3 Steps to Thinking Like an Equity Analyst

In another life, RBC Direct Investing president and CEO John Bai was an equities analyst. Having worked on both the sell side (think: investment banks and brokerages) and the buy side (think: pension or mutual funds), he has decades of experience analyzing and trading stocks. In a recent interview with Melissa Leong on the Money Moves podcast on the Globe and Mail's website, John distilled his store of equity investing knowledge into three basic steps.

1. Determine your objectives.

Consider what you're investing toward. Maybe it's a long-term goal, like retirement income; maybe it's a short-term one, like next year's vacation. Take these things into consideration at the onset. “Once you adopt a mindset and determine your objective, I think it's going to push you into investing in a certain way," he says. Think about risk, adds John. “Do you have $10,000 that you are prepared to lose outright in the first 60 days? Do you want to make investments that your grandmother or grandfather would be happy with?" Ask yourself questions like these to find your risk sweet spot and work within it.

2. Learn how to pick 'em.

Stock selection is not rocket science – anyone can get informed if they put in the effort. “Analysts will take the time to go to the websites of the companies they are considering investing in," John explains. “They read the documents that no one else will, like the 400-page annual report," he adds, admitting it can be tedious. “It's not feasible for a lot of people to spend that kind of time researching companies, but it's a good marker to what type of work is necessary to become at least a marginally educated analyst." For a shorthand version, he suggests reading analysts' reports, which summarize the key events. It's a good starting place for contemplation, he notes. “You'll read something and think, okay, this is interesting. Do I want to invest in that type of company?" Another way to narrow down your choices is by looking through a specific lens, such as environment, social and governance (ESG).

3. Stick to your strategy.

“Not doing anything can sometimes mean actually doing something when it comes to investing," says John, who weathered the economic downturn of 2008 as a stock trader. “Your natural inclination when markets are going down is to sell everything, but as an analyst you end up with the ability to sift through the noise. With the diligence of actually doing your homework, if you've invested in a portfolio that you're comfortable with, you shouldn't be swung around by overall market volatility."

John summarizes the above three steps this way: “You have to do the work at the beginning and you have to do the work all along the way!"

To hear more of John's thoughts about doing your investing homework, managing a portfolio and more, check out “How to Think Like an Analyst," episode two of the Money Moves podcast, brought to your by RBC Direct Investing and the Globe and Mail.