers. He notes the importance of watching for red flags and understandingadjusted figures.

15:03

📅 Understanding the Strategy

Richard explains reviewing management's strategic priorities and plans for spending and financing growth. This includes assessing feasibility, risks, and past track record. Information can be found in regulatory filings, presentations, call transcripts, and expert research.

💲 Valuation

Richard mentions using relative valuation (multiples) and discounted cash flows to value stocks. He also considers qualitative aspects and current events influencing price. Attractively valued stocks meeting earlier criteria are bought, while others are added to a watchlist.

📝 Review and Finalize

As a final step, Richard reviews notes, plays devil's advocate, and documents a thesis. Well-organized notes help quickly get up to speed in future and contextualize negative news.

Mindmap

Keywords

💡investment research process

The step-by-step method the narrator uses to analyze and evaluate stocks he is considering investing in. He describes it as his own personal process which includes screening stocks, understanding the business, analyzing financials, evaluating strategy, valuation, and finalizing research notes.

💡screening

The initial filtering process to narrow down a list of potential stocks to research further. It involves setting specific criteria like revenue growth, profitability, and debt levels to only analyze companies meeting those thresholds.

💡competitive advantage

When a company has something such as proprietary technology, strong brand loyalty, exclusive rights, or a unique business model that distinguishes it from competitors and makes it difficult for other firms to compete.

💡SWOT analysis

A framework for categorizing a company's Strengths, Weaknesses, Opportunities and Threats. Used to evaluate internal positives and negatives as well as external factors that can help or harm the business.

💡margin

A metric that measures a company's profitability by comparing profits to revenues or other benchmarks. Analyzed to evaluate how efficiently and profitability a firm is operating.

💡growth investing

An investment strategy focused on finding companies expected to have high rates of earnings growth, even if they have high valuations. Contrasted with value investing's focus on buying undervalued stocks.

💡capital expenditure

Money a company spends to invest in maintaining or upgrading its assets rather than on day-to-day operations. Analyzing CapEx gives insight into management's strategic priorities.

💡discounted cash flow

A valuation method that forecasts a company's future cash flows and then discounts them back to the present to calculate what an investor should fairly pay for the stock today.

💡technical analysis

Evaluating and predicting stock prices by analyzing previous price patterns and trends rather than focusing on the underlying financials or qualitative factors of the business.

💡thesis

The core logic and evidence-based reasoning behind making an investment decision. Having a clear thesis helps evaluate if new developments fundamentally change the investment case.

Highlights

I work as a portfolio manager investment analyst for my day job

I generally keep it pretty broad but we'll look for things like Revenue growth, being profitable as well as keeping debt within a certain range

I type notes as I'm going I do typically categorize stuff under the SWOT framework

I calculate a bunch of margins and ratios that again give that profile about how the company is growing how profitable they are

I also really like common size financial statements where you put everything as a percentage of a key figures

I've seen a lot of companies fail by doing something that they have no experience in doing

Building out a checklist of things you want to explicitly look for

There's relative valuation which is looking at multiples things like the price to earnings multiple

The more detailed approach is an absolute valuation such as a discounted cash flow

I will simply move it to a watch list at which point I will monitor it

Paying too much for a stock does increase your risk of capital impairment

When times get tough and you know say something negative develops about the business, that a lot of people are spooked

See if this new development is just noise that you can generally ignore and focus again on the long-term prospects of the business you've invested in

Once you've found a stock and especially once you've invested in it to keep researching the company

Morning Brew sends a business finance and Technology newsletter directly to your inbox every day of the week

Transcripts

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this video is sponsored by morningbrew

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visit the link in the description below

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to sign up for their daily newsletter

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today

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ladies and gentlemen welcome to the

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plain bagel I'm your host Richard coffin

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today's video is a bit of a peek behind

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the curtain to show you how the bagels

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are made and discuss my own investment

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research process as a investment analyst

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I've had this requested quite a few

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times over the years given that I work

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as a portfolio manager investment

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analyst for my day job and I figured

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what the heck I would cover things at a

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high level go through my general

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step-by-step process and it's not a very

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formal one I do change things up every

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now and then but hopefully uh people who

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want to go through this process

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themselves find a bit of value in it now

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if you notice before we get started

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firstly this isn't a recommendation that

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people should necessarily stock pick or

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do their own stock research I think most

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people are better served putting their

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efforts elsewhere either hiring a

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professional or just investing passively

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countless Studies have shown just how

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difficult it is to beat the market with

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stock picking so unless you're

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passionate about researching stocks

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you'll probably find this all very

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boring and strenuous with no guarantee

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of strong performance and secondly while

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this is obviously my own research

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process us there are different ways to

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research a stock there's technical

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analysis which focuses on past prices

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there's quantitative analysis which

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focuses on analyzing the relationship

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between different quantitative variables

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and then there's fundamental analysis

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which is my own approach of

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understanding the underlying business

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and within fundamental analysis there

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are different styles as well I do

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generally tilt towards value investing

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which is trying to buy a great company

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at a great price but there is also

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growth investing which I do hold some

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growth companies where you pay up a

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little bit more but they have a larger

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potential to grow their profits into the

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future this video will be divided into

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chapters so you can skip between the

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different sections I'll try to provide

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alternative tools to the paid ones I use

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at work and I'll also throw up a few

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terms and and whatever on screen so that

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you can have something to reference

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later on and for the purpose of saving

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time I won't try to Define every

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individual metric that that comes up and

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we'll generally like mentioned keep

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things high level so with that out of

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the way let's jump into it the first

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step as you can imagine is screening for

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ideas and finding the stock that you

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want to research the whole research

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process takes quite a long time it has

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taken weeks at times but obviously

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you'll want to narrow down your list of

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potential stocks so you don't waste your

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time doing this whole process only to

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find that you don't really care for the

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company now screening isn't necessarily

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a formal process I do sometimes just

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research a stock because I want to or

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there's been an interesting recent

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development but I do have a screener

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that I regularly refer to a screener

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lets you filter the universe of stocks

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so that you only have a list of

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companies that meet certain criteria I

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generally keep it pretty broad but we'll

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look for things like Revenue growth

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being profitable as well as keeping debt

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within a certain range from there I'll

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typically put the tickers through an

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internal tool that summarizes all their

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key financial information onto a

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one-page summary not to make any

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decision off of but again just to get a

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quick overview of how healthy or

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unhealthy the company is and whether

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it's something I want to look into

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covering things like past financial

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performance expected consensus estimates

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moving forward their debt levels a bunch

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of sales just again summarized on a page

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to see if there's anything of Interest

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here now once I have the company that I

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do decide I want to do this deep dive

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into the second step is understanding

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the business

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makes sense I know that sounds obvious

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but as an investor you really are a part

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business owner so I do try to take the

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mindset of understanding the ins and

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outs of the company in the same way I

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might if I were to buy a private

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practice and that means understanding

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all the company's segments and what they

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do how they earn their money uh the

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nature of the company's revenues and

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whether they're contractual recurring or

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seasonal where the company operates in

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terms of geography customers suppliers

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employees Regulators management anyone

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that plays a role in how this company

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will perform and depending on which

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sector the company operates within also

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make note of their key performance

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indicators or kpis which again are kind

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of sector specific allow you to compare

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companies that are within the same

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sector but also requires a bit of

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Industry background information and

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there are times where I don't research a

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company because I don't yet have that

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familiarity with the industry it

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operates with and you do have to operate

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as mentioned many times by others within

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your circle of competence where you feel

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comfortable now this part is mostly

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qualitative there will be say

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quantitative figures that come up but a

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lot of it is again just understanding

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the details of the operations

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what this company does so where does

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someone find all this information well

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outside of a Google search which is not

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a bad idea to give you an overview of

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the company a good idea is to start with

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the annual report or 10K in the US as

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well as the most recent quarterly report

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if that doesn't also apply to the 10K

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all of which you can find on Edgar in

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the U.S Cedar here in Canada or the

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company's investor relations page

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because they do do a good overview of

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the company's business the risks

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applicable and key financial information

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from there I like to go through investor

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reports and recent 8K filings which

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provide important updates about the

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business and I do have access to a lot

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of paid for research which I'll

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typically go through the external

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analysts reports on this company I also

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might look up commercials tutorials

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customer reviews find any information I

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can about them now as you expect that's

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a lot of details so I do type notes as

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I'm going I do typically categorize

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stuff under the SWOT framework which is

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strengths weaknesses opportunities and

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threats strengths and weaknesses are

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internal factors for the company

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opportunities and and threats are

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external factors and that just lets me

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quickly categorize stuff I'll also write

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questions that I want to get to later if

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there's something I don't understand or

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a risk that I've thought of that I want

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to look into I kind of do a parking lot

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of ideas that I want to go back and

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research at a later point and my goal

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through all this is trying to find

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Quality Companies companies that have a

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competitive Advantage an attractive

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business model and as Warren Buffett

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likes to put in a mode something that

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sort of protects them from competition

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all right so once we understand the

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business the next step is understanding

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the finances where we get into the

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numbers obviously this is very number

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heavy and does require an accounting

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background to understand the different

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segments that you look at but generally

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I'm looking at the company's financial

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position in terms of debt how solvent

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they are their capital structure and

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whether they can meet their payments the

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company's growth profile their

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profitability and again where they have

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areas for improvement a lot of this as

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you would imagine does really boil down

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to analyzing the financial state

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statements the income statement which

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tells you how the company performed in

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the given year in terms of accounting

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earnings the balance sheet which gives

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you the snapshot of what the company

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owns and what they owe as well as the

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cash flow statement which is similar to

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the income statement but shows you where

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cash is actually moving within the

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business not just accounting earnings

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and accounting costs where money was

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actually spent and earned now I

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typically start by calculating a bunch

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of cumulative average growth rates which

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I'll throw out the formula for but I'll

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do this formula over a 5 10 or 15 year

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period to get an idea of what the

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average growth rate over these periods

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are for revenues and profit measures I

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also really like common size financial

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statements where you put everything as a

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percentage of a key figures so for the

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income statement that's revenue for the

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balance sheet that's total assets and

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this is a great way to look from year to

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year to see what costs are getting

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bigger which ones are getting smaller

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relative to the amount of Total Money

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that the company is earning then I'll

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calculate a bunch of margins and ratios

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that again give that profile about how

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the company is growing how profitable

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they are and different operational

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solvency liquidity things that tell me

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the General State of Affairs it's also

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here where I'll carry out a sort of pure

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analysis comparing this company to ones

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in a similar space based primarily off

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of these Financial details as well as

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the key performance indicators found

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earlier and I have at times pivoted to a

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new idea based on this peer comparison

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because something else looked more

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attractive once I really got down to the

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numbers now throughout this whole

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process and earlier with the overview of

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the business I do carry out a check for

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red flags I call it forensic analysis in

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understanding the business I want to

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know what the related party transactions

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are how management is compensated any

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conflicts of interest and in terms of

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finances any accounting Shenanigans

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unfortunately you can't always rely on

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the figures as they're reported

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companies do at times fudge the numbers

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for example it's really common for

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management to highlight what's called an

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adjusted figure which is where they take

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an accounting figure but then make some

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changes to it so that's more

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representative of what they believe the

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company has done it's not to say that

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that's always nefarious but it's really

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important to look into what the

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definition of that adjusted figure is

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and what they are adding or taking out

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of this number because the reason it's

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adjusted is that it doesn't meet

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accounting rules or regulations now in

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terms of where to find all this

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information I primarily rely on a data

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terminal that my company pays for which

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unfortunately just isn't an option for a

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lot of people they are very expensive

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there are free versions out there with

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not quite as many features but they're a

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good starting point for getting again

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the financial statements easily

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accessible and if you can get something

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with an Excel add-in Kudos because that

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really makes it easier to pull the data

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that you're looking for into the

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template you want when it comes to

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things like pure analysis or just the

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specific metrics that you want to look

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into I've made a crazy amount of use out

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of excel templates and programs that

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pull data terminal information and one

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of our sort of proprietary things for

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example is a peer comparison scorecard

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where based on the industry there are

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different metrics that are populated to

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compare companies at a very high level

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and quickly see how they look on

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different kpis finances all that stuff

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so I'll include some free Alternatives I

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can't really vouch for many of them but

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I have heard of them and if you're

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relying on a service for data make sure

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you understand how the data is pulled

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whether it's aggregated whether they

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make any adjustments to it because it

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makes it really important when trying to

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research a company is being able to rely

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on the data all right step four

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it's taking longer than I expected but

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step four is understanding the strategy

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everything we've done so far is the sort

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of historical perspective on things at

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this point I want to know what the

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opportunity moving forward is this

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includes going over the Strategic

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priorities of management as well as

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where they plan to spend money what the

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capital expenditure is moving forward

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will be a couple of expenditures I don't

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think I've talked about but found in the

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cash flow statement and it covers the

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money the company is investing in itself

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I also want to know how they'll be

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financing those plans so I'll consider

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whether they're taking on more debt or

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issuing shares or hybrid instruments

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which get a little complicated

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regardless of what the plan is what I'm

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looking for is to evaluate its

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feasibility the risks involved and the

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company's track record for doing what

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they say they will do moving forward

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I've seen a lot of companies fail by

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doing something that they have no

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experience in doing so it helps when a

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company if they are a Serial acquirer

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where they buy a bunch of businesses it

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helps when they have a history of doing

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that successfully sleep and growing

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their company as a result actually

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optimizing the companies that they bring

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in under their umbrella rather than just

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spending investor money to put growth on

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the accounting statements when they

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aren't actually improving their business

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one way you can evaluate the track

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record is by looking at the 5 10 15 year

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average or some variation thereof of Roi

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figures which includes return on Capital

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employed return on invested capital and

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return on Equity among others but those

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are ones that I look to look at and you

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can do a qualitative review of

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management as well in terms of their

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experience or tenure with the business

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one of the things I found really helpful

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myself as an analyst as a quick tip is

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building out a checklist of things you

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want to explicitly look for and this is

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a checklist that you build out as you

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research companies and you think of

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things that you want to look for when

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trying to determine what the mode is

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whether they're a healthy business all

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this stuff I have my own checklist that

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I've built over time just an example of

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one thing on there is whether the

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company adds value for all the

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stakeholders or are there any

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stakeholders outside of competition that

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will lose from operations and that will

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present a risk to the business's success

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in terms of where you can find

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information about the strategy for the

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firm you can typically find it in those

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regulatory filings the 10K will

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typically have some sort of high-level

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strategic objective for the business but

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you can also look at investor

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presentations which again will highlight

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it and transcripts from earnings calls

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are great because management is often

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asked questions about what they expect

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to do moving forward and the challenges

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they expect you might also find

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transcripts from the different

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conferences management have gone to

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which you again might be able to find on

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the Mr relations page and also through

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my company I've been able to meet

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Executives and have calls and attend

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in-person meetings with Executives from

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different companies in terms of research

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in the industry again I do have some

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paid for services which really help I do

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really rely on the data terminal as well

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as some expert inputs and new sources

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but in terms of news that's actually a

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good thing that most people can access

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is just researching news about about the

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industry you might be able to find some

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different research stats about total

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addressable market and whether things

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are growing or Contracting so once I

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understand the business I understand

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their finances and I understand their

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strategy from there I'll look at the

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actual evaluation for the stock it's

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something I leave later on into the

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process because I don't want my earlier

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steps to be influenced by whether the

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stock is expensive or cheap even though

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that is important their number of

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methods for doing this at a high level

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there's relative valuation which is

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looking at multiples things like the

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price to earnings multiple EV to a bit

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of free cash flow yield things like that

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which you can compare historically to

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what it's been in the past as well as to

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peers to see what related companies or

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companies in the same industry are

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trading at to see whether you're above

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more expensive or below that level the

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more detailed approach is an absolute

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valuation such as a discounted cash flow

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which I do do from time to time for

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companies where you actually forecast

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all the line items of different

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financial statements to forecast their

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free cash flow into the future year

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discounted to today's price so that you

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have an idea of what you should pay

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today for that future performance I like

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to change the variables to see how the

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company's stock price would be in

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different circumstances and what's

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justified in terms of the Stock's price

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I'll also consider the more current

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events around the stock recent lawsuits

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current headlines press releases which

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you can again find on the company's

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website and I'll try to understand what

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variables in this you know realm are

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influencing the current stock price as

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it tends to be the more recent stuff

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that sways prices in the short term it

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doesn't matter much as a long-term

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investor but it does help with the entry

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point and I do consider some technical

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aspects of the stock and more

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qualitatively things like whether

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management is buying or not but really

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at this point if I like the company and

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I think the valuation is attractive

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relative to what it could potentially

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earn then I'll likely be investing at

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this step now the problem is that stocks

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that have gone through all the previous

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sort of filters and steps at this point

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tend to be the most expensive you know

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the stocks that have great growth track

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records great profitability excellent

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management all that perfect stuff

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uh they tend to be more expensive

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because investors recognize that and

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they bid up the stock price accordingly

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but if the company is not attractively

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valued it isn't all for naught at this

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point I will simply move it to a watch

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list at which point I will monitor it

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I've already done the fundamental

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research and we'll have more flexibility

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to hop into the stock if there's a dip

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in the price given a current event I can

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quickly analyze the current events see

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if it's material or not and then take

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advantage of any movements in the stock

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price I will also dollar cost average in

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companies I really like and generally

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speaking that's a sound strategy for

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Diversified investors but I always have

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an eye on valuation paying too much for

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a stock does increase your risk of

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capital impairment so I at least want to

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ensure that the price on paying is

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within a reasonable range so that's a

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valuation step and finally step six

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we've made it this far is to review and

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finalize notes for future reference at

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this point I'll have an idea of whether

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I want to buy this stock now or wait but

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I will also seek answers to fill in the

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gaps address those questions that came

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up throughout the research process I

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also try to play Devil's Advocate and

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find conflicting reports about uh say

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the thesis I've sort of developed with

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this company find opposing opinions to

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try and Sanity check some of my

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assumptions I also have the benefit of

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being able to then share it with my team

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who have more experience with

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researching stocks and myself and I

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typically write up a formal report but

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we'll still organize my notes regardless

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just so that they're easier to digest in

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the future making sure things are bullet

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points providing a sort of summary that

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I can quickly reference in the future so

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I can get up to speed about my company

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and the thesis I have for it and also

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points I want to follow up on and the

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reason why I think this step is really

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important is not only because when a

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Stock's On Your watch list you can

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quickly review things and get back up to

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speed up with the company but when times

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get tough and you know say something

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negative develops about the business

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that a lot of people are spooked is

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going to challenge their future

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performance you can go back and see what

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the fundamental business is and what you

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believe the value lies in what your

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thesis about the company is and that

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will make it easier evaluate whether

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that has fundamentally changed or if

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this new development is just noise that

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you can generally ignore and focus again

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on the long-term prospects of the

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business you've invested in so that's my

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investment research process as an

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analyst

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we made it thank you for sticking to the

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end I know I didn't really get into all

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the nitty-gritty about the specific

play17:21

things I look at but that is really out

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of respect for my employer they were

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gracious enough to let me do this video

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they don't have the perfect Krabby Patty

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secret formula but uh you know they do

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have proprietary stuff that uh it's in

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their interest to keep as I've hopefully

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highlighted this is an ongoing process

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once you've found a stock and especially

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once you've invested in it to keep

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researching the company not to get

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caught up in in the day-to-day

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happenings but do regularly review it

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and make sure you're not missing

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anything so thanks again for joining me

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and before I sign off I do want to give

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a quick thank you to our sponsor

play17:53

morningbrew as I mentioned keeping up to

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date on the news is an important part of

play17:56

the research process I've always had to

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keep an eye on a bunch of outlets to try

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and get an idea of the important

play18:01

headlines for the day but if you want a

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free resource for keeping a pulse on the

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general markets and what's happening

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politically what's happening in the

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business world they're a great resource

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morning Brew sends a business finance

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and Technology newsletter directly to

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your inbox every day of the week and

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they'll cover headlines that you'll

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certainly come across in researching

play18:18

stocks for example they recently went

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over how the US saw a 21.7 jump in home

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building project starts in May which is

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the highest level it's been in a year

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it's still below 2008 levels but should

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help with the country's 3.8 million home

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shortage but the best part of the

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newsletter outside of the price

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free is that it's entertaining to read

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genuinely it's one of the first things I

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read every day because the writing is

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witty really easy to read compared to

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what you would typically see in the

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space it's entertaining makes for an

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easy start to the day so if you want to

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join the other four million

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professionals already reading morning

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description below to sign up it takes us

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in 10 seconds to start getting their

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free quality newsletter to your inbox

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directly so thank you morning brew and

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thank you guys for joining me today I

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hope you found this video helpful if you

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did please make sure to like subscribe

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all that good stuff it does help the

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challenge tremendously and let me know

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your thoughts on the research process

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both positive and negative genuinely

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because I am always trying to improve it

play19:10

this is not the NLB processes so I'm

play19:13

always happy to hear feedback thanks

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again for joining

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see in the next one