Picking a stock wisely is one of the most intimidating things one could do. No one is born with the knack of choosing the right stock for themselves. Out of the blue, you might find a seemingly good stock, but could it really be the best one? After you choose it, is there going back without facing any of the consequences? You could never know.
Losing money is a part and parcel of the market but though that is true, you could not give in to it wholly. The stock market is far from the guessing game, and you need to choose wisely, which involves analysis, strategy, and some more sound investing principles. Here are
some ways that you can give a shot to say to yourself that you did well. It is hard, with so many options, to select the right stock for you. It can definitely be a challenge for the average investor. As a beginner, here are some rules that could get you through this challenging phase of investments.
Rule #1: Take a Wild Trip in the Markets you Know
Invest in stocks that have an easy-to-understand business. If you know your whereabouts in the industry or business that you choose to buy your stocks in, you could make a great deal out of it. This is also one of the biggest rules Warren Buffet has been following in the past. If you have enough knowledge about a company then you will have a competitive advantage in the investing universe. Learning about companies and markets can be done easily with so much online content in today’s world; alternatively, you can also check major indices such as Nifty and Sensex today to get an idea of top well-established companies.
Rule #2: Keep Emerging Brands on Top of the List
Invest solely in best-in-class firms. This covers firms with exceptionally well-established brands as well as those with extremely strong emerging brands. Keep in mind that certain industries have the notion of “brand” and signify less than in others. Branding, for example, is less important in the mining industry than it is in retail. Overall, it is preferable to stay with some well-known, and well-liked brands, as well as underweight areas where these stocks are difficult to discover or do not exist. When investing in less “brand conscious” industries, however, stay with “best in breed” firms and follow the rest of the strategy outlined above. Buffett has spoken extensively on the concept of brands acting as “ponds” surrounding enterprises.
Rule #3: History Does Play its Role
While the classic investment maxim “past performance does not guarantee future success” is correct – and widely repeated – it is also deceptive. Stock must be a strong prior performance in order to fulfil the criteria of this investing approach. It doesn’t have to be up
in the previous year or two, but the long-term chart has to be attractive. Do you want to invest in a company, brand, and management team that has destroyed shareholder value in the long run, or one that has made shareholders rich? The solution is self-evident.
Simply put, acquire stocks that meet the required criteria and have done well over a long period of time. This shouldn’t be an issue if you’re looking for both well-established names and new ones. Most firms that meet this description have a strong track record of producing shareholder value over time.
Rule #4: Mid-Caps and Large Caps Could be your Good Choice
Invest in mid-and large-cap firms while avoiding small-cap names. This isn’t an edict; there are some outstanding tiny firms that would fit within this investment framework; nevertheless, make sure that the majority of your selections follow this guidance. It comes from the Benjamin Graham and Warren Buffett schools, as are many of the suggestions offered here. Furthermore, if you invest in “best of breed” firms and prominent brands, you should have no trouble adhering to this guideline.
Rule #5: Focus on Dividends
Try focusing on the companies that would give you a dividend. As a beginner, you would want something at your end to support you every month. It is not necessarily mandatory for you to have a stock with dividends, and for instance, Apple had just launched a dividend. All of your stocks do not have to pay you a dividend but make sure most of your portfolio does carry along with this feature.
Rule #6: Identify Companies that Hold an Advantage
A competitive advantage is a company’s capacity to outperform its competitors by exhibiting attractive characteristics that keep customers loyal to its products or services for an extended period of time. Competitive advantages are sometimes referred to as “broad moats” because they protect a company’s market share from rivals.
Most individuals understand “intuitively” that businesses have competitive advantages, even if they don’t know what these advantages are named. Competitive advantages often fall into one of four categories:
Network Effects – It is when the company’s product or service has become even more valuable as it starts to gather more users.
Cost Advantage – It is when a company offers good quality products at a lower price, which makes their price better than their competitors.
High Switching Costs – It is when a company can also have an advantage over others for the fact that consumers do not want to pay the cost to switch to alternatives.
Intangible Assets – It is when a company with a household name or strong brand has intangible value.
Rule #7: Where Would the Stock Stand in your Portfolio
After you’ve chosen firms you understand (with strong competitive advantages), evaluated its pricing using important indicators, and studied historical returns, it’s time to make the last decision: whether the stock belongs in your portfolio. Remember that a well-balanced portfolio contains companies from a variety of industries (financial, technology, and energy), each with a unique value proposition and market size. If the stock you’re considering fills a gap, expands your exposure, or hedges against market volatility, it’s usually a good investment. If your portfolio consists exclusively comprised of one type of company (say, technology), and the stock you’re contemplating isn’t much different, you may wish to diversify into other areas.
But doesn’t it go against the entire “invest in what you understand” principle? Yes, a little. Keep in mind, however, that the most successful stock investors never stop learning. Sure, you start with what you know. However, as you gain experience in investing, you may apply what you’ve learned to different industries. That is, in essence, how you construct a portfolio of well-chosen companies.
Final Takeaway
The story behind the stock you pick is one of the most important aspects of all. After you have gotten through with these rules you will finally end up with a single investment prospect of a list of ten or more companies that you can easily filter from through what makes it the most suitable for you, that is, your investment, your returns, your risk appetite and much more.
