How we pick stocks.

One of the most important decisions in individual stock investing is to avoid making a mistake.  Make that a BIG mistake, one where the company you bought is actually going in the wrong direction and the stock goes into free fall. Risk happens fast, very fast, so fast almost all investors can not adjust quick enough to avoid losing lots of capital.  In trying to catch a falling stock you render a lot of blood capital in the effort before finally finding a way to rid yourself of the stock. You might not get rich quick, but you sure will not get poor fast.  Trust me getting rich slow is a whole lot more fun than getting poor fast. 

Now the key here again is to avoid completely the falling stock and loss of capital and there are some ways to reduce significantly your risk.  Here are some points to keep in mind. 

One, pick stocks with dividends, strong sustainable pay outs, that at some point buffer bad economics and bad economies. Seriously if the stock has a sustainable 4% dividend there comes a point where the stock becomes yield bait to those seeking yield and those buyers come into the market and buy shares shoring up the stock price. Most stocks like these do not have 20% price collapses. 

Two, pick stocks with large capitalization,  We much prefer $200 billion plus which is about 25 stocks, but will look for values down in the $50 billion plus category selectively.  A large capitalization stock will not fall as fast either since they most likely have the financial heft to sustain bad corporate decisions, bad economies, and frankly can use their government connections to help with regulatory pressures.  Take a look at the 52 week highs and lows and you will see little movement. 

Three, we consider this trait the most important and that is a low PE.  In fact we look for stocks with single digit PE's which tell us there is the possibility it is undervalued and ripe for upward movement.  We will buy stocks into the lower teen's PE but almost never above that point of value. Of course one needs to do their due diligence here to make sure there is not a compelling reason for the low valuation.  But when dealing with most large capitalization stocks with low PE's your chances of it going down is much less and your chances of higher price good. 

Four, keep a eye out for stocks that fit the first three criteria that are selling off or have sold off significantly into a value point. We just love seeing stocks fitting the first three criteria getting sold off or a whole category getting sold off.  Recently oil stocks got killed over a two days period and values popped up on our radar from the overselling.  Panic breeds opportunity.  Keep an eye open for chances like these and buy at either the sharp early sell off or wait for a day and see if the stock stabilizes if it sells down to a stable price in a slower manner.  Step in and buy and most times you will get your money in the green within the week or less. 

Follow these criteria and you will find yourself most times a successful investor in individual stocks.  Never ever fall in love with a stock, you date them you do not marry them.  Does not mean you can not hold them for long periods, it means if the value has passed you sell and move on.  There are better values somewhere else or the money is best in cash. Do not let tax issues decide you selling point as a profit taxed is a profit gained and that is much better than a profit lost.  Lastly do not try to make the last dollar, as in you will keep this stock past the point of fair value as the risk increases and smart investors let someone else risk making the last dollars in a stock.