Friday, June 3, 2011

How do you know what to buy?

I admire investors who adhere to strict criteria for their investments. Value investors who set out parameters on price-to-book-value and price-to-earnings ratios and don't deviate. Growth investors who do the same with revenues and earnings.
I've never clung to any strict guidelines or any single methodology.
And unlike the manager of a "value" mutual fund, I don't think lay investors like you or I have to.
It seems most important to simply be opportunistic.
Some of the picks in my portfolio below came from Motley Fool's Stock Advisor newsletter. Teradata, my biggest gainer at 191 % to date, falls into this category. I'd never heard of the company until I read about in SA two years back.
Some I researched after reading an article in Money or Barron's, or even hearing Jim Cramer call "Buy! Buy! Buy!" Gilead turned up in a bullish article, and I just read another this weekend.
Others were found using stock screeners, looking for solid growth and earnings and a low price-to-earnings, then put through some further research.
National Presto, the maker of kitchen gadets, bullets and diapers, falls into that catergory.

Confidence is key
Sometimes, the stars line up. I liked Ford's turnaround story. And soon after I started watching the stock, it won the recomendations of both SA and Cramer.
Hasbro had risen to the top of my buy list when it showed up as an SA pick.
I like it when that happens. You should be confident when you buy a stock, and nothing instills it better than seeing people smarter than you thinking along the same lines.

Diversify your sources
Over my time investing on my own, I've found it crucial to keep myself exposed to a variety of sources. When people considering stock investing ask, I advise they do the same.
  • Read financial publications.
  • Frequent sites like the Motley Fool that offer insight and fun reading to make things easier. This should be fun as well as rewarding.
  • Get yourself some knowledge on fundamentals. Stock Investing for Dummies is a great starter reference.
  • Learn your way around stock screeners. Every financial website seems to have them now. They are a great tool that the web has put in the hands of every investor. 
  • And yes, watch Jim Cramer. He may come off wacky, but there are lessons in his edu-tainment, as well as continual nagging reminders. Diversify. Research. Don't let pride get in your way of making money. They're all there, just tucked in between "Booyahs!"

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