Before I buy any share, I use my imagination.
Not easy after a couple of pints, but I do my best.
I imagine I am a multi-billionaire - money is no object and I'm looking for companies to buy. What I want is to buy a company on the cheap. Preferably a public company whose share price I think is a bit low and can be bought at a good price.
I also want to buy one that has some growth in it. I then want to watch the profits roll in so, say, in five years all my money is returned and now the rewards start to come in.
Why do I do this?
Because with my billionaire's hat on, if I decide I'd like to buy the company then I reckon it'll be worth me buying the shares.
If, as a billionaire, I think it's a bit pricey then why would I buy the shares?
A quick example: a few weeks ago I bought Carrs Milling. Putting on my billionaire's hat I thought, "Blimey!" (Do billionaires say "blimey?"). "This is a nice little company, I'll buy it!"
Why would I buy it?
Well, the market cap was roughly £35 million (this gives a guide as to what I might have to pay). Yet it was making profits of more than £5m already, and profits were on the way up.
That looked pretty good to me, especially as the company was obviously growing. Profits could easily become 7 to 8 million or more in a couple of years, especially as the company was buying others at a good price.
Now imagine £8 million profits. Now we're talking really cheap.
Being an imaginary billionaire really helped! I bought at 380p, and the shares have stormed higher to the late 500s.
I am sometimes, like everyone, tempted by companies that are making losses. Putting on my billionaire's hat, I often look at them and see a company that makes a loss but has a market cap of £71 million because it has some kind of product that investors think will take off.
But why would I buy it? Yes, it's possible the product will work out, but I have no interest in paying over the odds for the possible future potential. I'd much rather buy a company whose profits are already booming. I guess that's why I hardly ever buy a loss-maker.
So next time you buy a share, have a good think. Would you buy the company yourself if you had the money? Not sure? Well, if you're not, don't buy the shares!
I believe many of us small and medium cap investors are on a good roll at the moment, so well done if you are.
My portfolio continues to blossom nicely with Gibbs and Dandy, Carrs Milling, Isotron, and RPC group doing the business for me.
If the rest of the year ends up like January, it won't take much imagination to dream of a luxury Caribbean holiday paid for by profits. Dream on!