Here are five things I look for when picking a stock l Insightful Investing

By Jeffrey Moormeier | Aug 22, 2018

Every day at 2 p.m. on CNBC is a show called “Fast Money.” Right after that is Jim Cramer and “Mad Money.”

Maybe once or twice a year I watch these shows. They are entertaining. I really like Karen Fineman. I like her financial investing style.

Based on these shows I have never bought or sold a stock. There are simply too many ideas for me to process.

One thing they do really well is to help me evaluate the overall direction of the market, the macro picture. When things get really volatile I watch the show. I am looking for insight as it relates to the overall economy. This leads to my number rule when picking stocks.

The number one thing I look for when picking a stock is I want to be in the right sector of the market.

When I worked at Merrill Lynch there was a Hall of Fame Institutional Analyst named Bob Farrell. He retired.

He used to say that it was better to have the worst stock in the best industry than the best stock in the worst industry. He was what you would call a technical analyst.

Every week he would give us buy, sell or hold opinions on each basic sub-industry. Things like banks, technology, housing, and retail, and I learned to fly in formation with his sector evaluation and opinion. I shopped for stocks in the sectors where he was positive.

The second thing I do is consider stocks I know something about. My first year in the business (1988) was preceded by eight years in the U.S. Army as a computer programmer.

At that time I knew a lot about the computer industry. I also shopped at COSTCO and Nordstrom, and ate at McDonalds. And I live within walking distance of Boeing. These are all publicly traded companies.

In his book “One Up on Wall Street,” famed investment manager Peter Lynch laid out the case for normal people to pick stocks.

He said, “Buy what you know about.” This simple advice is actionable. There are hundreds of companies you come in contact with that are publicly traded companies.  Ask yourself the next time you are spending money, is this a public traded company?  Would I buy more of their product? And then consider investing. Why not?

Many birthdays ago I installed a dish satellite on my house. It was Dish Network. I bought the stock and their service on the same day. That was a good one.

Years later my son started a subscription to Netflix. Every week he would get a new movie in the mail. Another nice idea.

I remember when Starbucks went public. I must have had half a dozen female clients call me and want to invest their “mad money.”  Not one male client called me.

I didn’t get Starbucks either. Everybody misses from time to time.

Warren Buffet and Bill Gates have been friends for years, and yet Warren Buffet never owned Microsoft shares. He didn’t understand the software industry. He is on record as saying that he owned just 100 shares just so he could get the annual report.

 

Rule number three: I want to know how big a company is. When I say “how big” I mean this: If I were going to buy every share on the market at the current market price, how much money would I need?

For example, if I were going to buy every share of Apple, I would need about a trillion dollars. It is the first company in the history of the world to hit the trillion-dollar mark.

I also want to know what type of company it is. When I say “type of company,” I ask myself if it is a fast growth, slow growth or turnaround type of company.

Does it pay a dividend, or is all their profit going back into new products or expansion? This evaluation can get very complex. Personally I like to look for little companies that can become much bigger as opposed to Apple that is a trillion dollars in size.  This leads to rule number four.

Why am I buying it? There are thousands of reasons to buy or sell a stock, and there is no one right answer. The only reason that should matter to you is the one that matters to you.  I would submit that at least one of those reasons should be to make money.

Believe it or not, some people hold stocks they inherited and refuse to sell no matter what the stock price does.

And the final point: When would I sell? Under what conditions would I sell a stock?  There is no right or wrong answer here. One of my sell rules is that if it goes down within a certain range (20 to 25 percent depending on the stock), I sell. I can always buy it back.  But I do not like letting a little loss become a very big one.

Next month we will pick up here and talk about position sizing. This answers the question “how much?”

Once you determine the stock, the next question is how much should I invest?

Insightful Investing: if you want to own individual stocks, make sure to have a plan.

 

Jeffrey Moormeier of JG Moormeier Financial is a Mukilteo-based financial advisor affiliated with KMS Financial Services, an SEC registered investment adviser. His column does not represent the opinions of KMS Financial Services, nor is it an official prediction or recommendation of any kind. The opinions expressed in this column are generalizations. For advise catered to your specific financial circumstances, contact Jeff directly at jeff@jgmoormeier.com or 425-931-8898.

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