Ask HN: How do you pick stocks?
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?
44 comments
[ 4.7 ms ] story [ 131 ms ] threadThe 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.
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... ;)
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.
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.
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.
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"
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?
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?
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.
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.
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).
Still it's important to diversify your portfolio: Pick at least two companies to invest into. There is no need to pick more than five.
Don't sell in panic when price goes down -- if you didn't sell company when you was more expensive yesterday -- why sell it today when you get even less? Don't buy in greed when stock price goes up. If you didn't think that company was undervalued yesterday -- why buy it today when it's even more expensive?
You are right to invest long term. If you are buying/selling same stock more often than once per year -- you are spending too much time on it. Time that you could better spend in your profession.
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.
That guarantees a negative real return. If you can accept short term fluctuations, you'll be much better off with an index fund.
That's from history (1929 to 1944-49). Perhaps this time it might take longer.
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
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.
But for now I can't afford to buy one, so that's why I'm looking at the stock market.
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.
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.
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.
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.
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.
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!
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.