Pick Stocks for Slackers

A portfolio of stocks will outperform secure investments like bonds almost inevitably. Ok, so you figured out how to fund a brokerage account. You know you’re an idiot not to be investing your money in stocks. You let money sit in your savings account and are embarrassed at the 2% return. But how do you actually pick which stocks are the right ones to buy? It does require a small amount of work, but you actually don’t need to be too obsessed to succeed.

Use your industry knowledge.

“I don’t know much about any industry,” you say, “for I am a slacker.” Well, since you probably play video games, maybe you knew that Take Two Interactive was the publisher for a game called Grand Theft Auto IV. If you knew about it five months before the release date and had already bought shares, you would have seen a huge bump when EA made a takeover offer (from 16 to 26 in one day). Was there any way to predict EA’s offer? No, but stock jumps happen ahead of major events like on-sale dates of big products.

Follow the news and pick accordingly.

Kenya recently went through a period of major political unrest. A lot of stocks tumbled, notably insurance and tourism-related companies. But after the unrest was over, the stocks bounced back. Also, remember that the population is booming around most of the world in a way unprecedented in history, so companies that can take advantage of that will be good performers.

Don’t resort to math, P/E ratios, or other numbers games.

That’s what they are – games, with little payoff. If P/E ratio had anything dependable to say about a stock’s future performance, then everyone would easily make money on stocks. It looks authoritative, but don’t waste your time trying to decipher the meaning of number-heavy statistics if you aren’t committed to spending significant time becoming an investment professional to put the statistics in perspective.

The only information you want is verbal descriptions of company performance from neutral sources like The Wall Street Journal, which you can find plenty of by typing a stock ticker symbol into Google.

Try to divine the path of the stock price curve.

Stock price prognostication is a learned art. You must look at a graph of the stock’s price over the past few years and figure out its current status, under- or over-valued. Consider the company’s recent news: were there recently any announcements or scandals that artificially affected the price? Consider what’s to come: are they growing; do they have new products coming out soon?

Use comparable companies to see trends.

Apple and Google both got hit hard early in 2008. Apple’s recovery happened only shortly before Google’s did. If you were watching both stocks, all you had to do was wait for one or the other to go back up and know that it was time to buy.

As soon as it’s told to too many people, stock advice becomes useless.

Stock experts in print or on TV aren’t worth listening to; in person they are. If you have a friend who works in finance or I-banking, take their advice if they grace you with a stock tip. Don’t waste your time with mass-market investment tips. By the time you see the show and log in to your Scottrade account, all the other amateurs who were watching have beat you to it.

When it starts to feel too obvious or too easy, that’s the time to jump.

Real estate prices were skyrocketing in the early part of this decade, and it seemed obvious that a second home was a good investment. Dot-coms were guaranteed money-makers regardless of profitability in ’99. If you remember, it was a running joke for a while about how none of the dot-com millionaires were actually turning a profit. In the late 1920’s, it was a running joke how easy it was to buy stock on margin. Running jokes are really bad signs.

Put a stock ticker on your homepage.

Don’t keep checking prices, but set up a widget or some such so that you won’t miss any sudden rises or falls. Paying occasional attention pays off. Sell when you make an unexpected large gain.

Update your portfolio a few times a year.

For a person or family, you should choose a few stocks to buy and sell about three or four times a year. Get rid of the losers and try something new on a regular basis and your long-term returns will be the better for it.