I've reached the age where money is the most common birthday gift I receive. Not that I'm complaining, mind you. But I miss the mystery of not knowing what's behind door number three.
Instead, I find myself flush with cash, going through the doors of stores like Bloomingdales, and wondering if I'll leave with a $1,490 Louis Vuitton bag or a $35 Lancome surprise package of make-up I'll never use. (Actually, it's much more likely to be the Lancome surprise since no one has ever given me anything resembling a grand and a half, except in Monopoly money. But I like to at least entertain the possibility of Vuitton for a while.)
It's great to have a wad of cash ready for spending, but if you don't know what you want to buy, it's easy to get lost in the quicksand of indecision, a trap waiting equally for department store shoppers and Foolish investors.
Here's the all-too-frequent scenario. You've read The 13 Steps to Investing Foolishly and are ready to build your personalized portfolio. You've paid off your debts (yay!) and set aside enough money to cover three to six months' worth of living expenses for emergencies. With the rest of your savings, you've allocated 40% to an index fund, 30% to Foolish Four stocks, and 30% to finding some excellent individual companies to buy and hold for the long-term. But how do you find the right one in a shopping mall of more than 9,000 publicly traded companies?
Or, for those of you to whom shopping does not resonate as a valid metaphor, how does an investor dive into the multitude of available stocks and surface with her spear thrust deeply into a good investment? Here are five suggestions to help find individual stocks that work for you.
Suggestion 1: Buy what you know
As is written in the The Motley Fool Investment Guide, "Looking for great individual stocks to research and invest in is no more difficult than studying the companies that provide great products or services in your life." Begin hunting for possible investments around your home. What products do you use and love? Track down the manufacturer of your favorite product by reading labels on packages and clothing, and then doing a "Search" on our site for company information.
The Motley Fool Investment Workbook recommends checking your fridge for a snack that may potentially lead you to the path of riches. Could your favorite food evolve into your favorite portfolio holding? Quite possibly! Or snoop around your closet for a possible stock tip.
If it worked for Peter Lynch, there's no reason the "buy what you know" approach can't work for you.
Suggestion 2: Ask friends
If you have friends who invest, ask them for suggestions of great companies. I'm not referring to the latest, greatest hot stock tip -- those will most likely end up in the Toilet Bowl Port. The trick is to ask for great companies, not hot stocks.
Several year's back, a close friend spent time traveling in Finland. Between sips of vodka and bites of smoked reindeer, the local buzz revolved around a little company named Nokia (NYSE: NOK), which seemed destined to become a leader in the wireless industry. Had I been Foolish enough to investigate (and buy) this Finnish company back in 1996 when it first crossed my path, I would be finishing this quarter with a 10-bagger.
Suggestion 3: Stock research
In the Motley Fool Research reports, our analysts dissect noteworthy companies in a much-easier-to-take way than those dissections you did in high school biology. You can use these reports as a starting point for gathering information on companies that interest you. We don't offer "buy"/"hold"/"sell" recommendations; just the facts you need to make your own decisions.
Suggestion 4: Stock Screens
Another handy tool investors can use to narrow the field of possible companies is a stock screen. It uses a data base containing financial statistics on thousands of companies to help you find stocks that meet certain predetermined investing and financial criteria. For instance, you can screen for all companies that have a P/E ratio of less than 10, an earnings growth rate of more than 100%, and a dividend yield of more than 4% -- and if you find one of those, let me know immediately!
Here at the Fool we prepare weekly screens for stocks that have missed or beat analyst consensus estimates by 9% or more, and two screens that show you rising and falling margins. Links to other screens can be found on our Web Resources page.
If you really like the idea of stock screens, check out our Workshop area, where stock screening techniques have been developed to a high art.
Suggestion 5: Newspapers and magazines
In the BTMF era (before The Motley Fool, that is), I often used magazines as a starting point for finding companies to invest in. If a company I knew and loved appeared in roundup articles or as a stock tip, I'd use it as a heads-up to initiate an all-out research binge on the company.
Every day the news is filled with companies ripe for investment investigation. A name appearing in the news doesn't necessarily equate with a "buy" rating; it merely offers a starting point to begin consideration for your portfolio.
Finally...
Take advantage of online resources, especially our discussion boards, to get other opinions on the company you are interested in. Remember, finding a product you love or picking a stock off a screen isn't the answer to your investing dreams. It's only a place to begin your research.
As for me, I'm putting my birthday gifts into a money market account. Then, I'll follow my own advice and look for a new company to add to my portfolio. (Cash is so versatile!) A few years down the road, you may even see me traveling with that Louis Vuitton bag after all.
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