PART 5: If You're Going to Pick Stocks, Here's How to Do It Properly
How to Research and Value a Company Without Just Gambling
Disclaimer: This content is for educational purposes only and should not be considered financial advice. I am not a financial adviser. Everyone's financial situation is different, and you should do your own research or consult with a qualified financial adviser before making any investment decisions. Past performance is not a guarantee of future results.
At 40, I've learned the hard way that stock picking is best treated as a hobby, not a retirement strategy. It can be educational, even profitable, but it's not where your core savings should live.
That said, if you're going to do it anyway, and some of you will, at least do it properly.
This isn't about hot tips or following influencers. It's about understanding what you're buying and why. Think of it as detective work, not gambling.
The ground rules first
Before we get into the how:
- This is your 5 to 10% play money, not your pension or emergency fund
- Only invest in companies you understand, if you can't explain what they do and how they make money, don't buy it
- Plan to hold for years, not weeks, if you're not comfortable owning it for 5+ years, don't buy it for 5 minutes
- Accept you'll probably underperform an index fund, and be OK with that, because you're learning
Why bother if index funds are better?
Fair question. Here's the honest answer: stock picking forces you to deeply understand how businesses work.
When you research a company properly, reading their reports, understanding their competitive position, analysing their financials, you learn skills that carry over into your career. I've used insights from researching companies as investments in my own role as CFO countless times.
Understanding how businesses make money, manage cash, handle debt, and compete in their markets? That knowledge compounds over your career in ways an index fund never teaches you.
So yes, your index fund will probably outperform your stock picks. But the education from doing it properly is genuinely valuable.
Where to find information
Don't get your information from social media or random websites. Go to the source:
- Company investor relations pages, search "[company name] investor relations" and you'll find annual reports, financial results, presentations
- London Stock Exchange website, company announcements and regulatory filings
- Financial websites, Yahoo Finance, Google Finance, FT.com for stock prices and basic metrics
Annual reports are free and contain everything you need. Yes, they're long. But you only need to read specific sections (we'll get to that).
Using AI to help
Here's something I wish I'd had in my 20s: AI tools like ChatGPT or Claude can now analyse financial information for you.
You can upload a company's annual report and ask:
- "What are the key revenue trends over the last 3 years?"
- "Summarise the main risks this company faces"
- "Compare this company's profit margins to industry averages"
- "Build an investment case for and against this company"
AI won't make the decision for you, but it can pull out the key facts in seconds rather than you spending hours hunting through a 200-page document.
It's a massive shortcut for the research phase, just make sure you still think critically about what it tells you.
Let's use Tesco as an example
Everyone knows Tesco. You probably shop there. Let's pretend you're considering buying shares.
Here's what I'd look at (all this info is available in their annual report and investor relations page):
1. Revenue trend, are they growing?
Look at the last 3 to 5 years of revenue (total sales). Is it growing, flat, or declining?
What you're looking for: Consistent growth or at least stability. Declining revenue is a red flag unless there's a good reason (like they sold off a division).
Tesco example: If revenue has grown from £60bn to £65bn over 3 years, that's steady growth. If it's bouncing around wildly or declining, ask why.
AI shortcut: "What has Tesco's revenue growth been over the past 5 years?"
2. Profit margin, are they making money efficiently?
This tells you how much profit they make per £1 of sales.
How to find it: Look for "operating profit margin" or "net profit margin" in the financial results.
What you're looking for: Supermarkets typically run on thin margins (2 to 4%) because of competition. Tech companies might have 20 to 30% margins. Compare to industry peers, not different industries.
Why it matters: A company with shrinking margins is struggling to control costs or facing pricing pressure.
AI shortcut: "What is Tesco's operating margin and how does it compare to Sainsbury's and Morrisons?"
3. Debt levels, can they handle their borrowing?
Look at total debt compared to their ability to service it.
How to find it: Annual report will show "net debt" (total debt minus cash). Compare it to annual operating profit or cash flow.
What you're looking for: As a rough rule, if debt is more than 3 to 4 times annual operating profit, it's worth asking if they're over-leveraged.
Why it matters: Too much debt means they're vulnerable if business slows down or interest rates rise.
AI shortcut: "What is Tesco's net debt to EBITDA ratio and is it concerning?"
4. Cash flow, are they actually generating cash?
Profit on paper doesn't mean cash in the bank. Companies can show profit but run out of cash.
How to find it: Look for "free cash flow" in the cash flow statement.
What you're looking for: Positive and consistent free cash flow. If they're consistently cash-flow negative, they're burning money.
Why it matters: Cash flow pays the bills, funds growth, and returns money to shareholders.
AI shortcut: "Is Tesco generating positive free cash flow and has it been consistent?"
5. P/E ratio, are you overpaying?
P/E (Price-to-Earnings) ratio tells you how much you're paying per £1 of company profit.
How to find it: Any financial website will show this. It's current share price divided by earnings per share.
What you're looking for: Compare it to competitors and the market average. If Tesco trades at a P/E of 15 and competitors are at 12 to 13, ask why you're paying a premium.
Why it matters: You don't want to overpay for a stock, even if it's a good company. Expensive stocks have further to fall.
AI shortcut: "What is Tesco's P/E ratio compared to the supermarket sector average?"
The qualitative stuff (equally important)
Numbers tell you what happened. These questions tell you what might happen next:
Does the company have a competitive advantage? What stops competitors from eating their lunch? (Brand loyalty? Scale? Patents? Network effects?)
Is the industry growing or declining? Even a great company in a dying industry struggles. (Newspapers, high-street retail, coal mining...)
Do you trust management? Read the CEO's letter in the annual report. Does it feel honest or full of excuses and buzzwords?
What are the risks? Every annual report has a "risk factors" section. Read it. If you don't understand the risks, don't invest.
AI can help here too: "Summarise the main competitive advantages and risks Tesco mentions in their annual report."
Red flags to avoid
Walk away if you see:
- Consistent losses, some startups lose money while growing, but established companies should be profitable
- Revenue declining for multiple years with no clear turnaround plan
- Debt growing faster than profits
- Frequent accounting restatements or auditor changes (suggests something dodgy)
- Management selling lots of shares, if insiders are selling, ask why
- Too good to be true stories, "the next Amazon", "guaranteed returns", "can't lose"
The honest reality
Even if you do all this research, you might still pick losers. Professional analysts with teams and resources get it wrong constantly.
But at least you'll understand what you own and why. You won't panic-sell at the first dip because you'll have conviction based on research, not hype.
And you'll learn a lot about how businesses actually work, which is valuable even if your stock picks underperform. That understanding has genuinely helped me in my own career, being able to quickly analyse a business, understand its economics, and spot risks or opportunities is a skill that compounds over time.
The 5-question checklist
Before buying any stock, ask yourself:
- Do I understand how this company makes money?
- Are they growing revenue and maintaining or improving margins?
- Can they handle their debt and generate cash?
- Am I paying a reasonable price (compared to competitors)?
- Am I comfortable holding this for 5+ years even if it drops 30% next year?
If you can't answer yes to all five, don't buy it.
At 40, here's what I know
Stock picking can be educational and genuinely useful for your career development. But the vast majority of my wealth will come from boring index funds I contribute to consistently, not from the handful of individual stocks I own.
If you want to pick stocks, treat it as a learning experience with a small amount of money. Your future self will thank you for keeping the bulk of your savings boring and diversified.
Where Champion Health can help
Want to understand more about how to read financial statements, evaluate investment opportunities, and build a balanced portfolio?
Peter Komolafe's Intro to Investing Masterclass covers investment fundamentals, including how to research companies and understand what you're actually buying.