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Financial adviser: Crafting a newbie investment plan

Published:Sunday | June 28, 2015 | 6:00 AM

QUESTION: I have always been intrigued by the investment advice you give. My question to you is, after performing the necessary research about the stock market and the various aspects of investments, how do I determine who to invest with? What is it that I am supposed to look for to aid in making my decision?

- D. Hunter

FINANCIAL ADVISER: I am not absolutely clear about what you would like to know so I will respond by taking two interpretations into consideration.

When some persons ask with whom to invest, they mean the financial institution that distributes the financial instrument. Others mean the issuer of the instrument.

If your interest is in the institution that trades stocks, in your particular case, that is, a stockbrokerage, I suggest the following:

Look at the financial strength and profitability of the company. Some stock brokerage houses are listed on the Jamaica Stock Exchange so financial information on them should be readily and freely available.

Look closely at their balance sheet: the level of debt to equity, their retained earnings. Is there an over-reliance on debt? To what extent have the shareholders put their own funds into the business?

earnings statement

Look at their earnings statement. Have they made profits consistently? Have profit levels improved satisfactorily over the years? How diversified have income sources been?

I am not saying you should examine the financial strength of the brokerage houses to suggest you could lose your money if they fail because your investments should be registered in your name, not theirs. The truth is, a strong company should be expected to last and inspire confidence.

Further, how an investment house is run could indicate how helpful it can be in helping you to make money.

If the company is a part of a group, how strong is that group? Who are the directors and principal managers of the group and the company? Do they have a reputation for making good business decisions?

Does the company have integrity issues based, for example, on its compliance record with the regulatory authorities? Does it have a good name in the industry? What do investors generally say about it? Are there complaints about it in the media, for example?

What does the company say about itself, on its website, in its brochures and in the Yellow Pages, for example? Are you happy with the products and services it says that it offers? Can they add value to you?

Look also at the support that it offers to the public. Research is one area to look at. Does it offer serious and valuable analysis of the market, financial products and the economy? Is the research it puts out regular, timely and of high quality?

When you call by telephone, visit or make enquiries by other means, is the staff polite, helpful, knowledgeable and attentive to you and your concerns? Does the staff have time for you? Here, you should be reasonable; there are others who need attention too.

Bear in mind that the services offered by the companies are similar but look for the difference in quality.

To decide which companies to invest in, that is, by buying their stock, look at their financials as I outlined above for the brokerage houses. If a brokerage house fails, it may cost you some inconvenience, but if a company in which you have invested fails, it could cost you a significant sum.

Examining annual reports from previous years can provide more information than you can care to have. It is useful to read and analyse what the chairman of the board, the managing director and the auditors say.

What the chairman and managing director say usually assists greatly in understanding the context and environment in which the company operated in the past and the extent to which they delivered on the goals outlined by them for the company.

You should also be able to see how developments in local and international economies and other spheres affected the company and how well it responded to them.

If you can analyse the ratios from the balance sheet and profit and loss statement as well as those ratios which employ data from both statements, you should be able to get a good trend of the company's performance and strength.

Although past performance cannot give an absolute guarantee of future performance, it is necessary to evaluate historical performance to make some determination of what could happen in the future. Bear in mind that investing in stocks is really buying future earnings, but try not to allow the past to detain you.

If you are interested in good dividend income, look at historical dividend payout ratios and company policy on dividends where this is stated.

Pay attention to the sector in which your target companies are and how they do relative to the rest of the sector or industry.

If you want to succeed in investing, be prepared to spend time doing serious research and be ready to take responsibility for the outcome. Success.

n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning", offers personal financial planning advice and counsel. finviser.jm@gmail.com