When you want to choose a good restaurant, it’s easy to do so with an app like Yelp – but what if you could similarly apply a standard approach to find the best stock picks?A lot of people will tell you that the stock market is unpredictable, that it can be impossible to know which stocks will do well, and that active stock picking is no more rewarding than letting a monkey throw darts at the stock pages in the newspaper.Those things are partially true but they obscure the bigger truth, which is that some people do consistently make outstanding stock picks and there is a methodology you can follow to share in at least some of their success.Based on our own adventures in the stock markets over many years, here we share some critical principles you should apply if you want to find the best stock picks.
Always Demand a Margin of Safety
A great batting average is affected more by avoiding bad hits more than by scoring good ones – and that is also true in the stock market.You’ll often find stock picks which seem promising but about which you feel there is still some risk. Often people will invest in those for fear of missing out on an amazing return. This approach, in the long run if not sooner, will see your portfolio shrink not balloon in value.You should look for investment picks which are totally compelling and where the buy side story is so strong that the stock will still be a great buy even if part of it turns out to be misguided. This is what investment gurus like Benjamin Graham and Warren Buffett refer to as a margin of safety. It is critical and if it means that you only end up plumping for one stock pick a year – or even one a decade – that’s actually a positive thing.
Ignore Stock Picks from those in the Know
It may sound counterintuitive, but it pays to ignore stock picks which come from people with highly specialised knowledge or a special connection to a company.There are several good reasons for this, aside from steering well clear of any whiff of insider trading. First, they may be invested themselves in the stock and so their motives in recommending it are not subjective, whether or not they realise it. This can cloud professional judgment. Secondly, if a stock cannot be understood by an interested outsider based on publicly available information, then it may never be properly appreciated by the market even if it is an outstanding investment option.Getting a stock pick from someone at the dinner table may feel more special than getting the same pick from an investment newsletter – but finding the best stock picks isn’t about feeing special.
Look for Proven Success – But Don’t Rely On It
You wouldn’t want to be the first patient your doctor had ever seen and it pays to feel the same way when searching our stock picks.It’s not that a stockpicker without a long proven success record isn’t good or perhaps even outstanding. It is just that you do not have the data set to make a judgment on whether or not he is.That is why you should only take stock picks from sources which have a verifiable record of successful stock picks stretching a long way back. Make sure that what you are assessing them on is the whole record, not just a carefully curated list of their proven winners.But a successful past does not guarantee a successful future. So, while you should demand this as a minimum proof of competence, you should not simply rely on it blindly. You still need to assess the stock pick on its own merits.
Stick to what You Personally can Evaluate
Stock picking shouldn’t be rocket science – unless you are a rocket scientist.Everyone has their own circle of competence, areas they understand and have the right tools to evaluate objectively and correctly. These circles of competence can be based on what you studied, what professional field you are in, the hobbies you have or building up a knowledge base in a certain area over a long time.Sticking to your own circle of competence will allow you to evaluate stock picks more quickly and more successfully. If someone tells you to buy in to a chain of gas stations, it helps if you drive by them every day and know firsthand how they are doing. If you are an expert in political risks, you are better able to evaluate the upside and downside in oil stocks. If you’ve never stepped inside a yoga studio in your life, it will be hard to evaluate whether a hot new yoga brand has staying power.A lot of people make the stock market sound very complicated. What is interesting about the world’s most successful investors is how simple their approach to stock picks is. They have established a proven set of easily comprehensible principles in picking stocks which they apply rigorously and consistently. We’ve shared some of the key ones with you above. Based on them, which stock picks you’ve had recently may be worth a deeper look?