Three vital “high conviction” questions to ask before buying a stock
There are three “high conviction” questions you need to ask before buying a stock:
1. Is this stock a better buy than adding to my existing holdings?
2. Would I sell some of my portfolio to invest in this stock?
3 .Would I be prepared to invest a sizeable part of my wealth in this stock for the next 10 years?
If you can answer in the affirmative then the stock is a worthwhile addition to your portfolio.
Opportunities to buy stocks can present themselves in various ways.
The whole market can collapse as happened with the onset of the global financial crisis in 2008-2009. Fear reigns and great businesses are available cheap.
Opportunities also arise when a great business encounters unusual circumstances that cause its stock to be misappraised. The market habitually overreacts to bad news.
Then there are the opportunities that arise from getting in on the ground floor of a new product or technology.
The key is to continually search with a curious mind, and be prepared to invest significantly when the odds are extremely favourable.
“The beauty of valuing companies is that it is cumulative. If you started doing it 40 years ago, you’ve really got a working knowledge of an awful lot of businesses. While you are never 100% sure of anything, things will be served up to you on a platter from time to time.” Warren Buffett