How To Pick SMART Stocks, Part 1
Long-term investing offers some of the best opportunities to grow wealth, fight inflation, increase personal freedom and help ensure a comfortable future for ourselves and our families. Investing also is becoming something of a necessity for most Americans.
The days when everyone worked the same job for 30 years and retired with a nice pension are gone.
We talked about Social Security in the past month, but for some it isn’t enough. For many people, investing may be one of the best ways to retire and maintain a comfortable lifestyle.
Having said that, it’s important to remember that investing involves risk — positive results never can be guaranteed. In my recent podcast interview with Arthur Lipper, founder of the first stock index mutual fund and the Lipper Mutual Fund Performance Analysis (visit artofthinkingsmart.com/4 to listen to his top investing advice), he warns that most people are better off investing in index or mutual funds run by professionals.
Investing in stocks can be risky, so it may be better for you to hire financial experts. But for those who want to choose their own stocks, how do you know which one is right for you? There are approximately 45,000 stocks listed on stock exchanges in the world and approximately 8,800 in the United States. There are so many to choose from!
In this article series, we talk about investing in stocks and SMART ways to choose them. For a more in-depth checklist and the Eight Simple Rules to
Choosing Winning Stocks, visit artofsmartstocks.com.
* Think Long-Term when Choosing Stocks. Many people look to make a quick buck by day trading. Unfortunately, in a recent study, only 1 percent of day traders are “predictably profitable” — 80 percent lose money, which means they are paying to day trade. If it is a form of entertainment, then that may be OK, but if this is for your future, you may want to think twice. Every time you make a trade you have to pay trading commissions, taxes (if not in a qualified account), research costs and opportunity costs of the hours spent trading (which could be spent doing something else). One study showed that for day traders who do make money, on average it equates to $8 an hour!
Another important thing to note is that trading involves two parties, and often one side will lose while the other side wins. Wall Street has spent billions on advanced computers and has an edge by jumping in front of average investors and making sure it is on the winning side. The high-frequency and speed traders have a head start of a few milliseconds, but it is enough to figure out which stocks investors will buy, purchase them first and then sell them back at a higher price. These types of trades make up about half of the trading volume in the U.S. and are legal. Since average investors don’t have access to this type of technology, information and research, the deck is stacked against them. This is why you should pick stocks that you plan to hold for the long term (at least one year to 18 months). Long-term investing helps level the playing field between high-speed traders and individual investors.
In upcoming articles in this series, we will cover the different ways of analyzing a stock and some important screening criteria to use.