A Layman’s Guide To Picking Stocks
For a lot of people, the stock market is a big black hole and stocks are nothing but worthless pieces of speculative paper. As I’ve discussed under Stocks 101, this is of course not true. Stocks represent ownership of a company – a claim on the assets of the company and a right to share in its profits.
We’ve also discussed how stock prices rise and fall and what influence these fluctuations. In this article, we will discuss how to pick stocks for your investment.
For me, Rule #1 is “Never invest in the stock of a company whose products you’d never buy.” Only invest in companies whose products you believe in. This is a personal opinion, I’m not sure if you’d read this rule elsewhere. But I believe that investing in the stock of a company whose products you consume creates a beneficial investment cycle. Consuming the products of the company you invest in improves their financial health, which enhances the public perception
of the company and enhances the stock price. For example, why will you buy stocks of GMA Network, Inc. if you’re a die-hard Kapamilya? Most of a broadcasting network’s earnings come from advertising, whose rates are determined by their ratings or audience shares. If you’re not contributing to GMA’s audience shares, it doesn’t also contribute to GMA’s better financial performance, which will be reflected on GMA’s stock performance.
There two main methods that stock analysts use to analyze stocks: technical analysis and fundamental analysis. Technical analysis refers to the study of the movement of the stock price over a certain period of time and making recommendations based on the trends gathered from the observations on the price movements.Fundamental analysis is the analysis of the financial fundamentals of the company, assessing it financial health and determining how these fundamentals will influence future stock prices and dividends.
No analysis is better than the other; in fact, I believe that both methods are necessary in making very good stock picks.
Another thing is for sure: there are a lot of gold mines in the stock market. Striking the gold pot does not mean being limited to the same stocks that everyone else is investing in, so don’t worry about not being able to acquire the stocks that business writers are raving about.
Online stockbrokers provide research services at no extra cost, but of course the risk will be borne solely by the investor, which means, if you made any investment based on the research advice provided and you incurred losses from this investment, the research firm will not be liable for this loss.
For me, you need a good combination of fundamental data and technical analysis before you decide on investing a significant amount of money. Personally, I use two metrics in determining which stocks I want to invest in. First, the stock price should have increased by at least 50% over the last twelve months. Second, and this one gets a bit more technical, the price to earnings ratio should be around 9-12x.
The price-to-earnings (P/E) ratio is the peso amount of the price of the company’s stock divided by the peso amount of the earnings of the company per share (Earnings per share is the total earnings of th company divided by the number of shares, for example, if earnings is 1 million and you have 1,000 shares, earnings per share is 1,000 pesos per share). The result is a multiple that roughly tells you how much the public perceives the company is worth in relation to its earnings. For example if the stock is currently trading at 5,000 per share and the earnings per share is 1,000, you have a P/E ratio of 5, which would be too low, based on my standards. A company’s P/E ratio can also tell you a bit about the characteristics of the company. A company with a low P/E ratio is usually in the traditional industries and has been around for a bit and has consistently paid dividends while companies with higher P/E ratios are younger and tend to congregate in the emerging industries. That said, companies with higher P/E ratios tend to be more speculative. For me, my speculative threshold is a P/E ratio of 12-15x. This means that the public thinks you are worth 15 million pesos even if you just earned 1 million pesos over a certain period.
There were about 10-15 companies who met my standards when I first did my stock picks. Weeding out some companies that I wouldn’t be a consumer of, I ended up investing in seven stocks. So far, my strategy has worked. I’ve had minimal losses on some speculative stocks but earned 15% over the last one-and-a-half months.
If you want to know more about which stocks I picked and why, or if you need help in creating your own investment strategy, let me know.