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15 Ways to Become a Better Stock Picker

Author: Selena Maranjian | May 14, 2021

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Better stock picking means a fatter portfolio

The easiest and best way for most of us to invest in the stock market is via a low-cost broad-market index fund. Doing so will instantly diversify your money across many stocks, and you can just sit back for years and let them grow -- ideally adding more money to your position over time.

If you'd like to try to do better than the stock market's average annual return, you'll want to invest in some carefully selected individual stocks. Here are some tips to help you be a better stock picker.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

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1. Understand what stocks are

First off, understand that stocks are not like lottery tickets or spins of the roulette wheel. Each share of stock is a piece of an actual company, tying your fortune to that of the company. If the company performs very well and grows in value, so will your stake in it. If it fails, you'll lose money. All stocks are not alike, either. Some are tied to wonderful healthy and growing businesses with strong competitive advantages, while others are tied to speculative propositions or shaky businesses that are likely to falter or fail. Choosing your stocks well is important.

ALSO READ: 3 Stocks That Could Be Worth More Than Apple by 2035

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2. Expect to be a part owner

Since each share of stock entitles you to a share of a company, owning stock in a business makes you a part owner of it. Literally. Not every company's management thinks of its shareholders as its owners, but they should. Warren Buffett has often referred to shareholders as his partners. He has even included an "owner's manual" in many of his annual reports.

So think of yourself as a part owner, a partner, in the businesses in which you invest. Stay interested in them and follow their progress. Check out their quarterly and annual reports and visit their "Investors" pages on their websites now and then. You'll likely find links to company presentations that will lay out how the company is doing and what its future plans are.

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3. Plan to hold for many years

Plan to hang on to your shares for many years, too -- as long as the companies continue performing well and their futures seem promising. Don't swiftly bail out due to temporary setbacks or cash out for a 50% gain when you might have gotten a 400% gain years down the road. When you think of amazing stock market performances, such as those of Netflix, Apple, or Monster Beverage, remember that they occurred over many years -- and even decades. Be a long-term investor.

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4. Consider dividend-paying stocks

As you start to seek promising stocks in which to invest, give plenty of consideration to dividend-paying stocks. While all good stocks offer the possibility of meaningful stock-price appreciation over time, dividend-paying stocks offer that plus regular income. Those dollars that will magically appear in your brokerage account can be used to buy more shares of stock that can also appreciate over time (and perhaps pay out more dividends of their own). And when the economy is in a slump and stocks aren't growing, healthy dividend-paying companies will keep paying out to their shareholders.

ALSO READ: 3 Dividend Stocks That Should Pay You for the Rest of Your Life

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5. Consider small-cap companies

Consider small-cap companies, too, because they have great growth potential. It's far from guaranteed, though, and many small companies will stay small or will perhaps fail. That's why it's best to focus on companies and industries you've researched deeply and understand well. Small-caps can be risky -- and they tend to not pay dividends -- but they might also grow faster than any other kind of stock. Small-cap companies will have a market capitalization of roughly $300 million to $2 billion.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

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6. Consider large-cap companies

While it's true that small companies can grow faster than large ones, don't assume that large companies can't grow at a good clip. Consider that in their last reported quarters, Amazon.com grew its revenue by 44% year over year, Apple grew its revenue by 54%, Microsoft grew its operating income by 31%, Netflix grew its revenue by 24%, and Facebook almost doubled its net income. Large-cap companies will have a market capitalization of roughly $10 billion or more, with those topping $200 billion considered "mega-caps." Large-caps often pay dividends, too.

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7. Consider mid-cap companies

Mid-cap stocks are also well worth considering, because they offer the best of both worlds, with characteristics of both small and large companies. They have plenty of growth potential, and they're generally less risky than small-caps, as they have grown into the mid-cap category through solid execution. Mid-cap companies will have a market capitalization of roughly $2 billion to $10 billion, and some of them pay dividends, too.

ALSO READ: The Smartest Stocks to Buy With $1,000 Right Now

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8. Diversify internationally

The U.S. stock market isn't the only game in town, so consider including some international stocks in your portfolio, too -- as long as you've researched and are comfortable with the economic prospects of the stocks' home countries. Many economies are growing faster than ours, making foreign stocks intriguing -- and some, like China and India, are far more populous, with more potential local customers.

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9. Consider mutual funds and ETFs

You can't be an expert in every industry, though, or in every (or maybe any) foreign economy. So if there are industries or regions in which you'd like to invest but where you don't feel confident in selecting stocks, you might opt for a mutual fund or exchange-traded fund (ETF) that focuses on such an area. There are gobs of such funds that specialize in, say, biotechnology, healthcare, small-cap companies, Chinese companies, European companies, and much more. Pay attention to fees, though, and favor low-fee funds.

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10. Keep reading and learning

If you want to be a better and better stock picker and investor over time, keep reading. That's what many of the best investors do. Warren Buffett is reported to have said, "My policy [is] reading every annual report in sight that can further my knowledge about anything," while his partner Charlie Munger noted, "I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading." Read about great businesses to see how they were designed and managed and grew, read about great investors and their philosophies, and read financial magazines online and offline to learn about various industries and companies and their developments.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Previous

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11. Learn how to read financial statements

As you're reading and learning, one thing you'll do well to learn, in order to be a better stock picker, is how to read a financial statement. Financial statements -- such as balance sheets, income statements, and statements of cash flows -- can be intimidating and confusing until you get to know them. They're not impossible to understand, though. (Here's a tip: Many items have multiple names, so be prepared to learn that revenue means sales and an income statement may be called a profit and loss statement -- or even a statement of revenue and expense.)

ALSO READ: 3 Top Tech Stocks Under $20 Per Share

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12. Learn how to value stocks

You'll also want to learn how to value stocks, to arrive at an educated estimate of their intrinsic value. Once you have an idea of what a stock is really worth, you can see what it's trading for today and know whether it appears overvalued, undervalued, or fairly valued. Undervalued stocks are your best bets. There are complicated ways to determine a stock's value and simpler ways, such as using the price-to-sales ratio, the price-to-earnings (P/E) ratio, or the price-to-book ratio.

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13. Seek a margin of safety

Requiring a margin of safety before you invest in a stock is a hallmark of value investing. For example, if you've determined that Scruffy's Chicken Shack (ticker: BUKBUK) is worth about $45 per share and it's trading around $35 per share now, you've got a margin of safety -- it appears significantly undervalued. If it's trading around $65 per share, though, there's no margin of safety and the stock may be as likely to fall closer to its intrinsic value than to keep rising.

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14. Ignore noise and fluctuations

As you go through your investing life, you'll do well to ignore certain things, such as fluctuations in the price of stocks you own. If you've bought a stock and believe in its likely future growth, don't fret if it's down 5% today or even if it falls 20% or more. As long as there hasn't been a significant, lasting negative development, and as long as the reason(s) you bought it remain valid, just hang on. Similarly, don't get distracted by analyst ratings of stocks ("buy!" "sell!") -- because there may be conflicts of interest in play.

ALSO READ: Got $1,000? 3 Unstoppable Stocks to Buy and Hold Forever

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15. Remember index funds

All of these tips for becoming a better stock picker should help boost your investing performance. But they may seem like too much work -- which is fair and will be the case for many people. If so, remember that you can just opt for index funds instead and do very well with them. Or do both -- invest a big chunk of your assets in index funds and invest in some individual stocks as well.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Previous

Next

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Get better … and richer

If you want to invest in individual stocks, aim to get better at it over time, in order to improve your investing performance. There's a lot to learn, but none of it is rocket science -- so you can probably master it with some determination.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Amazon, Apple, Facebook, Microsoft, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, Microsoft, Monster Beverage, and Netflix. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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