How Do You Pick Stocks?

Do you like to?make your own stock picks? Or have you thought about it but just don?t know where to start? The maturing of the bull market in the past five years has to have some of us thinking that there?s got to be a better way to pick stocks – an inside secret even.

Most of us go with mutual funds so that we can at least keep pace with the general market. Mutual funds are after all managed by people who are in-the-know, so to speak. Or at least they should be.

If we decide that we?re not comfortable with mere market performance, we have to pick our own stocks and see if we can do better. But how do we do that?

How Do You Pick Stocks?
How Do You Pick Stocks?

Most of us lack either the time or the resources to pick our own stocks, and truth be told, while we have access to more information than ever before, the sheer volume of it can be overwhelming. How do we make sense of it against the backdrop of complex economic, regulatory and technological environments?

A strategy to pick stocks that probably isn?t new, but it?s still worth thinking about

In post on this site by Rob Bennett some time ago, Stock Picking Works (But Probably Is Not for You), corpfan1 commented and hinted at an interesting strategy to pick stocks in his comment:

?Why go with an index fund when you can choose the best 2 or 3 stocks out of that fund??

His comment got me thinking about a cohesive strategy using the same basic principal.

What if we can choose five (or ten, or what ever number we want) high performing mutual funds, and look for common holdings among them? Choose from stocks that appear on most or all of the portfolios of the funds, and those are the ones we buy.

The point is, we don?t have time to research all of the stocks on the market?or even a large number?so we use a poor man?s way of tapping expert advice. We?re looking at where the Big Guys are actually putting their cash. We get access to the professional management of the funds without committing money to them and the plethora of other stocks sitting in their funds that we don?t have much interest in.

There?s a herd mentality in all investments and among most investors, and even among fund managers. By looking for common plays, we?re getting in where the traffic is the heaviest.

This is probably not original?hey, I?m not claiming expert investor status here?but is there any merit to this? Are there any risks?

That?s just my shot in the dark, but I think there are three basic sources we can identify as sources for stock picks.

Choosing from among the ?Nifty Fifty?

My little expansion on corpfan1?s idea is based on this. In bull markets the broader markets may rise, but the greatest growth is concentrated in a small number of stocks that have become ?hot?.

This narrow segment has sometimes been referred to as ?The Nifty Fifty? or by some other title. Translated, it represents the stocks that are the markets biggest cash magnets. Everyone wants to get into them, but the big boys usually get in first.

Identify this group early enough, and the profits can be substantial. Downside: this group is a moving target, and you can never tell when the big money will shift into a different set of stocks.

Finding the Golden Goose of stock picking strategies

Stock picking gurus abound. If you can identify one or two who are really good at what they do you may be on an elevator ride up the wealth tower.

The issue here is that you usually have to pay for the strategies or picks they have, and that can be more expensive than the fees paid for mutual funds.

Even if they?re the real deal, investment experts are notorious for hot and cold streaks. Some are very good in bull markets, some in bear markets, some in lateral markets, but very few will do well in all or even most markets. Alas, we?re all painfully human, even the experts among us.

Cutting your own path

The third alternative is to develop your own system, strategies and abilities. If you?ve already done this successfully, chances are you?re one of the investment guru?s discussed above!

In truth, few people have the ability to consistently pick winners in the market, at least not over the long run. Stock picking isn?t just an intellectual pursuit either. Emotion plays a powerful role in investing; can you stay the course when the market has turned against you? Can you buy when everyone else is selling? Can you sell when everyone else is buying? Most of us can?t.

Another caveat is that developing your own system takes time?years if you?re going to truly perfect it. Along the way money can be lost, and years of compounding with it.

I?m not being too encouraging here, am I? What methods of stock picking can you offer?

Do you pick your own stocks, or do you prefer to go with mutual funds? If you pick your own, what strategies do you use?

( Photo by tradetosuccess )

8 Responses to How Do You Pick Stocks?

  1. I know someone who simply waits for “media events” relating to specific companies and then takes advantage. For example, the BP oil spill led to a great opportunity to buy BP stock. Today’s VISA and MASTERCARD issues related to government restrictions on fees caused these stocks to tumble 15-20%. The Toyota recalss provided a great entry into that stock. In fact, the whole recession caused almost all stocks to overshoot to the downside…a great buying opportunity!

    Can you get hurt this way? Occasionally…as it is often difficult to pick the absolute bottom or time it right to move in. But, if you are patient AND have the stones to invest in a company that is in the middle of a media circus, you can often make some nice gains.

    Remember, stock prices always overshoot to the upside and likewise, they always overshoot to the downside.

  2. corpfan1 – I’ve heard of that as well, and it sounds like a strategy that could work if you can move fast enough. On the downside, it’s actually the principle behind what used to be called contrarian funds. They’d buy up stocks that had recently been battered. From what I’ve studied they have at times been the most successful funds. In the past couple of decades with stocks rising almost continously and predictably, they haven’t done as well. Good plays after a crash though.

  3. In my 25 years of investing, I have done great at picking mutual funds, but not so great at picking individual stocks. The good news is that I’m getting much better at it.

    If you look at the greatest stock pickers in history, they all seem to have a value strategy. This goes in and out of favor, but over the long-term, it really pays off. If the earnings and fundamentals aren’t right, I avoid a stock, no matter how hot it is.

    Having gotten stuck with some lousy stocks in the past, I now look at each stock before I buy it and say to myself, “do I really want to own that company for the next 20 year?” If not, I don’t buy the stock.

  4. Bret – That approach stacks the deck in your favor. You can wait down markets and think and plan long term.

    On the flip side, one of the issues I see with shorter term strategies is that they keep you tied to the market on a day by day basis. That may be fine if stock investing is your full time job, but if it isn’t, that level of attention and concern can be distracting or worse.

  5. I have a subscription to a private and non-biased research company. (Former trader, unhappy with the situation of paid placements by “analysts” so he started a bias-free research firm. It’s called 5I research).

    But stocks aren’t my bread and butter any more. I’m an options trader and I’ve found a very robust strategy that works if markets go any which way. The returns are huge, but you have to be very good at separating your emotions from your money.

  6. We subscribe to a lot of financial and investing publications like Value Line, Wall St. Journal, Kiplingers etc. We also watch Fox Business News. Whenever we get a glimmer of an idea, we research it, talk about it and watch what it does. Every stock we purchase must pay a dividend. We didn’t buy Apple for years until it started paying dividends. We have a near 50/50 split between stocks and bonds. We also have a bottom line for its safety and financial strength for a company that we won’t go below. And we invest. We don’t trade. Our strategy has worked for us so we didn’t panic during the last recession when our portfolio value went down. The dividend and interest payments just kept right on coming so we weren’t hurt at all. Not saying it will work for everyone but we’re happy with the results.

  7. For me stay away from stock picking and just focus on reducing fees, optimizing taxes, and a “set it and forget it” dollar-cost-average investing strategy.

    If you look at the numbers, nearly all mutual funds underperform plain ‘ol index funds in the long run. You can try picking “hot stocks” that are similar across funds, but by the time you do, you’re already behind the 8 ball and everyone is thinking the same thing. It’s the wisdom of the masses playing it’s role here!

    Instead of spending precious time picking individual stocks (time, after all, is what you can’t get more of), just start investing regularly – treat investing just like you’re paying off a high interest credit card balance. Set up a weekly automatic deposit and investment. Don’t let the thought of wanting to pick the “right” stocks from keeping you out of the market and missing out on compounded returns!

  8. I agree with all that you’ve written, but with the bull market getting long in the tooth, you have to wonder if investors won’t want to take matters into their own hands, and try to beat the market with their own picks.

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