In 2012 I thought of investing in Home Depot (HD) and my logic to invest in it was simple. People were not buying homes because the economy was still recovering which meant that they will live in their current house longer and because of that they will spend more on repairs & upgrades. To me Home Depot was a clear winner in this situation because it was and still is the largest home improvement retailer in the world.
I was an immature investor at that time. I didn’t understand the importance of reading annual reports, listening to the quarterly conference call or doing proper financial analysis. I decided to look at an analyst report for HD. I had just opened an account with Optionsxpress and they provided access to S&P Global stock report. Stock was trading around $48 and S&P global had a sell rating with a 12 month price target of $42. I got scared and I didn’t invest. I hadn’t done any research on my own so I couldn’t validate what the report said. I kept watching the company because my logic still made sense to me. Below is Home Depot’s stock chart since 2012.
From 2012 to Dec-19-2017 HD has a return of 287% Vs 108% return in S&P 500 index. I did invest in the stock but at a much higher price and my return on investment is around 136%. Because I didn’t do my own research I committed two mistakes:
- Didn’t invest when I first identified the opportunity
- Didn’t invest as large an amount as I should have. My confidence was low because I didn’t do my own research and was going against what a professional was recommending.
The reason why I thought of writing about this topic today is because an analyst at Nomura downgraded Apple. Over the past three years I have heard a lot of negative news about Apple, however, the company has gone from strength to strength. All those people who sold Apple because they got scared by what someone else said lost a great opportunity to build wealth. As humans all of us have biases and these biases drive our decisions. We also have different motivating factors which influence what we say and do. When you take someone’s advice you take their biases and influencing factors with it. I am not trying to pass judgement on whether this particular Analyst is right or wrong, only time will tell. I am also not saying that all Analysts are wrong. My point is that by doing your own research you gain a huge advantage over others. You will make the decision to invest or not to invest with a lot of conviction. Take the following steps to do your research:
- To understand the business read Annual Reports – Annual Reports – An Investor’s best friend
- Listen to conference calls to understand what management is saying about the business
- Understand if the company has any psychological advantages – Read this post to understand the role of psychology
- Do the break even analysis – How to Value a company put simply
Doing this work will help you to understand where the company stands today and what can you expect in the future. Please feel free to share your comments and feedback. Happy Investing!
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor. I am not recommending any of the companies mentioned in this post.
