Wise man learn from his mistakes, wiser man learn from OTHER's mistakes. Deriving from my own mistakes and others' experiences, I am using the following criteria to pick stocks from now on.
Great investors in the past and present, such as William J. O'Neil and Warren Buffett, has great systems to pick stocks.
I use William J. ONeil's CANSLIM method first to determine what stocks NOT TO PICK from the pool of stocks in the market.
C-Current quarter earnings...if growth is less than 40% from the previous year's same quarter, it should be toss out of the pool.
A-Annual earnings growth...similar to C, but use several years of track record to determine. Stick with positive earnings...dont go for the "may-bes." New biotechs, companies with a declining revenue, an unsure "turnaround"... If you want your stock to grow at least 20% on an annual basis, why would you buy companies that grow less than that.
N-New product, management, highs...new products preferred (And Buffett loves monopolies. If product has a monopoly, GREAT). Experienced management are essential. If the stock is already making a new high, it might go even higher
S-Supply/Demand...small float is preferred. The "had-been" big-caps should be avoided for the best money making opportunities.
L-Leader/Laggard...Stock should be in the market leading group. This selection varies overtime. It once was the railroad companies, retail, then it is now techs and oil drilling.
I-Institutional sponsorship...if stock has institutions buying, great. I personally do not use this because institutions might miss out on some new startups, or because of small float, or other reasons. And if institutions have large positions, they are likely to be the first ones to dump stock if anything goes wrong with the company because of they are "in-the-know" than most of us.
M-Market Directions...Bull/Bear market right now? You be the judge. A bull market certainly helps a good stock.
Then throw in some Buffett and Graham. Buffett see stocks similar to a bond/fixed income instrument. He use an earnings/price ratio (instead of PE) to determine the "annual return" of the stock investment. If the stock is about to make 4 bucks in earnings this year, and the stock is currently 30 bucks, then the return is 4/30=13.3%. If company grow at a rate of 40% the next year, the return is 5.6/30=18.8%. So the long term return is around 15% or so, not too bad. Therefore, the cheaper you pay for the stock, the better the rate of return will be. Another wisdom that I derive from my own mistakes is that you should wait for the stock to hit your target price (buy when blood is flowing in the streets). It is sometimes impossible because you will end up looking at this great stock to hit new highs without owning any. This criteria is particularly essential if you are investing for the longest term. If its to be held for 18 months ONLY, many criterias can be slimmed down a little (eg. Pay any price for stock, monopoly of product not necessary...)
I also prefer stocks that are in the consolidation period (just fluctuating around a certain channel, not making new highs or new lows).
Cutting losses early is another wisdom that I learned from my own mistakes. Dont argue with the market.
What about do not overuse margins? That kills most investors the most. In the long run, unless if your annual return is well above the gurus', your margin interest will eat up a lot of your gains. Not to mention the possibilities of margin calls.
What about not to get in the hypes and stories of Wall Street? I personally HATE the Wall Street analysts. Not to mention the Wall Street Journal and most of the Wall Street publications. I ONLY use Investor's Business Daily because its more "neutral" and MUCH MORE INFORMATIVE than others.
Another lesson from past mistakes. For a personal portfolio, have no more than 8 stocks and no less than 4. Both the upper and lower limits are important. Due to the lack of "diversity," the stocks should be in DIFFERENT industry/sectors. There are always good, fast growth, and solid companies in different sectors. Even small companies in unfavored sectors might have revenue/earnings growth that matches or exceed the big name techs.
Sometimes you cant go for the best of both worlds. Buffett likes companies with great track record, but many of the best growth stocks are new startups with only a few years of track record to follow. Do your own homework and see what works for you. Adjust and be flexible.
Here are my humble opinion and thoughts.
Ben Yeung |
