Thursday, 5 January 2012

Long Term Stock Picks For Long Term Gain

It is quite unfortunate that there are no formal personal finance classes when we are younger because money is an essential part of life.  Learning how to handle your finances and how to invest for yourself are very important life skills.  If people learned these things at an early age, then they would have had a great start on having a stock portfolio with long term stock picks.

It might be hard to believe that young adults would be capable of picking winning stocks but if you know basic math and can read, that’s all you really need.  Sometimes, people get ahead of themselves and overthink.  They are persuaded by the latest news and hype.  Perhaps the best way to pick stocks is through the eyes of an amateur and what go with what they can understand. After all, the stock market is the trading ground for everybody – investing beginners and so called experts.

Understanding a company’s business is fundamental in picking the best stocks.  So often, people hear about a hot stock tip and trust the investment advice of others rather than doing their own homework.  If you don’t understand what a company does, it becomes very hard in judging the intrinsic value of a company.  You want to know the true value of a company so you know when to buy in and when is a good time to sell.  If you don’t know at least that much, then it would be very hard for you to make money in the stock market.  In fact, it becomes more likely that you would lose money.

The investment strategy of buying stocks at fair value or below came from Benjamin Graham and was further reinforced by Warren Buffett and the margin of safety investing method.  By buying companies trading below its intrinsic value, it leaves room for error – or a margin of safety.  And since Warren Buffett’s stock pick advice is to hold stocks for the long term, an investor with a cheap blue chip stock pick has the luxury of waiting it out until the price goes up again.

Most newbies looking for investing advice often wonder why they don’t just buy penny stocks and wait it out for the long haul if it is a simple matter of a waiting game.  However, penny stocks are meant to be fast money in the stock market but it also carries a lot of risks as well.  When the market is turbulent, the first thing that people will sell is their penny stocks (they will keep their blue chip stocks for as long as possible).  If you are one of the traders trying to unload thousands of shares, good luck in finding a buyer.  You just might be left in holding the bag.  You can make lots of money day trading penny stocks but you can lose a lot of money too because of the sheer volume you would need to buy and sell to make it profitable on the smallest of fluctuations in stock price.

Another reason that penny stocks are not meant for the long term is that it is very hard to do fundamental analysis on new companies as that is generally what happens when start-ups want to generate money.  With no track record, you cannot do proper stock analysis and that is why penny stocks are meant for trading and not investing.

And just like day trading penny stocks, there are other methods of making lots of money in the stock market quickly such as shorting stocks, buying and selling options and playing with currency arbitrage.  Obviously, these ways of making money in the stock market work or else people won’t be doing them.  As mentioned however, fast and easy money is obviously not without risks.  And people often get far too ahead of themselves and create these complicated investment strategies when simple methods work best.  Have you ever seen a monkey making stock picks?  Sometimes, they beat the so called stock pick professionals so imagine what a young person can do with a little bit of knowledge and stock analysis.

If you truly want to learn how to invest in stocks, the person you should learn from is Warren Buffett.   As mentioned, he thinks ahead in the future with his long term stock picks.  There are a few reasons for his.  He doesn’t get flustered and forced into selling when the stock market falls.  In fact, recession stock picks are great when everyone is selling and you are buying because people are in a panic.  This is a great way to buy undervalued stocks.  That being said, is it a stock you’d be happy to hold in your portfolio for the long term?   Buffett says that you should only buy something if you’re happy to hold if the stock market were to close for 10 years.  Given this criteria, how many people’s stock picks would be filtered out?  There are other criteria for Warren Buffett stock picks such as: does the company have a branding advantage over its competitors?  In the case of one of Buffett’s most famous stock pick Coca Cola, “Coke” is synonymous with soft drinks.  Pepsi and other brands cannot compete with it as a brand without throwing huge money into it.  Coke is way ahead of the game in terms of being in the consciousness of its consumers worldwide.  This is what Buffett calls his business moat and it is far reaching across the globe.    This is how a huge behemoth of a soft drink company can still grow worldwide when you think it’s already plateaued.  Buffett’s portfolio picked it up as a value growth stock in the late 1980s and it has done very well for him since then.

For this reason, this is why amateur investors can do quite well managing a do it yourself stock portfolio with their own stock picks.   You don’t have to be on the lookout for the latest break out stocks.  Truly, a portfolio composed of blue chip stock picks purchased when they are undervalued will make you rich once they rebound.  It does take research to find these gems and patience but Warren Buffett has made a career of doing something just as simple instead of worrying about the noise of the market.  If the greatest investor in the world imparts such wisdom to us, who are we to argue with Buffett’s stock picks?

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