How to pick good stocks?

Huh?

 

Log in or Sign up to hide all adverts.

notice how low S&P 500 is at 2009, chances are people panicked and started selling and they most likely bought it at higher per share price.

 

Log in or Sign up to hide all adverts.

What's your point? Don't break rule #1?

 

Log in or Sign up to hide all adverts.

Stocks as a class of investments are generally a good investment especially for long term investors. If you want to be a stock picker, you need to start by being able to read financial statements (i.e. learn accounting). If you don’t know and understand profit and cash flow, and know the difference you have no business being a stock picker. The second thing you need to understand in is economics. You need to have a working knowledge of macro and micro economics.

And the third thing you need to understand is the concept of risk and how it applies to your potential investments. If securities are required to file with the US Security & Exchange Commission, that information is available online through Edgar.

http://www.sec.gov/edgar.shtml

Fourth, you need to understand your expenses including the tax consequences of your investment. No investment should be made solely based on tax consequences. But in order to assess the value of your investments, you need to understand your costs. Costs vary by the type of investment, account types and your geographic location.

Additionally, you need to be versed in the concept of time value of money and how it affects your particular investments. For example, if you are an investor in mortgage REITS you need to understand how your investment will be affected by changes in interest rates. Mortgage REITS use short term debt to finance long term investments (i.e. mortgages). That makes them very profitable when interest rates are stable, but very vulnerable to rising interest rates.

If you don’t have that knowledge and still want to invest in stocks, then you might want to consider investing in exchange traded funds (ETFs). ETFs allow you to invest in stock indexes. But you still need to have a grasp of economics in order to understand how changes in macro and micro economic environments will affect your particular investments.

http://en.wikipedia.org/wiki/Exchange-traded_fund

If you are concerned about inflation you may want to consider investing in Inflation Indexed Securities like Treasury Inflation Protected Securities (TIPS). TIPS are a more secure investment, so you don’t get the yield of higher risk investment products but you do get the inflation protection.

And finally, you need to have the courage of your convictions. You need to know when to hold them and you need to know when to fold them. You do not want to be the emotional investor who is always selling and buying in a panic. You need the knowledge, a strategy, courage and the ability to enact your strategy.

This quote probably sums it up best, “"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

Source: Letter to shareholders, 2004 – Warren Buffet

Read more: http://www.businessinsider.com/warren-buffett-quotes-2012-8?op=1#ixzz2Y0Vkx5Pq

The bottom line here is if you want to invest in stocks and do it well, you need to do your homework. Anything less is gambling, you may win and you will lose, but the odds are against you if you don't do your homework.

 

I am a hedge fund trader so my approach to the market is going to be very different than how most retail investors do and/or should approach it. I've never lost any money trading, primarily because most trades that I do go through a system of trades (a stop loss is a basic systems trade). I literally can know nothing about a company but can profit from it because I manage distributions of risk and factor out associations and correlations.

This can be replicated in a small scale (retail investor) but it may be very time intensive. If you use a system of trades over a long period of time, and manage your risk effectively, you should be alright. Note that I'm assuming that you have all of the background required--a basic understanding of economics and business and a profit maximizing outlook, basically everything that joepistole covered in this post.

I'll send you that PM.

 

Thank you. Very useful. Let me think about these points.

 

Well…there is a lot of oversimplification going on here. The idea I think you are trying to communicate is that industry expertise is of value to investors. It can help inform an investor when and what to invest in, and if that is what you are trying to say, I would agree. But buying shares just because you like the product, is not always a winning strategy. If you would have purchased GM shares before The Great Recession and held them, you would have lost everything. If you bought Facebook IPO shares you would have lost a third of your investment. It takes more than a good product in order for a company to be successful. And it can take more than a good company to make a good investment.

Yes it takes time to become a good investor, knowledge and a special temperament to be a good investor. There is no doubt about that. That is why most people use mutual funds. They pay someone else to do the hard work for them. But then you get into issues with mutual fund mechanics.

Well bad is relative. It depends on the economy you are referencing. For example, Greek, French and Spanish economies are not doing well, the US economy on the other than is not doing too badly. It went from shrinking at 10% and more with each passing month to growing at 4% in Q1 of 2010 and has since been putting along at about 2%. That is some significant growth.

The issue here is risk. All investments have risk. Risk is an often overlooked and poorly understood concept, but it is integral to any investment. Higher returns are associated with higher risks. Lower risk is associated with lower returns. Any investor should understand the risks and potential rewards of any investment, and in order to have that understanding they need to do all the things I referenced in my previous post.

Well it depends, with real estate it is all about location, what you intend to do with it, and how you finance it. In some locations it could make sense, in others not so much. If you intend to rent the property, there are significant risks in renting. If you want rental property you might be better off investing in a Real Estate Investment Trust which provides you of professional management and diversification. If you want to buy a personal residence, this might be a good time to buy. If you are going to finance a purchase or refinance real estate, now is probably a good time while interest rates are low.

This all goes back to that old risk-reward notion.

Again, it is all about location, intended use and how it is financed. If you have condo or apartment shares in Manhattan, New York or San Francisco, it could be a great investment, in a place like Kansas, maybe not so much. And association fees are not restricted to condos, shares, and townhomes. You can buy a nice single family home in an upscale neighborhood and be subject to a homeowners’ association and their fees and liabilities.


I think the best way for a novice to invest in real estate is through a real estate investment trust. With a real estate investment trust they get professional management and diversification.

Our friend might want to consider using an investment club to help get him started.

http://www.betterinvesting.org/Public/SingleTabs/clubs/default.htm