I Eat Bear

How to pick stocks, or even whether you should at all, depends on your age, financial status, and your tolerance.

Before I make it EASY for you, let's quickly dismiss those who need read no further. I have known people to invest until the day they died. That is probably a little excessive. Investments are for gains, usually to be recieved over time. If day trading is your thing, and you can afford the losses you may incur, well, have fun. It is a HIGHLY risky strategy that I DO NOT recommend, for MOST people. If you are already rich, and like to play in the market, have fun, just don't ruin it for the rest of us (largely by short selling, but if you have that kind of volume you can be a terror to a single stock). If you are already rich, take your toys, and play elsewhere. The safety of CD's, treasury's, muncipal bonds, etc will still allow your millions to grow.

The second group to dismiss is the TRULY economically distressed. If you live at poverty level, you need food and shelter, not a stock. A stock certificate is at best a not very tasty meal, and can be a very expensive one. Living under one is not going to be very rewarding either.

So, I am adressing the other 85% of the population now. We have removed the poor and the rich (hopefully). And, even this group is still widely diversified.

To get started, is maybe the hardest thing to do, and the most important thing that you do.
Typically, you have little to start with. That makes it doubly tough. Lots of choices, and most of them cost more than you have to make it worth while (at least for the better ones) So, the first lesson, is the cost of a trade. The price you pay for a stock is not the stock price times number of shares. It is stock price time the number of shares PLUS the brokerage fee for the transaction.

OK, my FIRST recommendation. If you have little to invest and know little to nothing about picking stocks, get into a fund, and NOT individual stocks. While you are in this fund, learn EVERYTHING you can about a FEW individual stocks you may be interested in. I do not address picking funds, but MSN has many decent writers on the subject, Fidelity Investments offers many good funds, and they are not that hard to find. Most come pre-rated for you. But, funds DO have problems. Pick a no-load fund if possible, and one that agrees with your values in life (I am agressive or conservative, I believe in "green" (ecology), or your belief in world economics (ie, China will do better or worse than the rest of the world).

Then, wait and watch. See how much your fund is costing you? Over time it will cost you even more. But did it cost much to learn this? Not really. But, the longer it goes on, the more it will cost you. Oh, you may be making a profit (hopefully, but not guaranteed), but you could make more FASTER, by doing it yourself.

My SECOND recomendation, should not be considered until you have applied the excercise of my first recommendation. That is, you have learned SOMETHING, about a few stocks. Ok, I am going to tell you UP FRONT, you just paid too much attention to media HYPE. Virtually everyone does. But, it is still time to close out your fund, and enter the stock market, as an investor. Picking stocks is about LONG TERM investments. I dismissed day-traders in my first oaragraph or so.

My THIRD recomendation, is pick well. You will have winners and losers. Everyone does. Do not be discouraged by losers. Learn from them. In the end, if you picked all winners, you are lucky, but learned little. Most of you will learn, and in the end, that may well far exceed the results of one who never picked a loser.

My FOURTH recommendation. Diversify. If you start with as little as 5-10 K, don't put all eggs in one basket. You may not need many, but you need a few. Watch out for your eyes bigger than your wallet. Yes, your best investment may be that $150 stock, on 20 shares, or it could be 500 shares of a $2 stock. Risk/reward. A lot of risk in that $2 stock, almost none in that $150 stock. Maybe, some of each, in a little less quantity? Keep in mind that trading cost I mentioned earlier. And, now, you are a BUY AND HOLD investor. Until you hit about 25K, you don't have much choice about that.

My FIFTH recomendation deals with VOLITILTY and DIVIDENDS. Gains in the market are a percentage game. I cannot tell you which is better. A highly volatile stock may have swings of 10 or more percent in a single day. A decent dividend stock may give a dividend of 6% or more in a year. Both could go up or down in stock price in a given year. I can say, the trend in the PAST has been the dividend will pay off better in the long run. What the future holds, is almost anyone's guess (but I do NOT put my faith in Obama's insight, or lack thereof).It is about getting the highest perecentage return on your money (and you now control that).

My SIXTH recomendation, is let your money work for YOU. In time, two things should happen.
Some of your stocks will split. No, don't jump for joy here, because you did not make a dime yet. But, it does offer you an opportunity (I sugeest you take it), and sell some stocks to get into others (see rule 4 - Diversify). The second thing is you should see some share price appreciation. When you see enough growth in share price appreciation to buy15 additional shares from profit from shares , the trigger is set. Consider trade costs again, but 1/2 of those gains should go to additional shares of that company, or another investment (yes, that diversification thing again).

Notice how in all of this I never mentioned a single stock by name? It is a formula, and it works.
You will be beating any index or fund on the planet, if you just keep working at it. There is just ONE more thing to mention, and this downturn, does make it well worth mentioning. There is a time to buy and hold, and there is a time to sell.

I, and you will make mistakes. I did not sell through the last downturn (before it). Had I done so, and had I had a GREAT crystal ball, I would have about 5 times what I do now. Trust me, most of you will not have a crystal ball that works either. Is all lost? No, I applied the rules. Shares will increase in value, and dividends will hold me through tough times.

I will beat the market,, SOUNDLY. Not every year, but most of them.

I wish I could give you one more piece of advice, but I would be wasting my breathe. Petition against computerized trade (a well written program will create a monopoly for the owner only, and anyone that has one, is and will be violating social laws, if not SEC laws) There is no good OWNER of such an animal. Petetion against short selling, allowing for certain commodities that need to. Petition against funds (yes, how you got started), because they RAPE investors over the long term. Or, maybe, just get fees, so they are not percentage based, and reasonable? And yes, funds get too much volume, so they truly CAN influence stock prices.

So, your friends are your enemies. That is the REAL rule of investments. And, let's suppose you do win at stocks over time. You will need to go back and look at FUNDS, because they are more secure? ( I gagged about then, but OK) It is part of a BALANCED portfolio, and part of diversification.

It is a process. You may not need every step. You will need some of them.

Good Luck.

Comments: View Comments |  Thursday July 30, 2009