Thread by @eldivyn

I always tell people, think of stocks as owning part of a business, rather than just as tickers to trade up and down. 25 likes on this post and I'll tweet 10 things I evaluate about a business before I buy stocks in it.

Okay, so we have hit 25 likes. Most people do this at the end but I'll do this at the beginning: welcome to my TED talk. This is a thread to tell you that investing in stocks should not be about gambling and shouldn't be focused on the short term.

Think of every stock you buy as purchasing a business and becoming part owner. You don't buy a business today to sell it in 2 months after you've made 20% profit so why invest in stocks that way?

Only invest money you've put aside that you won't need for years. And only invest in companies you think are a good business with great prospects over the really long term. How do you determine this?

It helps to think: if someone offered to sell me this entire company to become the owner, how would I go about deciding if it's a good deal? Which then brings me to the 10 things I look at to make this conclusion.

The first is: the business itself. Do I understand it? What does it do? How does it make money? Is this a good time to be doing this business? (For instance, the digital age might not be the best time to start a physical newspaper or magazine no matter the quality).

1b. An important thing to consider thinking of the business itself is: does it have a competitive advantage? That is, something that makes it harder for others to compete and makes it easier for the business to charge customers what it wants.

For instance, Google is the dominant search engine with legendary algorithms, page rank what not. What's the option if you don't want to use Google for your searches? Shitty Yahoo, or pointless Bing. That's competitive advantage.

If the business does well on that score, the next thing I look at is MANAGEMENT. A business is not likely to perform beyond the abilities and talents of those running it. Look them up on LinkedIn, guage their experience, google them. See how they think.

Read CEO letters, press statements, whatever you can. Listen to conference calls. Don't be impressed by credentials alone, that ain't nothing. Try to get a feel for the people themselves.

For example: JP Morgan is a great bank but odds are, any bank Jamie Dimon ran would be a great bank. Apple was about to die until Steve Jobs came back. Management is the difference maker.

After these two very subjective things, you can start looking at more technical/accounting stuff like 3. REVENUE/NET INCOME/CASH-FLOW.

If you don't know what these are, you should be studying, not investing. If you do, look at their 5 year record and next year estimates.

Next thing I look at is cost of capital for the business. Are they financed with debt? At what rate? Are they using equity? At what expected return? Paying back shareholders/investors can be expensive so those who have good capital structure have more room to FLEX.

If our EBITDA margin is 30% of revenue, a business with 4% cost of capital will be more profitable than one with 14% cost of capital all things being equal.

Naturally after looking at cost of capital, I look at debt to equity levels. Debt is cheaper capital but too much of it will kill you when economies slow down (which always happens). You have to keep debt at manageable levels. Very very key. If you doubt it, Ask Lehman brothers

After I determine debt levels, and equity levels (those are the two main capital types), I then check the return on equity. How much of the companies profits flows to the owners. As an investor, your long term returns will likely track this metric.

In the short term, stocks go up, down and sideways with however people feel that day. But in the long term, it generally tracks the returns produced by that business. Very important thing to know. Keep your eye on this.

After ROE, that's when I look at Free cash flow. How much cash is the company generating. If you notice, I didn't spend much time on net income. It's an easy number to manipulate. But cash-flow is everything. A business runs on cash, not reported net income.

If you know how much cash the business generates, you can forecast what the future cash flows will be and decide how much to pay for that cash flow today. As an investor, this is also one important thing to track. Your returns have to translate to cash one day.

Otherwise there is no point. A cash generating business is always better. The only reason to sacrifice this metric temporarily is GROWTH.

That's the next thing I evaluate. How fast is the cash flow, revenue, profits, market share, industry, Head count and expenses. If it's high, positive and in the right direction then you will likely do well in the long run.

The last thing on this list for today is Tax rate. I always check what the after tax value of my investment will be after the business pays taxes on its profits and I pay taxes on my gains and dividends. And also check how best to avoid overpaying.

Once I run through this check list, and weigh in other factors that are company specific including valuation, industry etc, I am in a good position to decide whether or not this is an investment I'm happy to make.

If it is, I buy as much as I can and ignore the ups and downs of the market. It's worked out well so far and of course, this is not exhaustive. Just something for you to think about and apply to your own investing. Salute.