When the average investor (I don't pretend being above average) hears about a must-buy stock, it is often too late. Early investors have already invested in it and most - if not all - of the high-growth expectation has already been captured in the stock price. It doesn't mean that the stock has become a bad investment, only that a large part of the potential reward is foregone but that a large part of the risk is still present. Because this is what investing is all about: finding the best reward/risk ratio.

Consequently, investors who are able to identify high-potential companies before they fall into Wall Street spotlight are best placed to enjoy superior profit. Discovering underfollowed, overlooked companies is a difficult exercise. I try to look at the IPOs. At any given time, there are a few IPOs but only a limited amount of capital. Naturally, one of the IPO will attract a large part of the capital. The other IPOs are not necessarily inferior to the one in the spotlight, but are to some extent overlooked. Actually, the investment in these "secondary" IPOs is somewhat delayed until investors have money to invest. If these companies are sound (this is another story!), they represent an excellent opportunity for the average investor to purchase shares before the growth occurs.

As a matter of fact, small caps are much more likely to be overlooked than other companies. The search should begin there.

Most financial data can be found on Yahoo! Finance or CNN Money, or on the website of your online trading service company. I usually also get the company's annual report.

A handful of key data can already give a good picture of the financial situation of the company:

• The current ratio or quick ratio gives an idea of the liquidity, i.e. the ability of the company to meet its short-term financial obligations.
• The profit margin shows the company's overall profitability. It should be compared with the profit margin of its competitors.
• The debt/equity ratio or financial leverage ratio reflects how the capital structure is split between debt and equity. Debt is cheaper but riskier than equity. Since I am looking at high-growth (i.e. riskier) companies, I want them to have low leverage.
• The cash flow is also important. Because the BS and IS are accrual-based, they do not give any direct indication of the cash flow. In particular, a company that has a positive net income can actually have a negative operating cash flow which can lead to trouble.
• Finally the price/earnings ratio (P/E) represents how investors judge the future performance of the company. Although it may be argued the other way, I think that the company should have a lower P/E ratio than its competitors, indicating that its market price still has potential for growth.

There are many other ratios and analysis techniques. What I briefly described here is very simplistic but achieves its purpose: filter out most bad investments through a quick financial assessment.

How can I choose stocks to invest in? Let's be pragmatic: I want to cash in after 1-to-3 years and I am willing to take a medium risk (for more that average rewards!). I lack experience in personal finance, but I learned a lot about investing and financing in my MBA.

I plan to build a portfolio to mitigate risks. My portfolio will be diversified in terms of industry and geographical zone.

The method comprises 4 steps:

1. Assess the market trends
2. Identify potential runner-ups that benefit from the strongest market trends
3. Investigate the strategy of these companies, ensuring that they have a clear and sustainable competitive advantage
4. Examine their financial situation

I identified the following markets as large and growing:

• Alternative energy, electric vehicles, and oil
• China (i.e. Western companies expanding to China)
• Advanced medical and biotech equipment
• Software (mainly mobile)
• Entertainment

Additionally, I want to split the investments more or less evenly between North-America, and Western Europe.

Later I'll go through the companies themselves.