A good stock investment for your friend doesn’t necessarily mean it’s a good investment for you. Everyone has different levels of knowledge and experience in investing as well as varying risk tolerance and investment horizons.
The stock market tends to appreciate over time. Investors can generate outstanding returns in the long run, but only if they can hold on to their shares.
With that in mind, here are some questions you can ask yourself to determine if a stock is a good investment for you.
Can you sleep well at night with your holdings?
If certain stocks are keeping you up at night, they either make up too much of your portfolio, or you are not comfortable holding them.
For example, if an investor had invested 50% of their portfolio in energy stocks, such as Baytex Energy Corp. and MEG Energy Corp. after the shares had a big drop in 2014, this investor would probably have trouble sleeping at night.
That’s why it’s essential to diversify. It’s probably prudent to not have one sector make up more than, say, 20% of your portfolio or one stock make up more than, say, 5% of your portfolio.
Are you willing to buy more shares on a big drop?
In mid-June, Spin Master Corp. (TSX:TOY) shares fell 10% from the recent high and about 16% from its 52-week (which was also its all-time high) and shook out the weak hands.
I saw the dip as a buying opportunity and bought more shares. A good investment should be one that you have the confidence to buy more shares when they experience meaningful dips.
Part of that has to do with how much you know about the company. Another part is that it should be a quality company to begin with. Otherwise, how will you have the confidence to buy more when shares fall?
Spin Master, a leading global children’s entertainment company, is known for is innovation. It has won 21 Toy of the Year awards across different product categories (and it’s been nominated for 82 awards) since 2005.
It’s still led by the founders who continue to grow the company in a number of ways, including consolidating the fragmented industry via strategic acquisitions and developing evergreen global entertainment properties.
The numbers say it all. Since 2014, Spin Master has increased its revenue by 70% to US$1.2 billion and its earnings per share by 62%. As well, the company’s recent return on assets and return on equity remain high at about 18% and 38%, respectively.
Investor takeaway
Before you buy a stock, ask yourself those two questions. Generally speaking, it’s good practice to diversify and invest in quality companies you are willing to buy more of if their shares drop meaningfully.
