How should a beginner investor choose a company to invest in?

Stocks of a large number of issuers are traded on the stock market. It is easy for a beginner who is just embarking on the path of long-term investment based on the fundamental analysis of stocks to get lost in this variety.

In this article, we will analyze where to look for candidates for getting into a personal investment portfolio and which companies to start research with. After all, it may be necessary to analyze many businesses in order to find the “same” stock that fully meets the goals of an individual investment strategy .

Is it worth studying all the companies on the stock exchange?

When the famous American investor Warren Buffett was asked which of the 27,000 public companies represented on the US stock market, it is better to start with, he answered: “Start with the letter “A” …”

The message is that a long-term fundamental investor should have an idea about every business that he could potentially become a part-owner of. Therefore, it is advisable to be patient and begin a methodical study of one issuer after another from a to z (or from a to z).

On a long time horizon, such advice can really help, because only by examining all the companies available on the exchange, the investor will be sure that he has not missed a valuable asset. Moreover, the list of issuers available for purchase in Russia is several times more modest than in the USA.

For example, about a thousand shares and depositary receipts are traded on the Moscow Exchange . This is much less than 27 thousand, however, I would recommend narrowing this circle even more so as not to dig into a large number of low-liquid stories with increased risk and complex business specifics, which can be very difficult for a novice investor to understand.

Just imagine: if you spend even one week calmly and carefully studying each business (in your free time from your main job), then it could take more than 19 years to study a thousand companies.

This is too long for a beginner, so it is worth making a short list of companies for research, including several dozen issuers.

Let’s consider how it can be formed.

Start from the domestic market

There are advantages to starting company research with Russian issuers.

  1. For natural reasons, it is easier for a Russian investor to understand the specifics of his market, to understand the peculiarities of the work of companies that conduct their main operating activities in Russia.
  2. You can visit the company’s office and see how the business works with customers and partners; purchase the issuer’s products or services to evaluate their quality. You can buy one share and go to the shareholders’ meeting to listen to the management and get your impression of the company’s management and attitude towards shareholders.
  3. For Russian businesses, infrastructure risks are lower, which is especially important during a period of increased geopolitical tension, when securities with the status of a foreign issuer were frozen for an indefinite period.
  4. Many materials are available in the native language. It is possible to study information about the company on the business website, read financial statements and listen to interviews of management and majority shareholders in Russian, which simplifies the research process.

As of June 9, 2022, about 200 Russian issuers have shares and depositary receipts traded on the Moscow Exchange – still too many for initial research, so we are narrowing down the list further.

Start with the most liquid and largest companies

On the Russian stock market, several echelons of shares are conditionally distinguished.

  1. First echelon. It contains the most liquid stocks with billions of daily turnover and huge business. Most often, these are economic-forming enterprises – leaders or even monopolists in their market segment.
  2. Second echelon. There are more modest companies in it, with a turnover of about several tens of millions of rubles. Often these are also quite large businesses by Russian standards, which occupy leading positions in their industry.
  3. Third echelon. Low-liquid issuers are concentrated here. The daily turnover on the stock exchange for these companies may not exceed several hundred or even tens of thousands of rubles. It is believed that investments in companies from the third tier are associated with increased risk, but the growth potential here can be much higher due to their relatively small size and low liquidity.

I would advise at the first stage to confine ourselves to researching the shares of the first echelon, in which the largest and most reliable companies are concentrated. Then you can move on to the study of second-tier stocks – where there are also quite interesting companies for investment analysis. And only then, having gained experience in fundamental business valuation, do research on companies from the third echelon or shift the focus of attention to foreign markets and try yourself in studying the shares of the most liquid foreign issuers.

We form a list

In the first level of the listing of the Moscow Exchange for the summer of 2022, there were about 50 shares and depository receipts of Russian issuers. The number of issuers is slightly less, since some companies list several types of shares on the stock exchange at once (ordinary, preferred or depositary receipts).

Let’s consider the list of issuers of the first listing level, sorted by capitalization (from largest to smallest). This is the order in which I myself would start researching public companies.

List of Russian companies of the first level of listing on the Moscow Exchange

Rice. 1. Source: Moscow Exchange website

If you spend about one week studying one company, then in less than a year the investor will have an idea about all the largest and most liquid Russian issuers whose shares are listed on the Moscow Exchange. And for sure, after studying them, he will be able to identify several candidates at once for getting into an individual investment portfolio.

Then you can go to the list of the second level of listing, where there are more than two dozen issuers.

List of Russian companies of the second level of listing on the Moscow Exchange

Rice. 2. Source: Moscow Exchange website

You can also pay attention to companies that have the status of foreign issuers, since they are registered abroad, but in fact their main assets are located in Russia and their main activity is connected with our country.

Thus, the list can be replenished with about two dozen more companies.

List of shares of foreign issuers with Russian roots on the Moscow Exchange

Rice. 3. Source: Moscow Exchange website

For many companies, there are dashes in the “Capitalization” line, which is associated with the introduction of temporary restrictions for foreign issuers whose shares are traded on the Russian market. Some companies from this list will eventually re-register in Russia in order to avoid the restrictions of the Central Bank of the Russian Federation and the Moscow Exchange.

Such a list of companies will be enough for about a couple of years of thoughtful study – it took me about that much time to form the “backbone” of my personal investment portfolio.

This is just one of the possible ways to shortlist companies for study. You can add to or change this list, as well as form your own on other principles that are closer to your strategy and understanding of the market.

In the next article, we will discuss how to start studying the issuer for a fundamental investor who plans to buy securities for the long term.

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