Investors love hot tips. They want tips on which stock is about to go up and tips on which stock is on its way down.
The problem is, many of these tips cut out your need to think- you just follow. What is the single-most important advantage you need to be successful at investing? You don't have to be a financial whiz, but you need to be your own thinker.
Here are three investing tips and two great stocks that could help you build the financial future you dream of.
– Think independently
Everyone's goals are different, so what's good for others may not be ideal for you. Know a stock's story well enough to be able to give a 2-3 minute pitch on why you are considering buying. Now you have your own reasons to buy… or to sell later if the story changes for the worst.
– Have a margin of safety
Stocks, even good ones, can sometimes sell off 10% – 30% because of market jitters or cloudy forecasts. Paying a high price multiple could set you up for a big fall. Minimise your risk by buying quality companies when the stock price is down. If it is already down 20% – 30%, there is less chance it will fall by a great amount again. Always build in a margin of safety into the price you buy at.
– Invest in companies with premium products and services
Premium products and services can attract better prices, making bigger profit margins. The company has to struggle less for the same money and can put more of its cash flow back into the company to grow it quicker and better. The two stocks below are great examples of this kind of company-
1) REA Group Limited (ASX: REA) had another strong year in FY 2014 with high double-digit earnings growth. As the number one property search website, realestate.com.au doesn't hold inventory or need warehouses or vehicle fleets, so its running costs are lower compared to traditional businesses. That translates into high margins.
The company is expanding into the US market in 2015, so the extra free cash flow can help fund that growth. It is expected to remain as a fast grower over the next several years, so having it in your portfolio could be a rewarding move.
2) FlexiGroup Limited (ASX: FXL) specialises in financing, interest free credit cards and other payment systems, as well as leasing. It offers customers easy financing options at major stores like Harvey Norman with its Flexirent. Its Certegy Ezi-Pay system allows customers to pay for many kinds of products and services with a long list of merchants as well.
Underlying net proft margins are usually over 20%. One more great point is the hefty 5.7% stock yield fully franked. That's good, steady dividend income for your portfolio as this small-cap stock continues to grow.
