You’ve decided that you would like to own some shares. But which ones do you buy? How do you pick a good one? What is overpriced and what is underpriced? Truth is many of the professionals get it wrong. So is there any hope for those of us who don’t have any training? I think the answer is yes. It does involve some time, energy and thought. If that’s not for you, I’d suggest buying LICs and EFTs. I’d suggest owning some of these anyway. Here’s some thoughts on how to pick shares. I’m certainly no expert but here are a few thoughts.
STEP 1: Make and Keep a List of Potential Shares
You can get ideas to pick shares from lots of places. Every time I get a new idea I put it on my watchlist with my online share broker. From that point I do some research and keep my eye on it for a time. The key is to not rush in or feel pressured to buy now. That’s a sure plan for disaster. Give it some time and thought. Here’s a few places that I’ve used to get some initial ideas for my watchlist:
Read Investment Blogs
These are never recommendations, but many give you a few share picks to go on your watchlist. In an Aussie context here are a couple that I’ve found and read regularly. If you know of some that should be added, please let me know.
Check out other Investment Websites and Forums
There are plenty of websites selling stock recommendations. I’m not willing to pay for advice. But many of these websites have blogs that are accessible to anyone. Again, these provide some ideas for a starting point. Here are few that offer decent commentary:
- motley fool (just watch out for the spammy oversell if you give them your email address!)
- Equity story
Again please let me know of others to add to this list if you know them.
Read Monthly and Quarterly Reports
Read Listed investment company and managed funds quarterly and monthly reports. These guys do this stock picking gig for a living. They’ve done more research and are betting on the share picks they’ve bought. I check out about 10-12 of these each month and have found it very helpful. They give commentary on what they’ve bought and sold and why. If you notice a stock come up a lot, it’s a pretty good chance you’re onto a winner. Or at least you’ll be losing with plenty of others that are smarter than you.
I’ve mentioned a number of LIC’s in my last post, to find some decent managed funds, go to monringstar.com.au and you can search for those that have performed really well over a long time frame. You might as well get your information from the best!
Read Magazines, Financial News Websites
Again, I won’t pay for advice. But I’ll flick through the odd magazine or newspaper. You can read the business section and there will often be market commentary on different stocks. The more informed you are the better. You might be able to pick up a few suggestions to go on the watchlist.
STEP 2: Determine Your Goal
Are you wanting to buy and hold for a very long time? Or are you in for a quick buck? Do you want a stable stream of dividends paid to your in an ongoing way? Or are you more interested in fast growth? Are you willing to be super risky and speculate or do you want to play it safe? Do you want very stable blue chips or up and coming smaller stocks? Having a clear idea of what you want to achieve will help you decide what shares are right for you.
For me personally I want to buy shares that have room to grow and that pay a growing dividend. I intend to hold most over the longer term and so want to ensure they are companies that will last. I’m not willing to speculate on the next big find, but instead want my money in well managed, proven companies with a clear plan for growth and a commitment to give decent shareholder returns through regular, growing dividends. Ideally these companies will have a market advantage over any competition. I will occasionally buy a beaten down company if it has a clear plan to recover. I will occasionally buy into a beaten down sector if it is a cyclical stock that will likely recover in time (eg. resources, building industry, etc).
This sets a clear path for the sort of share picks I want to buy and the criteria which I’ll use to choose them. As a longer term investor I’m not going to be buying and selling and chasing the market up and down. I’m going to be patient and review each stock and while its case is still strong will hold it over time.
You might want to be a day trader, you may want to trade growth stocks that don’t pay much in the way of dividends. Maybe you want to trade trending stocks and jump on for the ride. Whatever you do, it’s good to have a plan and not just hit and hope.
STEP 3: Research Individual Shares
Here’s some questions you want to answer when researching a particular company and it’s share price. Nothing magical here, just common sense really:
- Do you understand what the company does and how it generates profits? If not, it may be something to avoid.
- What’s its record been in the past? Does it tend to meet expectations or fall below? Sharp past share price movements are something that scare me away.
- Are its earnings growing year on year? Is it’s earnings per share growing year on year?
- What dividends does it pay and are they growing year to year? What is the payout percentage?
- How indebted is the company? Really high debt to earnings is scary and frought with danger. I prefer companies with low to no debt.
- How did the company do in the GFC? I always go see the price action in 2007-2009, that will tell you what might happen the next time there’s a major pullback.
- Are company directors buying or selling their shares? Not such a good sign if the major shareholders are selling out!
- How expensive is the company relative to its price. The P/E ratio? I prefer to stay below 20. Above that, if the growth company slows the price falls are really big. Think Bellamy’s of late! Growth stocks are great on the way up, not so much on the way down!
- How volatile is the company’s share price? It’s good to know what to expect.
- Is the sector it’s in something that is cyclical in nature or can it just keep growing?
- How much and how strong is its competition. Can new competitors easily come along? sometimes its beneficial to have a market leader with low competition or sometimes a new player that has a market edge.
- Is the management in good shape? If the management don’t know where they are going, the share price will likely end up down.
- Is there a very clear stated plan for future growth? I want to be convinced by their story.
- Is there clear future guidance? Companies that give guidance seem to me to be more reliable, provided that have a track record of hitting the target.
- What do other analysts say about the company?
- Is there any recent news announcements about the company? You need to be aware before you jump in.
- What do the current shareholders have to say about the company?
Where To Get This Information?
Now that’s a reasonable amount of information to source. Where do you get it from? Thankfully the average Joe can get hold of most of this information with a bit of effort. Here’s a few sources that I use, would love to hear where you go:
- asx.com.au gives you a decent overview and is a go to starting spot for me. You can see the company announcements about director’s interests and any news put out by the company. Easily download and read their annual and half yearly reports, a must in my opinion. You can see the P/E ratio, dividend payment and price history. Most of the basic information you need is here and available.
- Go to the companies website and have a look around. Get a feel for what they do, their passion, their vision, etc.
- Search out the company on hot copper and see what the shareholders are talking about. Just realize its banter and not always backed with truth. You can usually pick up good arguments for and against and has helped me in the past from not jumping in too quickly.
- Look at your share brokers recommendations. It’s actually pretty easy to have a share trading account with a few places and access their research and recommendations. I like to look at a few places and see what they say. You can also access most of the general info from your brokers website too.
- dividends.com.au has good dividend information available.
- simply wall st is good for seeing easily what’s happening with insider buying and selling, what analysts growth expectations are, dividend payout ratios and what debt levels are like compared to assets and earnings.
- australian dividend investor has a great list of low beta shares, that is shares that are less volatile that others that is updated regularly.
- Lastly just do a search for the company and trawl through what you find.
Doing your research should help you narrow your choices down to a shortlist of potential share picks. You can’t predict what will happen. But if you buy shares without any yellow flags you are more likely to end up with a sound portfolio of good quality companies. Though share prices go up and down, history would suggest that if you are patient and buy good companies, over the medium to long term you should do fine.
STEP 3: Buy and Evaluate Your Shares in an Ongoing Way.
I try not to look too much at the shares I’ve bought. They are there and go up and down. But I do read the annual reports, keep up to date on any announcements and keep a basic eye on the share price to make sure there aren’t any major moves. If the case for keeping the stock changes I’ll sell.
Its worthwhile aiming at owning a portfolio of more than 15 shares for the sake of diversification. You won’t get there straight away, but over time I think 15+ is where you might want to get to. That said, there’s no point buying shares you are not convinced about. If a share is good I’ll just keep adding more of it over time, rather than trying something new and untested that i’m less convinced by.
I’d also always buy some LIC’s and EFT’s to complement any stock picking (a good portion!). If you find that your picks are doing no better than say an australian index ETF like VAS, you might as well just own that. It’s not as fun, but you’ll get stable returns with share market growth.
Lastly, realize that you will make mistakes. No one can always pick just winners. You win some, you lose some. You buy to late, sell to early. It doesn’t matter. That’s just how it is. But over time you should do reasonably well.
In my next post I’ll share out of interests sake the shares I’ve got in my portfolio and why. You’ll notice some winners and losers in there too.