How I pick stocks
I got this question the other day —
How do I pick stocks?
So this depends on what kind of stock.
If I am looking for a general fund, I go through the list of index stocks, find a low to reasonable management expense ratio (MER) and buy it.
Now if it is just a stock (dividend or not), I also look in general at:
I sort by how big they are by market capitalization (the smaller they are, the riskier they are).
I look at the industry — some, I won’t touch if I don’t believe in them or they are not in line with my values.
I look at their ratios — earnings per share, beta, price to earnings ratio.. I may not remember all of what they mean but I just look it up and absorb as much as I can.
I set up Google Alerts and read about anything happening.
Looking at a shipping company? Google Alert then and read whatever comes up.
Also, time to start learning about what makes one profitable and then seeing what the market news and trends are worldwide.
Is China scaling down demand? This means less exports and imports, and less need for a shipping company.
I just read and READ, all analyst reports, pundit musings, news flashes… anything around it.
Who is running this? What’s their background and experience?
Are they quick to see things and make the corrections required?
This is much harder to figure out but if you read company reports and transcripts from earning calls, you can learn a lot by the way they answer questions even if you don’t know about that industry, per se.
I like it when their answers are NOT VAGUE and have facts in them about what they see coming down the pipeline and what they are going to do about it.
Sometimes, the future is murky and unpredictable (Effing oil prices and oversupply… Trump getting elected…) and they cannot predict everything but they can make educated guesses and do something to hedge their bets.
That’s what I want to see.
And to understand what they are saying, you need to learn about their industry and do some research. Hence why I don’t love branching out to too many areas because my brain can only hold so much.
The bonus is that my job as a consultant takes me into various industries and I pick up a lot of info like a sponge as I work, which helps me a lot.
Dividend stock specifics
If I am looking for a dividend stock specifically, I make a huge list of dividend paying stocks and then list their industries and narrow them down.
In addition to the above research, when it is a dividend stock, I want to know:
Anything under 2% right now is not in my strategy because I’m trying to take a bit more risk to grow my capital faster, and then I can look at taking a smaller but more stable yield
How long have they paid it? Has it increased steadily over the years? How many years?
After about a month of this, I can cross of my short list of stocks sometimes within a day, or it might take me 3 weeks before I decide: nah, too risky.
So.. that’s how I pick a stock. And I build a position in those 2-3 stocks I have chosen after careful research, and just plow money into it until I feel like it is enough versus the risk I am taking.
Riskier stocks, means I put in less money in total. Like $20,000.
More stable stocks, I feel comfortable putting in double the capital, up to $50,000.
And that’s generally how I do it.