Thursday, 5 January 2012
Long Term Stock Picks For Investing Beginners
If there is one thing that the recent recession has taught us, it is that everyone should be responsible for their personal finances and investments. Despite the fact that you are paying professionals for their stock pick advice and their inside track on hot stock picks, how many of them really have your best interest at heart or actually know what they are doing? How many Ponzi scheme stories do we have to hear on the news about people being robbed of their life savings? For some retirees, this is a devastating blow. For others, there is still time to make it back with long term stock picks on the horizon.
After suffering a financial set back, it might be hard for some investors to rebuild their fortune but the same investment advice can be applied to those who are beginning investors. Before you begin to invest, you need to have your personal finances in order. This means you need to have your emergency funds in place so you won’t feel obligated to sell your best stock picks because you need the money. It is generally regarded that you should put away enough money in your savings account for six months to a year if something goes wrong and you are out of a job. As an investment tip, it is recommended that you only invest with money you won’t need for a period of five to ten years. Even though you can make fast money in the stock market, you can also easily lose money too. The way to reduce these risks is if you think for the future with long-term stock picks. You want to invest in growth stocks that are trading cheaply for their future potential as opposed to hot penny stocks that are more erratic and risky.
To be honest, any stock picking advice can be reduced to one golden rule: buy low and sell high. However, it is important to note that it doesn’t cover the time line. You can make money on the stock market within a few minutes or you can make money over a period of years. Perhaps this is why famed billionaire investor Warren Buffett has his number one rule of investing as well: never lose money. His second rule of investing is never forget rule number one. Warren Buffett’s investment advice might sound glib but surprisingly, so many people do lose money in the markets. This is because while they might have a few winning stock picks, the vast majority of them were losers. So they understand the concept of buying low and selling high but they don’t do it consistently to make money in the stock market. And perhaps this is due to their time horizon.
If there is one person you should take investment advice from, it is Warren Buffett. He has an incredible financial mind and yet he can distill concepts to teach investing for beginners. So while you can make money from day trading, foreign exchange arbitrage, shorting stocks, buying and selling options and warrants, Warren Buffett does it the old fashion way with long term stock picks. Buffett’s investment strategy simply reduces the risk by buying good companies at a fair price. Again, this might seem like a very simplistic stock tip but it is amazing that so many people cannot understand the concept.
According to Buffett, price is what you pay, but the value is what you get. For example, a company’s share price might be the lowest that it has been in a year but is it worth it to begin with? There have been lots of stock market bubbles in the past with certain sectors being overvalued only to come crashing down again. When looking for best stocks to invest, it is important to look past the hype and realize a company’s intrinsic value. You should also invest in something you understand as well. If you don’t understand a business, how can you do your stock analysis? You need to do your stock pick research by going through a company’s annual reports and financial statements. This is called fundamental analysis. If you can identify top stock picks that are trading below their intrinsic value, you can keep them in your portfolio for the long term. And if you can find cheap stocks that are mispriced you will have the luxury of time for the long term horizon which gives you a margin of safety. Therefore, let this be another stock pick advice: when a company is overhyped, its stock price is probably overvalued. When a company’s stock is trading below its intrinsic value and the pundits are tell the public to sell, that is when you should go against the grain and buy. Again, the point of making money investing is to buy low and sell high. Therefore, even though a lot of people are scared to invest in the stock market because of the economic crisis, this is the best time to invest in recession stock picks.
If you follow Warren Buffett’s stock picks advice of applying a margin of safety when buying a few good companies and waiting patiently for the price to go up again, you will make money in the stock markets. The Warren Buffett strategy is also called focus investing. You put your focus on finding a few winning long-term stock picks. For some people, this might seem risky as it goes against the popular thinking of diversification. However, the point of diversification is because you want to reduce risks but what are the risks if you do your due diligence? This is very important advice for beginning investors to adhere to as well. It is easy to make money on a few hot stocks but it is hard to make money consistently in the stock market so always do your research.
As a final word of advice for stock market beginners, if you don’t have time to learn how to invest in the stock market, the next best thing is to invest in index funds instead of managing a stock portfolio yourself. An index fund is a low cost mutual fund that tracks a particular stock market index by buying the same companies that make up the index. Since markets rise over the years, this takes care of your long term investments. Of course, you will only do as well as the market and you won’t have the fun of watching break out stocks but the truth is most mutual funds are closet index funds anyway. If you look at the mutual fund stocks, most funds will be a duplicate of some index so why pay the extra management costs that eat away at your return? And for those high profile money managers, do you really trust them with your money after all that’s happened in the news with the financial scandals? While there are undoubtedly honest money managers out there, how do you separate the good ones from the bad? The bottom line is that no one will have your best interest at heart and care about your long term investments more than you. You might as well learn about investing for yourself.