When it comes to choosing where to put their money, investors have a lot of choices. Yet despite all the alternatives Wall Street has offered to investors recently, the best way to become a true expert investor is to focus on an investment classic -- individual stocks.

Beginning investors often gravitate to the simpler options available to them. With ETFs and mutual funds, it's easy to put small amounts of money to work without worrying about the added risks of an undiversified investment portfolio. And with thousands of different funds to choose from, you can follow nearly any strategy you want, from a broad swath of the entire stock market to any of dozens of focused niche funds that target particular areas.

In fact, in some situations, funds are all you have access to. For instance, most employer-sponsored 401(k) plans don't even offer the chance to invest in anything but funds. If you want something else, you'll often have to wait until you can roll that 401(k) account over into a new IRA after you quit your job.

Why stocks?
Using funds and ETFs isn't a bad way to invest. If you have the relatively modest goal of simply matching the market's returns, then index funds and ETFs make it extremely easy. Moreover, if you search through the assortment of actively managed mutual funds, you may find proven fund managers who can deliver market-beating returns consistently over the long run.

But even the best funds can't match the potential returns of the top individual stocks. Even over the past decade, as the overall stock market has languished with negative returns, these stocks have put in phenomenal performances:


10-Year Total Return

Average Annualized Return

BHP Billiton (NYSE:BHP)



Potash Corp. (NYSE:POT)



Annaly Capital Management (NYSE:NLY)






Nuance Communications (NASDAQ:NUAN)



Source: Yahoo! Finance.

The key, of course, is finding which stocks will outperform their peers and the market as a whole. While you'll spend your entire investing life struggling with that task, the best way to get started is to play to your strengths.

3 starters for picking stocks
Here are some tips for beginning the next phase of your investing education:

1. Use what you already know.
If you're an expert in something, you have an edge over your fellow investors when it comes to looking at companies that specialize in that area. For instance, if you've spent vacations in Las Vegas year in and year out, then you've experienced the properties that casino operators like Wynn Resorts and MGM Mirage (NYSE:MGM) rely on for their profits. And although your opinion of the Bellagio's newest nightclub might not give you great investing insight, your observations of how busy the casino floor is or which building projects stand idle make it easier to fill in details that you just can't get from financial reports.

2. Keep it simple.
For your first stock, don't bite off more than you can chew. Some business models are simpler than others. Even financial experts struggle to track all the inner workings of a major bank like Wells Fargo (NYSE:WFC). But a company like Home Depot (NYSE:HD) and its home-improvement retail business is easy to grasp fairly quickly. Once you've mastered some simple stocks, you can quickly ramp up to more complex businesses.

3. Get the help you need.
If you're ever going to be an expert, it's important not to rely solely on others for your opinions. Yet that doesn't mean you can't listen to anyone else's opinions. Do your own analysis first, but then share your work with others and see what they think. It's likely that you'll have some weak areas that others can improve on, while your own insights will help them in their own research. The Motley Fool benefits greatly from the ongoing interactions of our entire community, which is a powerful resource at your disposal.

Lastly, don't let yourself get intimidated. You'll obviously want your first pick to make money. But win or lose, buying individual stocks will mark an important milestone in your investing career.

Jim Royal has a home-run stock for you, but he thinks you're too afraid to buy it. Find out what it is and make your own decision about whether it belongs in your portfolio.

Fool contributor Dan Caplinger spent years with funds before buying his first stock, but he hasn't looked back since. He doesn't own shares of the companies mentioned in this article. Home Depot is a Motley Fool Inside Value pick. Nuance Communications is a Motley Fool Hidden Gems selection. The Fool's disclosure policy always starts you off on the right foot.