1. The Reputation of the Management Team and Board of DirectorsBefore you dive deeper into the quantitative aspect, ensuring management quality and transparency is crucial to long term investment success.If the people running the organization aren\u2019t accountable to its shareholders, then sooner or later, this phenomenon will be reflected in the company financials and their stock price.Phil Fisher, a long-term advocate of management quality, was famous for the depth of his research on companies in which he would invest. He relied on personal connections (what he called the \u201cbusiness grapevine\u201d) and conversations to learn more about a business before buying its stock. His first and most important book, Common Stocks and Uncommon Profits, published in 1958, devotes careful attention to this concept of networking and gathering information via business contacts. This step ensures complete transparency with regards to understanding company management and testifies the numbers found in the book of accounts.2. The Financials and Business ModelFinancial metrics and how the business makes money are the first two quantitative elements to look at. On rare occasions, I have discarded a few stocks just after this step. My logic to do so depends on the three criteria listed below.Absurd Valuation: If the P\/E and P\/B ratios are unbelievably high, it could signal that either the stock is overvalued or that the markets themselves are overvalued and all the corresponding stocks are riding on the same rally.The only exception to this rule is technology stocks since it\u2019s extremely difficult to forecast their earnings and correlate their growth with any ratio whatsoever. A perfect example can be Amazon, which has had P\/E ratios of above 40 for months now, but despite that, the company continues to soar in the stock market. Ratios are not a one-size-fits-all kind of parameter, so they should be used\u2026<\/p>","protected":false},"excerpt":{"rendered":"
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