Harvard University is well-known for wanting only the best. When it comes to investing, so should you.
I'm not here to talk about how you can emulate the way the university has invested its endowment money. Instead, I'd like to suggest that you invest your dollars the way that the Harvard admissions office (and many others) invest in people.
The market holds thousands of stocks, and they're not all equally attractive. Make sure that your portfolio is invested in the companies that seem like the biggest bargains, inspire the greatest faith, and hold the best promise of strong future performance.
Try ranking your stock holdings, and the stocks that you'd like to buy, in order of your confidence in them. Then ask yourself to what degree your money is invested in your best ideas.
Good scores
Admissions offices seek candidates with good SAT scores and grades. We should scope out stocks with good scores and numbers, too.
Our Motley Fool CAPS community offers one great way to look for highly rated companies. Our community members offer considerable commentary and insight on the highest-rated "watercooler stocks." CAPS' most talked-about stocks recently included Applied Materials (Nasdaq: AMAT ) , Foster Wheeler (Nasdaq: FWLT ) , and Sigma Designs (Nasdaq: SIGM ) .
You can also screen in CAPS for highly rated companies with attractive traits, such as high returns on equity (ROE) and solid earnings growth rates. Here are just a few examples:
|
Company
|
CAPS stars (out of 5)
|
Return on Equity
|
3-Yr. Avg. EPS Growth Rate
|
|
Precision Castparts (NYSE: PCP )
|
****
|
17%
|
21%
|
|
LabCorp (NYSE: LH )
|
****
|
26%
|
12%
|
|
Infosys Technologies (Nasdaq: INFY )
|
*****
|
27%
|
16%
|
|
Flowserve (NYSE: FLS )
|
****
|
25%
|
62%
|
Data: Motley Fool CAPS.
Of course, simple screens can be a good way to start your due diligence, but you'll want to delve deeper into further research before you make any investing decisions.
Mix things up
Admissions offices also like to see applicants with impressive histories and good recommendations. Similarly, we should seek out well-regarded companies with solid track records.
Look for companies showing steady improvement over time, and make sure that any recent strength it may have shown isn't a short-lived fluke. In particular, you want to find companies that can maintain their profit margins, pay down debt, and grow revenue and earnings at a healthy, sustainable clip.
And just as an admissions office aims to build a varied student body, you'll want to ensure a diverse selection in your own portfolio. Casting a wider net for good investments increases your odds of finding winning stocks. Large companies can add stability; small ones can grow faster. Dividend payers juice your returns with additional income, while international holdings can protect you against a downturn in domestic marikets. Just make sure you're not overweighted in any particular industry; otherwise, if it gets whacked, so will you.
All CAPS, no gowns
CAPS is packed with comments on thousands of stocks, contributed by thousands of participants. You can also see how highly rated each commenter is, so you'll be able to assess each opinion accordingly. And if you don't find unanimous support for a company you've come to greatly admire, that's okay. Currently unloved companies often make the best bargains.
Finally, remember that there are big stakes involved here. Harvard has a great reputation to maintain. It wants the students it admits to succeed in life, thus reflecting well on the school. Similarly, a successful selection of stocks in your portfolio won't just reflect well on you -- it'll also give you decades of financial security.
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