How to Pick Stocks for Your Portfolio
Picking stocks to invest in can be a confusing and daunting process. The stock market can be intimidating and puzzling due to all its uncertainties. From my extensive experience with the market, there are certain things you should know that will help you invest in the best stocks. These will help eliminate some of the doubt and ambiguity when you pick stocks for your portfolio.
Managing Your Assets
In order to invest for retirement, I firmly believe that most of your assets should be in Exchange Traded Funds. They allow you to diversify your portfolio at a very low cost. Most actively managed mutual funds tend to underperform index funds over long market cycle; but it does not mean that you should not own any individual stocks.
I believe it’s perfectly fine to buy shares of companies that offer products or services that you truly believe in. One of the first books I read on investing is “One Up On Wall Street: How to Use What You Already Know To Make Money In the Market” by Peter Lynch. Lynch was the legendary manager of Fidelity’s Magellan Fund, which at one point was the largest mutual fund in the world.
I have read many books on investments over the years, but I always come back to the simple advice Lynch gave. He believes that the average investor can invest in great companies by observing business trends and identifying products or services in high demand.
Investing in What You Know
Just imagine if you bought shares of Amazon or Costco when you first became a customer! If you are a fan of what they have to offer, there is a good chance that there are many other people just like you. For the average investor, I think it’s very important to invest in what you know and what interests you.
Resist the temptation to listen to stock tips from pundits on CNBC. It might just make things even more perplexing for you. There are many Wall Street research analysts that attend trade shows, participate in quarterly earnings calls, build financial models and talk to management; yet, many of them come away with very different or contrasting opinions on a particular stock. Often times, you will see one analyst upgrade a stock while at the same time it is downgraded by another analyst.
So I recommend the average person who wants to venture into buying individual stocks, to own shares of companies that they understand and believe in. Take some time to understand how the business environment is evolving and how these companies make money.
Invest in financially healthy companies that have a dominant position in an industry with a positive long term growth outlook. Does the company have a competitive advantage due to its number of locations, prime retail shelf space, technological innovation, pricing power or the lack of viable alternatives?
Here is a list of some of the core stock holdings in my portfolio:
- Alphabet (GOOG/GOOGL) – Alphabet is not just about the Google search engine. I can’t think of a day that goes by without watching something on YouTube. The company is a leader in artificial intelligence, self-driving cars, and cloud services.
- Amazon (AMZN) – The breadth and scale of Amazon is nothing short of phenomenal. I get a package delivered to my doorstep from Amazon probably once a week. The company will dominate e-commerce for the foreseeable future. Amazon is a dominant player in smart home technologies, Interest of Things, cloud services and artificial intelligence.
- Apple (APPL) – If only I bought the stock when I got my first iPod! Apple has a loyal installed user base around the world. It will be able to increase revenues and profits by offering more services over time.
- Constellation Brands (STZ) – If you like an ice cold Corona every once in a while, then you are speaking my language. The company has a dominant position in beer, wine and liquor. STZ has a significant investment in cannabis and will benefit if weed becomes more mainstream.
- Costco (COST) – I probably go to my local Costco once a week. Their pricing is always competitive and product quality is consistently superb.
- Home Depot (HD) – Being the largest home improvement retailer has many benefits. It’s always helpful getting advice from their associates before I make a purchase.
- McDonald’s (MCD) – My kids just can’t get enough of it! McDonald’s is leveraging technology to improve service and profitability. You know what you are getting whenever you visit a McDonald’s anywhere in the world.
- Visa (V) – Visa is the largest credit card provider in the world. It’s my primary card and I try to put everything I buy on the card. The company will benefit from the future of cashless transactions and mobile digital payments.
- The Walt Disney Company (DIS) – Disney is the king on providing quality family entertainment. Disney theme parks and resorts always attract a crowd. I am eagerly waiting for its direct to consumer streaming service, Disney+, launching in late 2019.
- Waste Management (WM) – It doesn’t get much more unglamorous than picking up trash, but somebody’s gotta do it! As the largest provider of waste management services, WM has economies of scale and a stable growth outlook.
Individual Stocks vs ETFs
It’s important to understand that buying individual stocks carry more risks than ETFs. If looking at stock tickers and price movements on a day to day basis stresses you out, then maybe owning individual stocks is not for you.
I would not buy so many different stocks that I can’t keep track of them all. I recommend having a stock portfolio of only 10-20 individual positions. Also, I recommend allocating around 20-30% of your overall portfolio to individual stocks with the remainder invested in diversified ETFs.
It’s always a good idea to buy half a position at first, and then see if you want to buy more. Create a list of companies that fit your screening criteria. Track the stock prices and news headlines to build your portfolio over time. Avoid the urge to trade in and out of stocks. It’s very difficult to time the market swings and you will likely cause yourself many sleepless nights.
Remember: Buying stocks based on hot tips or day trading stocks are clear signs of speculating. Good investors don’t speculate! Buy quality companies with leading market positions in growing industry sectors. If you do your homework and don’t mind the volatility, stock investing can be both rewarding and profitable.