A Few Simple Stock Picking Tips

These days, wherever investors look, there is always someone “armed and ready” to offer his or her opinion, even shove it down their throats, if need be. No wonder many opt to venture into stock investing on their own. But as Alexander Pope once said, “A little learning is a dangerous thing,” discussing a set of general rules that could be applied to everyone’s investments seems in order.

Focusing on the Fundamentals

A while back, Warren Buffett said something like, “investors should buy a business, not rent a stock.” Yet it happens time and time again: investors buy on rumors and sell in panic!

But who has the time to read every little press release or analyze a company’s financial statements? Well, everyone should! Who's money is it after all? And, who better to look after it than its rightful owner? So the number one strategy both to preach and practice is to first analyze the business. Believe it or not, it can be fascinating to learn about scientific breakthroughs, new technologies, people behind the scenes, etc.

Investigating a Company’s History, the Story Behind It, and Its Insiders?

Investors should investigate a company’s history, current and future fundamentals, management, if relevant, (as it could in the case of mining or technology stocks), the science behind it, business model, etc., all of which could help minimize their risks, at the very least, if not eliminate most of them. Furthermore, investing in solid companies with good stories behind them takes time and, by extension, patience. Yet, the mentality these days is making as much money as possible in the shortest possible period of time. And although there is possibility, albeit a faint one, that miracles could happen overnight, the best ones actually require time to grow and mature.

In addition, investors should check out how many shares are held by the company’s insiders. If the company’s management is not invested in it, why should you be?

Looking for Undervalued Companies

Regardless how good a company is, its stock price may not necessarily reflect that. Finding good companies at the right price is a complex task, especially in the current market environment. While there are plenty of good companies that are hugely undervalued, the problem lies in distinguishing which companies are in trouble and which are good companies whose stock price is in trouble. This is why a thorough analysis of any company is so crucial. Focusing on fundamentals, price history, balance sheets, etc. may tell you whether a problem, if there is one, is something of a short-term hiccup, or whether it may be the company's undoing.

Granted, telling the difference when something is wrong with the company, as opposed to just the stock, is not easy. In fact, saying that it is not easy is an understatement. One red flag is when a selloff occurs without any fundamentally related events. In most cases, it is only jittery investors reacting to something unrelated to the company itself, such as macroeconomic events, energy prices, inflation, etc.

Watching for Fraudsters

In very rare instances indeed, there may be fraud involved. For example, a company’s executives could be artificially boosting earnings to meet analysts’ expectations. In turn, they would get huge bonuses for keeping the company’s bottom line in black. Of course, there will be times when stars are simply not aligning properly, regardless of how good a story behind a company is. There is no such thing as a loss-proof portfolio. But at least there are investment tools and strategies out there that could help ordinary investors minimize the hits.

This article is part of the series. To read the next installment, please click here.

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