SELECTING STOCKS

- Capitalizing on your experience to help you choose investments

- Using your intuition to help pick stocks

- Setting criteria when analyzing a company’s stock

Practicing stock tracking and investing

Getting started as a do-it-yourselfer in investing in stocks is a challenge and maybe even a bit scary. This article helps you sort through the mountain of information confronting you by helping you set criteria for your stock selection. So that you don’t get lost in the research process, the following outlines my recommended process for research and ultimately selecting stocks.

1. Make sure you have a list of 50 to 100 stocks. You must settle on an investment strategy and write it down. Your investment strategy helps you concentrate on only certain kinds of stocks, based mainly on size and risk.

2. Do some preliminary screening, either manually or with assistance from a Web stock screener. Your resulting list of stocks may be as few as 25 or as many as 50.

3. Review your list and ask yourself which of the selected companies do you understand. About which of these companies can you make a fair and reasonable call about their future profitability? Make some cuts in your list as appropriate. 4

. Check out a few mutual funds whose investment goals match yours (aggressive growth, capital appreciation, and so on). Note carefully what stocks the better funds contain. Were any of these stocks on your list? Do some of the same stocks keep coming up that are not on your list? If so, add them to your list for further review.

5. Review your list again. Can you cut out 10 or 15 to get down to a more manageable number to work with? Do it if at all possible.

6. Take your list to the library or to the Web. Research the eight criteria that I describe later in this article for each stock on your list. Compare the results of your research. You may be able to drop as many as half the names on your list at this point.

7. One way or another, get your list down to no more than ten stocks as prime candidates for purchase.

8. Check the Web or the library for everything you can find about these stocks. Keep notes on anything that supports the future profitability for the company.

9. Bite the bullet and select one to three stocks. Either play the Paper Game (see later in this article) or actually buy them (see Chapter 6 for how to do this.) Your goal is to use the tools and research resources that I identify in this article to cut your list of potential stocks to invest in from 50 or so down to fewer than five candidates for actual purchase, possibly to only one for your first year’s investment.

Using Your Experience

Never buy a stock in a company or industry that you don’t understand. For example, say that you’ve heard or read that Internet stocks are going crazy and you want to get in before the big surge ends. Suppose that you don’t even have e-mail and don’t have a clue what a hyperlink is. Do you really think you’re qualified to be investing in Internet stocks? Before you jump on the bandwagon of Internet stocks (or any “hot stock” for that matter), develop some understanding of what the company’s product is, whether the company has any staying power, or whether an industry as a whole is compelling and has growth potential. A good place to find out about a company’s products and services is in its annual report. You can get a copy of any company’s annual report in a couple of ways. You can

- Call or write the company and ask for a copy of the most recent annual report

- Go to the company’s Web site and request or download the most recent annual report.

- Visit the Public Register’s Annual Reports Service Web site at www.prars.com. At this site, you can order printed copies of annual reports that will be mailed to you, or you may be able to view the annual reports online. Without a grasp of an industry as a whole, you’re investing blindly. Just because a stock with no earnings is being bid up by speculators hoping for quick profits is not a good reason to buy any stock.

The question that should be foremost in your mind whenever you review material about a company is whether the company will likely be increasingly profitable in the long run. The more you know about a company, its products, and its industry, the better you can attempt to answer this key question.

Using Your Intuition

Having experience or education in a particular technology or hot area of research isn’t always necessary to find good investment options. Often, basic familiarity is a good starting point for building knowledge through further research. You’re a consumer of different products each and every day. You know whether you like or trust a product. You know which restaurants, department stores, and banks you visit and which ones you avoid. You know the services you rely on, and the ones you don’t. Try this exercise:

1. Ask yourself what areas, or sectors, of economic activity you have some feel for as a consumer. Start with some obvious ones: food, clothing, transportation, housing, travel, health, entertainment, communications, and so on. For example, with regard to clothing, you read that XYZ Mart is now a stock market favorite and its stock is set to take off. You’ve shopped at XYZ Mart but did not enjoy the experience or the quality of goods at the store. As you consider buying the stock, take into account your experience with XYZ Mart as well as other retail department stores.

2. Make a list of companies whose products you believe are high quality and fairly priced the very things you look for in every purchase.

For example, you probably own a car or at least ride in one. You can select a few car manufacturers and add them to your potential investment list for further analysis.

3. Don’t forget to look at service industries, too. For example, you probably deal several times a week with a bank or two. What have your experiences been with various banks? Which ones do you hear or read good things about? Ask yourself the same questions about airlines, entertainment options, and insurance companies you’ve recently encountered. The bottom line: Don’t be afraid to rely on your own intuitions and experiences to help you determine which stocks to research and possibly purchase.