How to pick SMART Stocks

A well-balanced stock portfolio should consist of, at a minimum, 15-20 stocks in seven or more different industries so you are diversified. You want to use both technical and fundamental analysis to find financially strong companies with above-average growth.

Interestingly, out of the 8,800 stocks in the U.S., there are only about 250 stocks that fit this description. Since you want to hold stocks for the long term, it is important to choose the right ones. Steve Connell, former partner with The Capital Group and now CEO of Interlaced Advisors, states, “Being successful in the stock market … requires patience while riding the right horse. The stock market by nature undervalues opportunities that last more than a few years.”

Here are some more tips:

* Choose Companies You Understand. Warren Buffett is arguably the world’s greatest investor. One of his top rules is to only invest in what you understand. You want to pretend as though you are personally buying the company and have to run it. If you understand the business, you have a better chance of seeing opportunities and problems before they come up. This will help give you a leg up when investing. If you don’t understand the business, how it makes money, or it’s one that is too complex, then it becomes difficult to predict future cash flow, performance and growth of the company. To quote Buffett, “I try to buy stock in businesses that are so wonderful that an idiot can run them because, sooner or later, one will.”

* Look For Diversified And Recurring Revenue. Some companies go through periods of high sales growth followed by periods of no growth. You want to find a stock where there is diversified and repeatable sources of revenue. This way their income is more predictable with additional ways to make money. Also check to see how many clients or customers a company has. If a company is solely reliant on very few clients, it will hurt revenue if one of them leaves.

* Be Disciplined And Patient! Fidelity Investments analyzed the performance of their accounts and found that the clients who performed the best were the ones who either died or forgot they had an account! This is because emotions can be our greatest enemy, and we tend to make trades at the wrong time. Connell looks for companies that “improve the human lot more than any others for the indefinite future, they know how to capture the value they create, and the stock prices do not yet reflect the long and fruitful future that lies ahead of them. There are very few other investment opportunities like this in the stock market.”

-- David Chang, Thinking Smart, Midweek, October 15, 2014