A stock can be chosen in a variety of ways. You might teach a chimp to select a random portfolio by throwing darts at the financial section of a newspaper. The chimp would win approximately half of the time against Wall Street.
There are, however, simpler ways to choose stocks if training chimps isn’t your thing or you can’t locate a newspaper. Furthermore, as an individual investor with a long-term investment vision, you have an advantage over Wall Street’s short-term emphasis.
What To Look For When Buying A Stock?
Successful stock pickers have three elements in common:
- They’ve chosen whatever they want their portfolios to do ahead of time, and they’re committing to it.
- They keep up with the daily news, trends, and events that shape the economy and the businesses that operate inside it.
- They utilize these objectives and information to guide their stock-buying and selling decisions.
1. Determine Your Goals
First, you need to know what you’re investing for. Are you saving up for a house? Do you want to leave money behind in your will? Or are you just looking for stable returns on an investment that won’t fluctuate too much with the market (i.e., low risk)? It may seem like finding stocks is all about studying financials and reading quarterly reports.
Still, there will always be other factors—external ones often outside of a company’s control—that affect its performance. If it makes sense financially, think about how buying this stock can achieve one or more of your personal goals over time (and beyond).
2. Three Types Of Investors
Investors are looking for a steady stream of income focus on buying (and holding) investments in firms that pay out regular dividends. These are usually stable but slow-growing corporations in industries like utilities. Among the other choices are highly rated bonds, real estate investment trusts (REITs), and master limited partnerships.
By nature or by the situation, investors who seek to preserve their money have a low-risk tolerance. They like to put their money into well-established blue-chip companies. They could focus on consumer staples, firms that thrive in both good and bad times.
They don’t go for first public offerings (IPOs). Investors seeking capital appreciation should choose equities of firms that are still in their early stages of growth. They are prepared to assume a higher level of risk in exchange for the possibility of significant returns.
3. The Diversified Portfolio
This is the hedge fund portfolio I developed. It has performed very well over its first two years of operation, but it might be too volatile in a bear market. For example, this portfolio lost around -41% from February 2008 – September 2009 despite recovering nicely during 2010 and 2011. This volatility can also work to your advantage if you are shorting stocks or have some other form of hedging going on as part of your strategy.
The Diversified Portfolio consists mainly of large-cap US companies that pay dividends and do not take much debt onto their balance sheets. The minimum number of shares held per stock is 100, while the maximum percent invested in any one company is capped at 20%.
4. Keep Your Eyes Open
There are many things to consider when looking for a stock, but one of the first that usually comes up is whether or not you need to keep your eyes open. Does this mean how often you will be checking in on the company and watching their progress? A good answer here might depend upon your investment goals as well.
If you plan to regularly buy stocks to hold them long-term, keeping an eye on daily performance could work against you by causing unnecessary anxiety.
5. The “Story” Behind A Stock Pick
The “story” behind a stock pick is how you plan to make money off the investment. For an investor to invest, they need to understand their return if things go well. Having this understanding allows an investor to make a good decision on whether or not the investment is worth it. It also helps you understand how different factors affect your return and can help you decide if what you are thinking about doing is going to work for your portfolio.
6. Find Companies
To find companies, you can use “The Fundamentals” on GuruFocus.com or search in Google for a company’s name and add the word ‘fundamentals’ to it: [companyname fundamentals]. You will usually end up with articles about financial statements like income statements, balance sheets, etc.
7. Tune Into Corporate Presentations
One of the best ways to get insight into a company is by listening in on earnings conference calls. You can often learn about plans and projects that will impact the stock’s future performance, as well as how management feels about its position going forward.
8. The Next Step
You may wind up with a single investment opportunity or a list of 10 or more firms after your study. Alternatively, you may decide that this is not the industry for you. That’s all right. All of your research may have saved you from making a poor decision.
When it comes to stock selecting, knowing when to say no is crucial. You may be ready to pull the trigger, or you could undertake an in-depth financial statement examination like a financial industry specialist.