If you are just starting out with the stock market and investing, things can be overwhelming. At least when I started I was. This is very normal when beginning anything in life.
The key to success in investing is to keep it simple.
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Investing – How to Pick Stocks
If you are brand new to investing, I’d suggest you start out like I did, with index funds. This way you will get your feet wet, but have a lot less risk than owning a single stock. My first investment in the market was an index fund tracking U.S. stocks. If I had to to do it all over again, I wouldn’t change a thing.
Before you learn how to pick stocks, learn how to pick investments.
Now, before you begin investing – make sure you have an emergency fund, first. The emergency fund is the foundation of personal finance.
Since this post is about how to pick stocks, let me go over a few things.
First, this is what I do for a living. So, understand that this is not advice, but rather the things I’ve learned over many years of trial and error. I am co-founder of Mapsignals and our mission is to find outlier stocks…and boy do we!
Second, this is my passion. I am constantly looking at data and have found a few things to be true…well, I believe them to be true!
Lastly, as with anything, you should always invest according to your risk tolerance AND consult a professional before dipping your toes into the market or stocks.
The Stock Market Over the Years
Have a look at what the stock market has done over many decades. Do you see a trend? You should notice that the market (Dow Jones Industrial Average) tends to go higher over the long-term.
Now, there are many reasons why the markets tend to go higher over time, but we aren’t going to dwell on those ideas. The simple takeaway here is that stocks tend to go up over time.
Of course all stocks don’t go up over decades…just the best stocks. The DJIA is simply a basket of 30 well-known companies that have rich histories of strong fundamentals and performance. Many of the names in the index you’ll probably recognize.
As of today, some of the companies in the Dow Jones Industrial Average include: Apple Inc. (AAPL), Exxon Mobil Corp. (XOM), Coca-Cola, Co. (KO), and Verizon Communications, Inc. (VZ). Obviously, the companies that make it into this index are real companies…none of these are speculative in nature.
Now that we know that the market tends to go higher over the long-term, the other realization is that only great companies last for years and years. Those are the companies you want to be on the lookout for when making an investment.
We aren’t looking for a grand-slam quick buck, rather we are wanting a steady performer. We won’t always win at picking investments, but if we use prudent principles, on average, we’ll have better odds of success.
Stocks Are Nothing More Than Shares of Companies
When you buy shares of a stock, you actually own a small sliver of the company. Since there are thousands of companies to choose from, shouldn’t you try and find amazing companies to own? But, of course!
This is where I want to share a few things I’ve learned over the years that I’d like to include here. My first stock investment lost nearly 99% of its value! That’s right, $1 ended up being worth $.01.
My misstep was I ended up buying shares of a company that was all hype. The company literally made no money and I was sucked into buying it because of chat rooms …of all places! The people posting to the boards said it was a “great investment.” I was new to investing, so it had to be true, right? WRONG.
Now let me say something, experiencing failure was a great way to learn. All investors should expect to lose from time to time…it’s part of the game. This “failure” turned out to be something that changed my life, because it opened my eyes to the possibilities. If stocks can lose value, they certainly can gain value, too.
Be Choosy With Stocks
You work hard for your money, so why not try and pick smart investments? Great investments tend to be companies that make money. Said another way, they tend to make profits.
If we think about many of the greatest investors out there (think Warren Buffett), they all focus on companies they believe will grow and spin-off profits.
They learned how to pick stocks over many years of trial and error. You should try and do the same thing.
When constructing a portfolio of stocks, try and look for companies that have a long history of success in growing revenues and earnings. Take time and investigate. Think long-term. Looking at the chart above you can see that there were periods of down markets. This is going to happen from time to time. You just have to keep focused and repeat this process over and over. As they like to say, “Rome wasn’t built overnight.”
Remember, the markets have a way of humbling all of us. What looks like a great company one day can look the exact opposite in a year and vice versa. Always diversify and invest in steady-eddy companies…those that are consistent. Keep it simple. There is a reason certain companies stick around for many many years. They must be doing something right.
-PFkid