Learn how to select stocks for investment success and also how to best fit them into a well-diversified portfolio
Good chess players never “go for broke,” as the saying goes. Instead, they position their pieces so they can profit from the mistakes they expect from opponents who are less talented, less experienced or less patient.
Successful investors follow a similar approach in determining how to select stocks for investment success. The crucial difference is that they have no opponents who can be relied upon to make the wrong move. Instead, successful investors try to arrange their portfolios so that they can more or less automatically tap into the steady profits and long-term growth that inevitably come to well-established companies operating in relatively free and stable economies.
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Use these three tips and our three-part Successful Investor approach to help you discover how to select stocks for investment success
1) Be skeptical of investment advertising
A successful investment is one that provides long-term gains for its investors. And one key to making a successful investment is you need to disregard or at least downplay investment marketing messages.
This is especially true with new investment innovations. Investors need to be vigilant when looking at different types of investments because investment firms work hard on their marketing. They do this because it can attract customers and spur sales. But investment marketing can do damage when it makes an inherently risky investment look safe.
Building on this point here are Four other key successful investor tips to keep top of mind:
Don’t depend on luck to make money for you or to prevent losses.
Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
Don’t do anything stupid.
Win by not losing.
….and to profit in any market, use TSI Network’s three-part Successful Investor philosophy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
2) Remember to look at both growth and value picks to build the best stock portfolio
a. Know the difference between momentum stocks and growth stocks: It’s very easy to confuse growth stock picks with momentum stocks. Like growth stocks, momentum stocks often move up faster than the market averages. But momentum stocks attract a different kind of investor. Growth-stock investors are in it for the long haul, while momentum investors aim to profit from short-term trades. Momentum investors are particularly keen to jump in on a so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates.
b. Add value stocks as well: Most successful investors hold some growth stock picks and some value stocks at any given time, depending on where they discover the best opportunities.
Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Some technology stocks, for instance, start out as growth stocks and transition into value stocks.
Together, growth stocks and value stocks can form a winning combination. A growth stock can be a top performer while the company is expanding. However, a single quarter of bad earnings can send it into a deep, though often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.
3) Looking for dividends and hidden assets are among the first steps for investors learning how to select stocks for investment success
One Successful Investor tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well. Canadians who own shares in Canadian stocks that pay dividends will also benefit from the dividend tax credit.
If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.
What types of hidden assets do you look for in your investments?
What is the biggest mistake you’ve made in selecting stocks for your investment portfolio?
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