An Intro to How I Select Stocks

28 Mar 2015 13:57

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How to select and buy a stock is a tough process and for me it was something I had to work hard at before I settled down with a method that works for me. Jumping to the end solution, I do not buy a stock until I have done a complete and thorough analysis. The effort of doing this is not measured in minutes but in days.

Because of the effort put into a detailed analysis there is no way to be on top of every single company. Instead, I have split up my selection approach into four steps. I will save the details of the steps for future posts but here is the overall approach:

Step 1. The Initial Stock Screen - This is nothing more than plugging in my favorite financial ratios and key financials into a stock screening tool offered on many financial websites or brokers. I call these potential buys.

Step 2. The Watch List - Once I have an initial list of potential stocks I weed the list down a bit further by plugging my preferred valuation calculations. Anything that does not get within 10% of my calculation gets dropped from the list. For the remaining candidates I establish a buy price range that represents an opportunity to buy and continue to monitor. If a stock price falls into the price range I move on to Step 3.

Step 3. The Scrub - Now it is time to break out the calculators, spreadsheets, and web searches. The most powerful asset to start this process is the annual report. From the annual report you can analyze and trend the financial statements but it doesn’t stop there. The annual report also gives insights to risks, product positioning, and financial notes. Next is to perform a compare/contrast to major competitors. For example, if revenues are decreasing and the competition’s is rising then there may be a concern that the competition is winning (or stealing) customers from the business you are analyzing.

Step 4. Rinse and Repeat - How often do I perform steps 1-3? Once a month regularly! And steps 1-3 are not limited to new purchases. I also use the process for analyzing my existing portfolio positions to ensure nothing has changed.

Is this successful for me? Absolutely, I now have the discipline to follow these steps month in and month out. Other investors may or may not agree with my approach and that is fine but the one trait that all investors should have is patience and discipline to execute their method for stock selection.

I can trace back every single stock loss I ever had (and there were quite a few!) to only performing steps 1 and 2 and not following up with the last two steps. There was no one to blame for the losses except myself. It was my past laziness that cost thousands of dollars! Hopefully my hard learned lesson pays off for a new investor and they start off disciplined with managing their financial investments.

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