Why you shouldn't pick your stocks or pay someone else to pick them either. But, if you have to pick them, then do this.
Everyone, including myself, wants to get rich. If anybody tells you otherwise then they are lying to you.
In today's world there are many promises to getting rich that are being thrown out there that require little work and maximum pay-out. For example: create a killer app and get paid (Flappy Birds) or write a foodie blog and get tons of ad revenue. If you have ever heard the old adage if it is too good to be true, then it probably is. Well, these are the words to live by.
If you choose to create an app or write a blog, it should be because you have an idea or skill that may be beneficial and desirable to others. If you are doing it solely for quick money then you will probably flame out.
This idea of getting rich quick is applicable to any field, and the stock market is not immune to this notion. The idea of getting rich quick by hitting the right stocks is almost downright impossible. If people tell you otherwise and suggest that you should invest your money in this manner, then they do not care about you, and could care less if you end up in the poor house. If they can do it, good for them, then they have the Midas touch. But, you should not take that risk with your hard earn money.
The best example of why you should not be stock picking is by comparing the performance of actively managed funds against that of passively managed ones.
According to Market Watch, they have discovered that 1 out of 20 actively managed domestic funds beat out index funds. That is abysmal!!
In the category that had the highest success rates for actively managed funds, global equity, 83.05% of funds performed worse than the benchmark. In what sport could you miss 83% of the time and get paid as well as these managers do??
Check out the article below:
To put this in lay man's terms, these are well-educated and trained professionals who are picking stocks for these managed funds as their day jobs and they can't even beat out the index. What makes you think you can?
In my opinion, the safest route for you to allocate your money is into an index fund. This way you won't have to worry about what industries are hot, what companies are booming, because you will own them all.
But, if you are insistent on trying to become the next Warren Buffet, let me share some of the advice given by Benjamin Graham (Warren's former professor and father of value investing) on selecting stocks.
1) Practice, Practice, Practice. Before you start investing in companies with you hard earned cash, try doing some simulations and track your progress to see how good you are at selecting stocks. Morningstar.com; Finance.Yahoo.com; as well as others sites have portfolio trackers that you can setup.
2) Review the list of the new 52-week lows in the Wall Street Journal or Market Week. This is the old concept of buy low and sell high.
3) Review the Business Segments footnotes in the company's annual report. Analyze each division's earnings of the company separately. Determine the company's earnings and value. If the market price is around 60% of its value than buy, if not then you should probably avoid it.
4) In the company's annual reports see who heads the company and each division. If there is high turnover then things may be tumultuous and a sign that you should stay away. If the managers speak more about the stock price instead of the business plan, then stay away. If the managers pay themselves large jackpot salaries, bonuses, and options, then you should stay away.
If the managers speak about realistic goals, and are consistent in accomplishing them and staying true to their word, then that is a good sign. If the company is allocating capital wisely, and using the capital to build the business from within, then that is a good sign.
5) Find leading professional fund managers that own similar stocks to you. Follow their funds and see which stocks they own and intend to purchase. Make a point to learn from them. Typically these people have a disciplined approach to investing that you can incorporate into your own.
6) If there are only a few owners of a company and they own a majority of the company this could be a risky buy. If these owners decide to cash out their shares, it could leave you in a less than desirable situation. Make sure to research who owns the company and how much each major stakeholder holds.
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