how to select the stocks

So you've finally decided to start investing. You already know that a low P/E ratio is generally better than a high P/E ratio, that a company with a lot of cash on its balance sheet is superior to one burdened with debt, and that analysts' recommendations should always be taken with a grain of salt. And you know the cardinal rule of the smart investor: A portfolio should be diversified across multiple sectors.

That pretty much covers the basics, whether or not you've waded through the more complicated concepts of technical analysis. You are ready to pick stocks.

But wait! With tens of thousands of stocks to choose from, how do you go about selecting a few worth buying? Whatever some experts suggest, it's just not possible to comb through every balance sheet to identify companies that have a favorable net debt position and are improving their net margins.

KEY TAKEAWAYS

• Decide what you want your portfolio to achieve, and stick with it.
• Pick an industry that interests you, and explore the news and trends that drive it from day to day.
• Identify the company or companies that lead the industry and zero in on the numbers.

A stock screener, if you use one, is prone to error. Riding the coattails of institutional investors is an option, but you should know that they tend to rely on safe blue-chip stocks that may or may not provide the best returns.

How to Pick a Stock

Smart stock-pickers have three big things in common:

• They have decided in advance what they want their portfolios to achieve, and they're determined to stick with it.
• They stay aware of the daily news, trends, and events that drive the economy and every company in it.
• They use those goals and knowledge to inform the decisions they make to buy or sell stocks.

Determine Your Goals

The first step to picking investments is determining the purpose of your portfolio. Everyone's purpose for investing is to make money, but investors may be focused on generating an income supplement during retirement, on preserving their wealth, or on capital appreciation.

Each of these goals requires a very different strategy.

 

The thoughtful investor has a 'story' that explains every decision to purchase a stock

Three Types of Investors

Income-oriented investors focus on buying (and holding) stocks in companies that pay good dividends regularly. These tend to be solid but low-growth companies in sectors such as utilities. Other options include highly-rated bonds, real estate investment trusts (REITs), and master limited partnerships.

Investors who aim at wealth preservation have a low tolerance for risk, by nature or because of their circumstances. They prefer to invest in stable blue-chip corporations. They might zero in on consumer staples, the companies that do well in good times and bad. They do not chase initial public offerings (IPOs).

Investors who are looking for capital appreciation are looking for the stocks of companies that are in their best early growth years. They are willing to take a higher degree of risk for the chance of big gains.

The Diversified Portfolio