This is Part Two of a series completed for Solutions Showcase. To read Part One, please click here.

Through the volatility of the stock market and the difficulty of picking stocks, Equity Analyst Simon Paterson of T. Rowe Price has thrived throughout his career in giving stock advice. An 18-year career at Brown Advisory and M&T Bank has helped him learn about market trends and helpful tendencies. His role includes providing advice to portfolio managers within his company: “As an analyst, I say, ‘Hey, you should buy or sell this stock.” Then, the managers use that advice to purchase or sell their fund’s holdings.

Every analyst within a company covers a market sector, ranging from technology to energy. Mr. Paterson covers the “multi-industrials or companies that have businesses across different types of end-markets.” Across the defense industry, he covers companies such as Booz Allen Hamilton, General Dynamics, and L3 Harris. Meanwhile, companies in the multi-industrial industry include Roper Technologies and Teledyne. He covers “everything from transportation, construction software, and things like that.”

When covering companies and tracking their stock market activity, a large portion comes with reading news articles and press releases. He and his colleagues read “everything we can get our hands on.” Services dedicated to stock market activity such as Bloomberg and CNBC serve analysts well, according to Mr. Paterson. However, trade magazines, company filings, disclosures, and especially conversations with insiders serve them well. He mentioned that he speaks to people dealing with investor relations and listens to their advice on the company guidance. I asked him to rank the three sources of information for market advice: news, numbers, or charts.

While explaining the significance of all three, he chose charts as the most paramount: “What’s important is forecasting, so we spend a lot of time figuring out what the numbers were and why they were, so we can figure out what really matters in driving the numbers in the future.” Though they play a significant role, the other two do not hold the edge against charts. With numbers, “The whole name of the game: we are trying to figure out what’s something worth, and how much cash flow they will generate in the future.” On the other hand, with news, “I think finding out what’s actually happening is most important; there’s a tendency to have a narrative and look for things that support it.”

News and charts are pretty simple to explain when researching stock trends. However, business websites provide large amounts of numbers to investigate. My first article mentioned four numbers that investors use: PE Ratio, PB Ratio, Free Cash Flow, and PEG Ratio. Mr. Paterson explained that the Free Cash Flow metric is the best out of the four because “that’s what they [a company] has earned.” Instead of the quarterly earnings that companies send out, which “are an accounting construct, so there are some non-cash factors in there, free cash flow is the true cash measure of what a company earned.” Usually, significant changes in share prices occur after a company sends out earnings results.

According to Mr. Paterson, a stock begins a positive or negative change in the margin begins the same trend in a company share price. Also, he mentioned, “Most stocks go up when the market goes up, and down when the market goes down. A company typically needs to grow faster than the benchmark, sometimes will do worse if it slows down.” If analysts expect a company to improve by 20%, but they only grow by 10%, investors consider that as slow growth. However, if they outperform that expectation, it is believed that they performed well in the previous quarter. The earnings significantly affect stock price due to “either the earnings numbers or what they say on the call about guidance or sales.”

Through the volatility and unpredictability of today’s stock market, different market sectors fit our world’s positive and adverse events. Infrastructure and capital spending (new federal infrastructure bill), defense (Russian-Ukraine war), cloud technology, and the travel industry (recovery after the pandemic) are some of the best sectors to invest in, according to Mr. Paterson. On the other hand, transportation and retail goods (government not sending money relief) sit on the negative side of today’s world. Through the economy’s difficulties, he admitted that people are worried about a recession due to the high inflation and the rate increases by the Federal Reserve.

For young investors in middle school and high school, Mr. Paterson had some suggestions to start: “Read. Find some good books, and recognize that I’ve been doing this for over 20 years, and I’m still learning all the time. It’s maybe like an athlete, but the good news is our brains can get stronger even as we get older.” Also, he mentioned compound investing: “The most powerful thing in investing is the power of compounding. Any dollar you put in today is going to be worth a lot more when you are fifty or sixty.” When speaking about conversations with experienced investors, humility plays a prominent role in the stock market: “Be humble. People love to talk about their winners, and they never mention their losers. You should have some humility and make sure you are learning from your mistakes. Your expectation shouldn’t be that you are going to get rich quick, and if it is, you are going to do things that will increase the likelihood of you losing everything.”

As I mentioned earlier, money problems and scandals will plague our world, changing company confidence and negatively impacting investors. The trick about the stock market is managing these issues to bring in the most considerable profit. Mr. Paterson’s advice and expertise have grown since his early days as an investor, and his experience assisting professional fund managers helped him learn the craft of investing. The stock market will become more challenging to navigate with future complications that we cannot predict. Taking advice from the best will only help improve an investor’s attempt to traverse the market.

Alex Kwas is a freshman member of The Quill.