Successful stock investing entails more than just a view of a company's prospects.You need a macroeconomic view and an understanding of how an industry sector is performing. In his book "Get Rich Carefully," CNBC's Mad Money host, Jim Cramer, gives readers advice on the metrics they should use to assess a stock to determine whether it has strong long-term prospects. Here's an excerpt.
1. First things first: Build a worldview of the macro forces at work around the globe so you can access the growth rates that determine so much of what ultimately makes a stock go higher.
2. Decide if you want a cyclical stock that needs worldwide growth, to "beat the numbers" or a growth-cyclical that needs less, or a discretionary play that's good for a slow growth environment or staples if there is little to no growth at all. Utilities, real estate investment trusts, and master limited partnerships can also work with no growth, but be careful of fixed-income equivalents. They might not be equivalent at all in a rising-rate environment and might mean more risk than you can handle.
3. Measure your company's growth rate against both the rate of growth in its own sector and the rate of world growth, if it is an international company, or domestic growth, if it is a company that sells only into the U.S. market. You need to make all of those comparisons if you want to identify less risky stocks that can give you a bigger reward in a difficult environment.
4. Get your top-down growth views from managements of companies on their conference calls. Caterpillar and Alcoa are best, but there are many others you must listen to if you are going to be informed about the global growth picture.
6. Understand which hidden metrics really matter in each sector, as they won't necessarily be the earnings per share. Know the best of breed of each sector if you want to invest in it and don't you dare trade down; it's just too risky.