Time and time again, savvy investors will warn you: Never fall in love with a stock.
Getting all moony-eyed over some adorable little ticker symbol could cost you your objectivity, and blind you to its risks. Just ask former investors in Krispy Kreme or Crocs, who may have focused more on their companies' products than their potential for profit. Delicious doughnuts or comfortable shoes aren't a sound basis for any investment decision.
Then again …
We fall in and out of love with people all the time, and even if the relationship ultimately goes sour, it doesn't necessarily ruin our lives. Similarly, there are times when it's OK to fall hard for a stock -- or even a whole bunch of them. (Yes, when it comes to investing, monogamy might not be the best route.) Just remember to be picky about your portfolio paramours.
When seeking out your 10 or so true stock loves, keep these winning qualities in mind:
- A healthy, growing dividend, from a company with a long dividend-paying history. It's hard not to love Procter & Gamble (NYSE: PG ) for its reliability. It has been paying a dividend to shareholders since 1890, and raised that payout regularly for more than 50 years.
- Steep profit margins. This highly lovable trait suggests that a company has a strong brand name and a sturdy competitive position. Johnson & Johnson (NYSE: JNJ ) , for example, sports a net margin greater than 20%, while Procter & Gamble's tops 15%. Such steep margins might be expected in industries such as software, but they're rarer in manufacturing and consumer products. They reflect many consumers' willingness to pony up more money for Tide, Crest, or Tylenol than competing products.
- Competitive advantages. It'd be hard for an upstart to suddenly rival Boeing in building big airplanes. Online, Amazon.com (Nasdaq: AMZN ) and Facebook have an edge thanks to their familiarity and widespread acceptance.
- Innovative products and great growth prospects. Among many others, companies that fit the bill here include Intuitive Surgical (Nasdaq: ISRG ) , with its robotic surgery equipment, and 3M (NYSE: MMM ) , with its long history of debuting handy products. If you ever doubt innovation's power to create whole new industries and profit lines, just think back to the days before iPods or iPhones.
- Admirable management. Great examples here include Costco's (Nasdaq: COST ) Jim Sinegal, or Berkshire Hathaway's (NYSE: BRK-B ) Warren Buffett -- managers who make you smile whenever you read about their sage sayings or commendable conduct. My colleague Dayana Yochim has called Sinegal "Costco's secret weapon."
- A compelling price. Above all, if you find a true gem of a company, you still shouldn't pay too much for it. You want a great company at a good (or, ideally, great) price. Fortunately, there are lots of bargains around these days, since we're living through a rare buying opportunity.
If you can combine one or more of these factors, all the better! Intuitive Surgical may not offer a dividend yet, but its net profit margin tops 20%, while its revenue has grown at an amazing 50% annual pace for a decade. Furthermore, it has a strong competitive advantage, thanks to its solid padding of patent protection, and the high costs hospitals would incur in switching away from its machines. The more lovable traits you find in a company, the harder you can let yourself fall for it.
I only have eyes for you
Better yet, when you start swooning over a set of certain stocks, you're more likely to focus on them, instead of playing the field. Fear of commitment can quite literally cost you here; you'll rack up high commission costs, and a hefty bill for short-term capital gains tax, jumping in and out of assorted investments. Worst of all, you could miss out on steady, long-term gains. Keep your roving eye in check, and your relationship with your stocks will be even stronger and more rewarding.
Sometimes, it's perfectly OK to fall in love with the right stocks. Just make sure the ones you pick deserve your affection.
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