If you're new to investing, you're probably in the market for some good stocks to invest in, but you might not be sure how you should go about finding them. A good rule of thumb for beginners and seasoned investors alike is to stick to companies and industries you know and understand -- or ones you can learn about and master. Diversification is also desirable, as it can reduce risk.
Let's back up a bit, though, because most new stock market investors don't even have to bother to learn how to study companies and carefully select among them or learn how to find the best-managed mutual funds. There's a much easier route: You can simply invest in an inexpensive broad-market index fund that quickly has you invested in most or all of the stock market. The SPDR S&P 500 ETF (NYSEMKT:SPY), the Vanguard Total Stock Market ETF (NYSEMKT:VTI), and the Vanguard Total World Stock ETF (NYSEMKT:VT) fit that bill, respectively offering the largest 80% of the U.S. market, the entire U.S. market, or just about of the world's stock market. Each offers diversification, dividends, low fees, and market-tracking performance -- enough to outperform most professionally managed funds.
Going it alone
If you want to choose some individual stocks to buy however, they can outperform the overall market if chosen well. You might want to start with most of your money in one or more index funds and then add some individual holdings over time. If so, start with easy-to-understand companies that you would enjoy keeping up with -- because you should be regularly following any companies you own, making sure that they're still healthy and growing. Following are a few contenders.
Johnson & Johnson (NYSE:JNJ) is a huge company with three major prongs: consumer products (Band-Aid, Listerine, Tylenol, Splenda, and much more), medical devices (blood glucose monitors, stents, catheters, and so on), and drugs (dozens of drugs treating cancer, arthritis, diabetes, and more). One reason to be hopeful about its future is its heavy spending on research and development. In 2013, it spent more than $8 billion, which amounted to more than 11% of its revenue. It offers investors a solid 2.6% dividend yield, and it has been upping its payout by an annual average of about 9% over the past decade. Better still, it's reasonably priced, with its recent P/E ratio of 17 near its five-year average. It's a more complicated company than many, with all its different businesses, but that diversification can reduce risk, too. No single failure is likely to derail it.
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), led by legendary investor Warren Buffett, is also complex, with sizable insurance operations, significant stock holdings, and a host of wholly owned companies in a wide range of industries. These include GEICO, Fruit of the Loom, Dairy Queen, The Pampered Chef, the BNSF railroad, Justin Brands, and See's Candies. Buffett's portfolio features lots of companies tied to the housing market, such as real estate agencies, furniture companies, and companies offerings bricks, flooring, insulation, and more. Therefore as the U.S. economy grows and more homes are built and remodeled, Berkshire stands to benefit. The Berkshire business model is also attractive, as Buffett is able to collect the excess cash generated by many of his companies and then reinvest it in the companies that can use it best. Buffett himself, along with his exceptional management team, is another reason to consider Berkshire: The company is conservatively managed, and Buffett is famously frank with shareholders in his lengthy but readable (and educational!) annual letters.
These are just a few of the many companies that could be terrific stocks to invest in for beginners and veteran investors alike.