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Ask HN: How do you pick stocks?

20 points by DeusExMachina 16y ago

I don't like my savings to sit in the bank and being eaten by inflation, since for now my only source of income is my salary. So I usually invest my savings in long term stocks, the kind of investments that you do once and forget for at least 10 years. My problem is that it requires me a lot of time and energy to pick some stock, and even when I manage I always feel uncomfortable and feel clueless on which stock to pick. I studied some basis on reading balance sheets and income statements, but it always requires me a lot of time and since I don't do it frequently (it takes a while to have enough money worth investing) I forget everything I know and I have to go through it again every time. Add to it that this is something I really don't like doing. So, how do you pick your stocks? Do you analyze each company every time? Do you follow some investors advice? Do you follow some website? Usually I refer to Fortune's "retire rich" of "investment guide year 20XX" guides, but picking one stock is different than allocating the full portfolio they recommend and I don't fell comfortable to pick a stock just because they recommended it. Any recommendation?

davidw 16y ago
Investing seems to be a regular topic here, you might search for similar threads.
tbrownaw 16y ago
I'm trying to learn value investing, which means analyzing various companies (most recently, I've been looking for candidates by setting google stock screener to a strong current ratio and low-ish p/e) and then looking for advice on them to see if it matches or why it doesn't. One place for advice that my grandfather recommended is "value line" which you can probably find at the reference desk of your local decently-sized library. The other alternative that always gets recommended is using an index fund. These will always have average performance, so you can only (reliably) beat them by being more above-average than everyone else is.
HSO 16y ago
There is more out there than just stocks but since your question mentions stocks explicitly, here is a practical suggestion: Pick an index fund. Boom, you're diversified. Now, keep an eye on developments, read newspapers (I recommend FT, NYT, and Economist), something will start to tickle your fancy. When you feel like something looks interesting or resonates with you or your background, dig into it. Allocate, if you can, at least 2 full days, for example a weekend. Do on-the-side reading beforehand, gathering all sorts of material (reports, statements, articles, interviews, customer opinions, etc.), just read superficially, the goal is to get an idea and to narrow the sources down so you can do your final research in the 2 pre-allocated days. When after a while, your interest is still there or better yet growing as you find out more, and only then, pull the trigger and invest those 2 days. If you can't stomach the risk at the end of them, forget about the opportunity. If you feel good about it, pull the trigger again and take a position. Start with a small position, shifting some of your index fund into the stock. Maintain and see how it feels to have the position "on". If it feels good, take more (long _or_ short). If it feels wrong, get out, whether you're ahead or behind. Forget all about diversification too. Your goal is to iterate this until you have a portfolio of perhaps 4, 5, 6 positions. You are substituting "diversification" (you can't be better diversified than a broad index fund) with knowledge or insight or whatever you call it. Just my 2 cents (har har, I know... ;)
- DeusExMachina 16y ago
  There is more out there than just stocks I mentioned stocks because they are the only investment I was able to find that gives a decent return against inflation and is possible to do without huge amounts of money (like real estate). But if you would like to elaborate, I am interested.
  - deleted 16y ago
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  - slpsys 16y ago
    Options, warrants, futures, currencies, bonds, ETFs, et al. Check out: http://en.m.wikipedia.org/wiki/Financial_instrument http://en.m.wikipedia.org/wiki/Financial_instrument, but obviously, these are often or the more advanced (with the exception of ETFs, which are traded as stocks, or bonds).
- cynicalkane 16y ago
  It's worth pointing out that index funds can be overvalued and undervalued. For example, the S&P, up until recently, had been overvalued for a long time. The advantage, though, is that whereas it takes days to figure out whether a stock is overvalued, it takes minutes to do the same for a broad-market stock index. Just look at price:long term earnings ratio. In general, under 15 is a probable buy, over 20 means sell if there are better priced assets out there. And don't put all your eggs in one asset class.
- yummyfajitas 16y ago
  Don't pick an index fund, pick an ETF which tracks an index. The tax savings are considerable and they usually have lower fees.
  - cynicalkane 16y ago
    Depends on the index fund and depends on the tax situation. Some index funds are extremely low-cost.
frognibble 16y ago
I recommend that you read the book "A Random Walk Down Wallstreet" before you invest in individual stocks. The book argues that you will be better off investing in broad index funds.
- osipov 16y ago
  And after that, read Mandelbrot's "Misbehavior of Markets" to understand the limitations of the random walk model.
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  - frognibble 16y ago
    What are the limitations described by Mandelbrot? Does Mandelbrot show that active investing produces better returns than passive investing?
damoncali 16y ago
The easy answer is to index it. The hard way is to make your own portfolio. Playing around with fewer than 30-50 stocks exposes you to unnecessary risk, however. At least according to modern portfolio theory. The way I would pick stocks (if I didn't just buy an index) would be to calculate a reasonable, rational value for the security based on its financial performance - sort of simplistic discounted cash flow model. Then you just repeat, over and over again with lots of stocks, observing trends and buying when the market gets out of whack. There is judgment involved, so you can't fully automate the process. Done right, it's a full time job and takes a good chunk of change.
marze 16y ago
In his book "Rocket Boys", Homer Hickman tells how his mother saved a little from her household budget and invested it in stock of companies that made bandaids, and eventually used the proceeds to buy a summer house in Florida. Her children needed bandaids requently, and she could tell which were the ones that really worked, so she invested in those firms. Lesson: invest in companies where you have a good/deep understanding of the product/industry.
- patio11 16y ago
  Don't miss the important bit in that anecdote: save a little money, consistently, over a long period of time. Do that and your stock selection scarcely matters. (Indeed, you'd probably do better with index funds.)
  - DeusExMachina 16y ago
    Lesson: invest in companies where you have a good/deep understanding of the product/industry. I already invest in a company that I know well, Apple. Being a hacker, a Mac/iPhone/iPad developer and a fan (no so much lately) I know and understand the company quite a bit. I bought some stock in 2009 and it's performing quite well. But I know the risks of falling in love with a company, that's why I'm trying to differentiate. save a little money, consistently, over a long period of time I'm lucky that I have learnt this a long time ago, coming from a family that had economic problems since I can remember. My parents taught me the importance of saving with bad examples. Regarding index funds, I don't live in the USA and I'm trying to figure out how I could invest in them (it does not seem so simple, from here).
    - patio11 16y ago
      If you can invest in stocks like Apple, you can invest in Exchange Traded Funds (ETFs). Take a look at what Vanguard has available in index funds with an ETF equivalent, then buy that symbol as a stock. For example, VTI is their total market fund. You get basically the performance of the US market (Wilshire index) minus .07 basis points (i.e. 7 hundredths of a percent) minus whatever your trading costs for the shares are.
dedward 16y ago
I was going to write a big long explanation - but if you don't like investing in stocks - then DONT. Put your cash in the bank, maybe a few currencies (long term, I don't mean currency trading) - and different banks, possibly some offshore (not to dodge taxes - but to avoid banks going under - foreign banks have different rules, some much stabler than the US banks) Sure, inflation is there, as will be deflation and all that jazz - but one bad stock pick will do more damage to your finances than inflation will.... and if you're thinking you can head off, like, financial collapse by investing wisely when you admittedly hate the process... it's a no brainer. Put your cash in the bank, leave it there, and built up a big nest egg. If you ever want to start making that money work for you, there are lots of ways to do it - save it up until you have lots, then take the time and make really good decisions - you'll be in a far better position to take advantage of real opporutniteis if you are liquid - and nothing beats having cash in the bank when you watch the stock market tank and all those who were pressuring you to invest are freaking out.
- orangecat 16y ago
  Put your cash in the bank, leave it there That guarantees a negative real return. If you can accept short term fluctuations, you'll be much better off with an index fund.
  - beagle3 16y ago
    That's true if and only if, by "short term" you mean 15 years in nominal terms, and 20 years in real terms. That's from history (1929 to 1944-49). Perhaps this time it might take longer.
rameshnid 16y ago
Don't pick stocks if you are not a trader. Some rules I love- 1. Buy a house that you want to live in and after that stop speculating on houses. 2. If you need to pick stocks, pick ones with trustable management and with low p/e ratios. 3. Also buy some gold as a hedge occasionally. (not more than 10 pct of your net worth) 4. Don't get obsessed about your savings. Invest in yourself, invest on your skill sets so that you can earn more later. Good luck
- yummyfajitas 16y ago
  1. Buy a house that you want to live in and after that stop speculating on houses. That's a truly terrible idea right now, at least in most parts of the US. Houses, apart from "distressed properties" (read: people who need liquidity and must accept market price) are still wildly overvalued due to an irrational market. Additionally, many states will be raising property taxes in the near future, which would make the house into a potentially large and uncontrollable liability.
  - DeusExMachina 16y ago
    I'm leaving in Amsterdam and here the housing situation seems a little different. There is a really high request for rooms and a big scarcity of them, so I was thinking of buying a house with many rooms and rent them (while leaving in the house). But for now I can't afford to buy one, so that's why I'm looking at the stock market.
natrius 16y ago
https://personal.vanguard.com/us/funds/vanguard/core https://personal.vanguard.com/us/funds/vanguard/core
bufordtwain 16y ago
If you're worried about inflation, consider TIPS (US treasury inflation-protected securities) or an index fund that consists of them (e.g. TIP or VIPSX). That way you're less likely to lose a lot of your savings suddenly. The stock market can be flaky so the usual advice is not to invest money in stocks that you might need in the next 5 years or so. Also you might try going to the Bogleheads forums and ask for their advice, they are a helpful bunch: http://www.bogleheads.org/forum/viewforum.php?f=1 http://www.bogleheads.org/forum/viewforum.php?f=1
cadalac 16y ago
I personally think its best to think short term with stocks. Who knows what will happen to a company 10 years from now. If your careful, you can continually buy stocks when the're at a low and sell at a high. Here's some guidelines for doing this: buy stocks only from the large stable companies, because they pretty much never do radical or unpredictable ups or downs. The're are also the most liquid so you can buy or sell them pretty much instantaneously any time. Buy the stock when you see the markets moving up, and sell the stocks quickly, before it goes back down. Don't try to sell at the peak because it's almost impossible to know that point. Quit while your ahead. If the stocks goes down just sell it right away to minimize your loss. if you always do this you won't run the risk of significant losses, but you will have modest gains, which will add up in the long run.
ct 16y ago
Right now we're in a bear market which I see lasting for a loooong time aka the Japenese Nikki market where it didn't go anywhere for a while (also known as the lost decade). I'd recommend putting most of your money in a safer place like low risk bonds just get past inflation instead of losing it in the market. You can allocate maybe at most 10 to 20% in some ETF funds of your choosing though just to have some stock market exposure.
honopu 16y ago
Sure, I really don't believe in diversification. Here are my thoughts, maybe someone else will come along and cut me down or whatever, but that's ok. Diversification to me is like shooting a shotgun. Most stocks are profitable(they'd be delisted otherwise) so the scattershot(shotgun shot) is a nice way to handle that, and that is diversification. I kind of like the sniper rifle, where you invest in one stock which when you boil it down to what you're buying is a share in the company. If you are into stocks. They are pretty liquid, and you aren't managing a physical asset. So after typing all of that, there are other avenues of investment aside from stocks. How about tax-free muni bonds?, vacation rentals? buying land and lobbying to get it re-zoned(from agricultural to residential(house density per acre)) etc.
- beagle3 16y ago
  > Diversification to me is like shooting a shotgun. Most stocks are profitable(they'd be delisted otherwise) so the scattershot(shotgun shot) is a nice way to handle that, and that is diversification. That's not true. Continuous loss is not a ground for delisting. Going below a certain per-stock value (e.g. $1 or $0.01 depending on trading value) is, and that can be fixed by a so called "reverse split", without making the stock any more valuable.
arthurdent 16y ago
i typically recommend Magic Formula Investing to people who don't want to spend a ton of time looking into/maintaining stock portfolios but want a reasonable chance at outperformance. http://en.wikipedia.org/wiki/Magic_Formula_Investing http://en.wikipedia.org/wiki/Magic_Formula_Investing A lot of the literature around this, including the website sound really gimmicky, but the book itself is very well reasoned and presents a rational, easily udnerstandable case for outperformance and is backed up by historical performance. One metric i found compelling was that, over one test period, the author ranked 100 or so companies by the magic formula criteria. the top 10 performed the best, and each successively lower ranked set of 10 performed progressively worse. The author is a fairly well reputed hedge fund manager and has written a few gimmicky sounding titles, but for the most part the principles are fairly sound and compatible with general "buy and hold" investment strategies a la "intelligent investor", but rely primarily on easily attainable quantitative data and can be parsed very quickly with minimal effort.
swedegeek 16y ago
If you haven't already you need to check out the StockTwits community. They tend to be more traders (short term) than investors (longer term), but a lot of their discipline and decision making process will apply regardless of the time frame. There can be a bit of noise, but I think there's a recommended stream of quality posters you may want to start with. Personally I lean more towards the trading timeframes. Mostly use options to limit risk and sell time premium. Actually had a fantastic day on Friday with a position in SPY (S&P 500 ETF) and AAPL (yes that Aaple). Made ~20% in 24hrs and ~9% in 4hrs respectively. By no means happens all the time, but nice when it does. Either way, very successful investing or trading is a buttload of work. Stay on it and you'll get better over time. Good luck!
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jeffepp 16y ago
You do not need to read balance sheets or dig into financials (you can find general info) about nearly all listed stocks on financial websites and message boards. Then think about your risk profile. If you are relatively risk averse (hoping to beat inflation) then it is more prudent to diversify into some ETFs. Not necessarily the broad market but maybe some macro strategy. I prefer to look at the Risk/Reward profile. More akin to VC investing: I look for 20x based on macro trends or interesting opportunities (scalable growing companies in a huge market). One really basic way of looking at this is something like Baidu and Google. Baidu (BIDU) is the Google of China. The market cap is ~ 25b while GOOG is ~130b. With the growing middle class in China and the sheer market size, it would seem more likely that BIDU would become the size of GOOG rather than go bankrupt. This is just an example, but I have owned BIDU, based on this principle for 4 years (it was under 100 and it recently split 10-1) Another sector where this strategy works is in biotech. I have already commented about a similar investment in ARNA -- feel free to check out my past comments.

mcknz 16y ago

One good thing about actively managed mutual funds (as opposed to index funds) is you get the experience of the money manager working in your favor. The majority of actively managed funds fail to beat the market, but if you do your research and find experienced managers who have been at their funds for a long time, an actively managed fund can be a good part of your portfolio. Index funds should probably be the bulk of anyone's retirement portfolio. Fidelity (for example) has a total market fund that's 0.07% expense and no transaction fees (min 10K investment) -- hard to beat even with an ETF. Read, read, read. Picking individual stocks is very hard -- stick to funds and ETFs.

count 16y ago
Having an active money manager working on your behalf costs money that could otherwise be sunk into growth capital in an ETF tracking an index. See Burton Malkiel "A Random Walk Down Wallstreet" for a very detailed and full explanation.
- mcknz 16y ago
  Sure, it costs money, but it also costs money to be in an index fund that falls 40-50%. No-load, low-expense index funds are extremely useful but not foolproof. Something to be said for cash right about now as well....
  - beagle3 16y ago
    You commit the fallacy of assuming that if you pay someone to do a job he claims to be competent at, you'll get a better-than-random performance. Statistics for active fund managers show that 85% do strictly worse than the benchmark index (usually S&P or DJ), 5% or so are comparable with the index (i.e., they do better but that gets eaten away by their cost), and only 10% beat the benchmark. And fewer than 3% or so consistently beat their benchmark year after year. (Those that know what they are doing are not fund managers; they run hedge funds and make a lot more for themselves. Which should _not_ be taken to mean the reverse - i.e. that people who run hedge funds know what they are doing). Do read "A random walk down wall street"
    - mcknz 16y ago
      Not suggesting that there are many good active funds, but the ones with long-term managers are worth at least some research -- you don't have to beat the benchmark each year to be a long-term success.
      - beagle3 16y ago
        Actually, you mostly do need to beat the benchmark each year to be a long term success. Make 1% each year more than the benchmark for 10 years, and then lose 30% compared to the benchmark in one year, and you are a horrible failure. And that happens often. And if you could name some of these "long term managers" it might actually be helpful for the discussion. I don't know what your background is, but you come off this discussion as someone who knows how the world works, evidence be damned. I've been working in this field successfully for the last 8 years, and no one who _is_ successful (in the beating-the-benchmark sense) stays in index/mutual fund management -- they all go to "success fee" management (think private equity, hedge funds, etc). If you're any good, why earn 1% of AUM per year, when you can earn 2% of AUM + 20% of profits?
        mcknz 16y ago
        At risk of a further beatdown: Certainly not my intention to pretend special knowledge here, and I don't mean to be argumentative. Specifically I was thinking a long-short mutual fund like HSGFX might work as a hedge for a small investor in a situation such as now, where there's the possibility of futher downside risk (in the spirit of using the right tool for the right purpose). Now I could be completely wrong, and please correct me or suggest alternatives if I am. I guess what concerns me about answering the OP's question with "buy index funds" is that it's only part of the equation, and it seems too many people just buy the index and never think about it again (the buy-and-hold scenario). As someone with experience, what would you recommend the OP (or any index investor) do to help preserve capital?
        beagle3 16y ago
        I'm not familiar with HSGFX specifically. I've just compared them in Google Finance. If you put your money into HSGFX in the beginning of 2003, you would have been at +7% today; the SPY (benchmark) would be at +18% today. Depending on where you put your start date, you would sometimes be better off in HSGFX and sometimes better off in SPY. I see no indication from this past performance that there is any reason to believe it is any better than the SPY benchmark. I was replying to "active managed mutual fund is better than index", which statistically speaking is WRONG approximately 5 times more often than it is right. "Buy index fund" is (statstically) the right answer to "which stocks should I buy" which was more or less the original question. > As someone with experience, what would you recommend the OP (or any index investor) do to help preserve capital? Stay away from the stock market until 2013 at least, possibly later. The stock market has completely decoupled from fundamentals and performance. Last year's rally had no fundamental support whatsoever. The things that are likely to preserve capital are gold, and some government bonds. My personal strategy is to diversify on currencies (counting gold as a currency here), using strictly CDs and government bonds. I'm trying to make sure I have RETURN OF CAPITAL, rather than maximize RETURN ON CAPITAL at the moment. Some governments _will_ default on some of their obligations in the next 5 years. Many banks, bond and debt issuers will too. The stock market at the moment is, as far as the non-professional is concerned, an HFT casino. Stay away, unless you like gambling. Investment is a foreign concept to this stock market. If you want to learn more about the market, read Denninger ("the market ticker"), ZeroHedge and Michael Shedlock ("global economic analysis"). Only listen to CNBC, CNN, Jim Cramer and friends if you plan on losing money.