Many investors, particularly new ones, have a tendency to ask the wrong question; i.e., "what stock should I buy?" The reality is that, that is the fourth or fifth question they should be asking themselves. At best, this is also a great way to spot an amateur or rookie broker. At worst, any broker that promotes a stock without asking you pertinent questions first is a con artist.
Ultimate Purpose
"The" first question to ask is, "what is the purpose of this investment?" That question by itself will, to a large degree determine the fundamental direction for an investor to take. Stocks bought for income in the form of dividends are often utility companies and are a long way from high-flying speculative stocks.
Stocks purchased with the idea of "making a killing" rarely if ever work out. Should that killing be because the investor is privy to "inside-information" the investor risks going to prison along with anyone connected in passing that information. Don’t do it.
The term "growth-stock" is an interesting one. Growth can come in two different but kindred forms. Most people equate "growth" with capital appreciation which is true. The other kind of growth comes in the form of dividend growth. This is often known as "total return." For an income stream that endeavors to keep pace with inflation, total return stocks can be an answer.
Philosophy Dictates Strategy
Whether an investor manages their portfolio themselves, in collaboration with a broker or financial planner or is turned over to an asset manager or mutual fund, philosophy dictates strategy. That is true of investors themselves or the people they choose to manage money for them. It is a fact that brokers often have the same personality traits as their clients.
In a practical sense, if you are a risk averse and conservative investor you do not want a broker that loves to trade or likes to pursue sophisticated strategies. If you choose to turn your money over to an asset manager, look for one that reflects your philosophy. For example, if income is your main objective, you do not want to invest in a hedge fund that is highly leveraged.
Investor Psychology
The bottom line is that you have to be honest with yourself. Perhaps you regard yourself as a real risk taker but your stomach turns over or you lose sleep if the stock trades down a few points. If that is the case, you are not a risk taker. Choose a philosophy and strategy that you are comfortable with. To do otherwise is just not worth it.
Choose an Industry First
Regardless of your overall objective, choose an industry before you choose a stock. This is the fundamental essence of a "market neutral" strategy that many hedge funds use. This does not mean you should "short" anything, but it will help you to pick winners from among a group of peers. The reason is; at the end of the day, the market for any product is a zero sum game.
Regardless of the industry group, the individual stocks within that group will rise and fall relative to each other based on market share, profitability and so forth. It is of no consequence what the group is; defense, broker/dealers, banks, health, retailing or anything else. Each group will show differences in performance of each company. In some cases, those differences can be quite marked. Choose what is best for you.
Coming Attractions
In this series on equities, we are going to examine a number of different subjects: Remember, it’s not so much a stock market as it is a market of stocks.
 |
