How to Pick a Stock
Do you remember how old you were when you bought your first stock? A more important question is: do you remember why you bought it? Chances are it was a friend’s tip, a colleague who’s made a pretty penny, Jim Cramer on CNBC telling you it’s a no-brainer, or because it ‘seemed cheap’.
There’s no ‘wrong way’ to pick a stock - after all, if a friend’s tip quadrupled my investment I certainly wouldn’t complain. There’s no right way either – diligent research before buying a stock makes it that much more painful to see it plummet. The merit of your choice should not be judged by the results but rather by the process that goes into it. Here’s mine:
1. Begin with “Why?”
Asking ‘why’ is pretty powerful. Am I pressured to invest because I’m watching others make money? Do I have a ‘good feeling’ about this one? Beginning with why will help you identify your strategy and become a level-headed investor – not a reactive one.
2. Just do your homework
Researching stocks can be quite exciting (I PROMISE!) if you know what to look for and where to look. For information about a company, its financial standing, and business strategy looks it up on the Securities and Exchange Commission’s EDGAR database.
You’d be surprised how your perception of a company’s business can be wrong. Amazon’s online sales are only 50% of its net sales, and if you followed General Electric you’d see their product sales revenue decline and revenues from questionable investment decisions increase. Do your research.
3. Have a game plan
You don’t ‘just wing it’ when it comes to planning a vacation or what college you (or your kids) will go to, and you shouldn’t wing it with your investments either – have a game plan.
Are you buying a stock because it’s cheap? When will it be not-cheap? In other words, know what you’re investing for. If it’s buying something undervalued, know why it’s undervalued and why/if it’s temporary. What’s the most you’re willing to lose if you’re wrong? When do you get out if you’re right?
4. Stick to a theme
Stock picking CAN make individuals money in the market. In fact, I believe that with the right niche, individuals can outperform institutions (I’ll explain why next week). First, you need to figure out your niche. Some have deep, specialized knowledge about a product or service, others easily pick-up on new trends, some have iron stomachs and can continuously buy when markets panic without capitulating prematurely. The things that make you unique can also make you a successful investor.
5. Reflect
Feedback is learning’s greatest tool. Learning from successes and failures is pivotal to improving your investments. It’s necessary to contrast what you were hoping would happen to what happened in the first step (asking why). It’ll also help you identify shortcomings in your research (did you omit something important?, etc.) and evaluate your game plan (did you stay too long in the position?).
“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!” ― Edwin Lefèvre, Reminiscences of a Stock Operator
~ Igor Nikachin
Stock investing involves risk including loss of principal.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.