The Challenge of Stock Selection, Revisited
By Acceler8now.com Stock Investing Team,
November 30, 2007
For many people, taking that all-important decision to start investing, particularly in stocks, will prove a major challenge, albeit a turning point in their financial advancement effort. However, even when that crucial decision-point is crossed, another momentous milestone to tackle is the choice of specific stocks to invest in. Deciding what stocks to buy is difficult, for a number of reasons:
- There are no known stocks whose prices decidedly move in a single positive direction. Stock prices swing and could catch you on the wrong side. The implication is caution in selection.
- There is no perfect prediction of market price behaviour. If there was a place to obtain guaranteed price direction maps, every investor would line up for it.
- Nobody willingly wants to lose money and there is that concern about how to successfully pick stocks that will prove viable in terms of future performance.
- The number of listed stocks is continually growing with more IPOs, which compounds the challenge of selection, especially in the face of limited funding.
Finding a Walk-path
Yet, to possibly enjoy the much-vaunted benefits of stock-investing, one must successfully get beyond this hurdle. A decision must be made to select and invest in some stocks, which is why a lot of questions get asked as to "which stock I should buy". Yes, we get asked all the time. The truth is that every investor, whether a beginner or an advanced one, would be glad to have a ready list of recommended (perhaps guaranteed) stocks. We intend to provide services that include such working guides, in the months ahead, but beyond that, here are some factors to be mindful of when deciding on stocks to buy:
- Don't buy a stock on bandwagon basis - just because others are buying. Buy because you believe in a particular company. That's another way of saying that you have ascertained some satisfactory facts about the company and, in particular, how they propose to keep generating healthy earnings and cash flow, going forward.
- While it's difficult to totally ignore price movements, basing your actions purely on short-term price directions may prove ultimately unprofitable. It's primarily important to confirm the value potentials of the company, given the current price. If the company fundamentals are sound and it's a good bargain at the purchase price, you will be able to worry less about price swings in the short-term, within a reasonable band. Simply put, be driven more by stock value and less by temporary price sentiments.
- You don't have to own every stock that will possibly do well in the market. Your focus should be on seeing that those you choose to buy will do well, also. So, don't spread yourself too thin or torment yourself over stocks that later perform well which you may not own. Besides, some of your stocks may disappoint and that's not unusual. You want to see that, overall, your portfolio performs well, with well-performing stocks cancelling out the weakness of the few laggards.
- Company earnings are very important, which is why you should pay attention to the earnings track-record of any company you are considering. Recent quarterly earnings growth should be healthy. Compare recent quarters for upward trend and strong growth rate and with same period the previous year to confirm significant growth. Companies file their quarterly reports with the Nigerian Stock Exchange.
- Major developments affecting companies could mark the threshold of significant change of fortune, either way. It could be change in leadership or launch of new products or commissioning of a new plant, etc. Always pay attention to such changes and give some thought to their likely implication, first for the companies profitability and overall performance and the likely effect on its stock price.
No Perfection, Remember
While care is required in stock selection, it would be counter-productive to be frozen into inactivity just because you are concerned about not selecting the wrong stocks. Mistakes will occur, but learn and improve. Even the most successful investors have a cataloque of investment errors. Their success came from having more successes than failures, not the absence of the latter.
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