In the first part of this article, I highlighted two main aspects of the investment research that — if used correctly — can maximize investors’ time when scouring for quality companies in which to invest.

The first rule I outlined is the simple fact that an investor shouldn’t attempt to follow everything. The second is that you should keep company relationships — such as supplier-customer and competitor relationships — in mind when analyzing a stock. With these two established rules in hand, we are now ready to cast our net into the market to attempt to reel in possible investment candidates that will fit nicely in our portfolios.

Research Rule No. 3: Learn to Discriminate
While we’re primarily looking for good fits, it’s just as important to know the companies we don’t want in our portfolios. In essence, the investor must learn to discriminate between companies that are “good,” “great” and “outstanding.” And inversely, we must identify the difference between “bad,” “terrible” and “horrific.”

#-ad_banner-#Of course, there are more technical descriptions than the ones above that can be used to describe and categorize certain companies. But the point is, it’s important to have a process when deciding on the companies to pour money into to help control the chaos that can emerge from ongoing financial research.

More broadly, consider that all brokerage firms apply the same principal when offering an opinion on certain companies. The most common terms used are “Strong Buy,” “Buy,” “Hold,” and “Sell.” Other firms use the terms, “Outperform” or “Market Perform.” You might have also seen “Accumulate” or “Reduce.” Investment banking giant Goldman Sachs, however, also issues an exclusive rating dubbed its “Conviction Buy List,” which is closely followed by the market.

While few professional analysts ever use the term “conviction buy,” Goldman’s list suggests that the firm is absolutely convinced its analysis of a company or stock is correct and that the pick will likely produced a rate of return that is above those not on the list. Goldman, in essence, even discriminates between its “Buy” ratings from its “Conviction Buys.” And if investors apply similar principals, they can further distinguish between quality companies that deserve a spot in their portfolios between those that don’t. So, how do you start the discriminating process?

Research Rule No. 4: Study Performance Trends
If you refer to rule number 1 in the first part of the article, the discriminating process can start with stocks that the investor knows well and monitors frequently. Using this strategy, investors would have strong familiarity with the company’s products and know the company’s recent financial performance. My rule of thumb is to have a good understanding of the company’s previous four quarterly financial results and know the trends with regard to net income, earnings per share, revenue, and others.

After all, a company can’t be qualified as “great” or even “good” if it’s consistently missed analyst estimates. At the same time, however, by knowing the trends with cash flow, debt and market share growth, the investor will be able to determine whether the management is moving the company in the right direction and/or operating on the company’s stated objectives. So, if the trends are heading in the right direction, it could mean the company might not be in bad shape, even though it might have missed one or two analysts’ forecast.

Research Rule No. 5: Make Time To Keep Up With Developments
Once you’ve established a strong list of investment candidates and have refined your research process, sticking to that research and — every once in a while — fine-tuning it is just as important. This is where discipline becomes key to the entire process. Indeed, tracking all of the information available at any one time from all of your investments is certain to be a daunting endeavor. But why waste all of the effort made in our first four steps of research by becoming misinformed on your companies?

While it’s not necessary to know and read every article about, say, Apple, you should nonetheless try to stay knowledgeable on current events and any new developments at the company. To the end, the quarterly financial announcements and annual shareholder meetings are good base from which to log on your calendar. But if you apply rule number 2 — understand company relationships — you would also know that when an Apple competitor or supplier reports earnings, there could also be material events that may directly or indirectly impact your investment. My rule of thumb: Take time out of each month to learn or confirm new information about your investments.

Of course, there are many more rules and best practices that can be applied towards research. But overall, once you know what you’re strengths and weaknesses are, as well as the amount of time you have to devote to research, the process often reveals itself. It’s then up to you to tweak and refine it to suit your investment objectives.

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