Investing in high quality stocks rewards you when you have the discipline to keep only the stocks in which you have the most confidence.
Over the course of the average month or year, we look at a great many stocks for our newsletters, our Inner Circle Membership group and our wealth management clients.
Of all the companies we look at on the stock market, only a tiny minority are considered high quality stocks by TSI Network standards. There are several very good reasons why we are so particular with our stock choices.
Selling stocks is easier than building a business
First, high quality stocks that are attractive enough for us to want to recommend them as buys are always a small minority. After all, it’s relatively easy to set up a company and sell stock in it to the public. All it takes is some capital, legal fees, input by stock-promotion consultants and cooperation from a handful of brokers.
Promoters can launch a new company while it’s still living off that initial capital. (They can then add to the capital by selling stock in the company to the public.) Meanwhile, they can maintain investor interest with a string of press releases and other public-relations efforts.
Start-ups and new issues are always highly risky. But even long-established companies can fail to thrive for years, while maintaining a seemingly healthy glow. As their business gradually loses momentum, they expose you to an ever-growing risk of loss.
In contrast, it’s much harder to set up and manage a business, and make it thrive over long periods. That’s why only a small minority of stocks are ever really suitable for serious, long-term investment.
Why some high quality stocks aren’t buys
In the initial phase of our research, we eliminate high-risk stocks and those with limited prospects for profit. This still leaves us with many stocks to choose from, however. Then we have to watch out for well-established stocks that look attractive on the surface, but lack the investment quality profit potential that we seek.
Even if a stock looks like it might thrive, we may still refrain from recommending it for a number of reasons. Our research may lead us to conclude that it presents too much risk of heavy loss if it fails to prosper. Or we may feel that stocks we already recommend offer better alternatives.
Or we may simply prefer to hold off on a promising stock because we feel it has limited near-term potential. This can happen because it has been overhyped in the broker/public relations limelight, for instance. Stocks that fall into this limelight can attract exaggerated expectations—which means any downturn can be swift and brutal.
The Power of Dividends
Dividends are more important than ever. Today’s low interest rates prompt more investors to look to dividend stocks for income. And dividend stocks are a source of strength in volatile markets, so many companies are raising their payouts. This is the time to build more strength into your portfolio with Pat McKeough’s “How High Dividend Stocks Can Supercharge Your Income Investing.”
In many cases, we watch the progress of these stocks-we-like-a-little. We may recommend buying them months or even years later, but only after seeing favourable developments and signs of progress.
This painstaking approach is a lot of work, but it pays off. It has led us to recommend many stocks that subsequently surged in price. For that matter, the high quality stocks that we do recommend include a remarkable number of stocks that have been taken over at high prices that gave our readers huge profits. In addition, this approach cuts risk. It is the best way to stay out of a lot of duds, not to mention total losers.
What is a blue chip stock?
The New York Stock Exchange defines a blue chip as high quality stock in a company with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. The problem is that “reputation” plays a key role in the definition.
Many companies acquire a blue-chip reputation by displaying the qualities that the definition suggests. Others get it through a strong public relations effort or by being in the right industry or business situation at the right time and place. Regardless of how it got there, this blue-chip label sticks with companies long after they quit living up to it.
You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label.
We continue to believe that investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.
These are companies that have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.
Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.
Do you have a method for picking high quality stocks? Share it with readers in the comment section below.
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