Ask HN: How do you pick stocks?

https://news.ycombinator.com/item?id=1483792

by DeusExMachina • 16 years ago

20 40 16 years ago

news.ycombinator.com

I don't like my savings to sit in the bank and being eaten by inflation, since for now my only source of income is my salary. So I usually invest my savings in long term stocks, the kind of investments that you do once and forget for at least 10 years.

My problem is that it requires me a lot of time and energy to pick some stock, and even when I manage I always feel uncomfortable and feel clueless on which stock to pick.

I studied some basis on reading balance sheets and income statements, but it always requires me a lot of time and since I don't do it frequently (it takes a while to have enough money worth investing) I forget everything I know and I have to go through it again every time. Add to it that this is something I really don't like doing.

So, how do you pick your stocks? Do you analyze each company every time? Do you follow some investors advice? Do you follow some website? Usually I refer to Fortune's "retire rich" of "investment guide year 20XX" guides, but picking one stock is different than allocating the full portfolio they recommend and I don't fell comfortable to pick a stock just because they recommended it.

Any recommendation?

davidw• 16 years ago

Investing seems to be a regular topic here, you might search for similar threads.

tbrownaw• 16 years ago

I'm trying to learn value investing, which means analyzing various companies (most recently, I've been looking for candidates by setting google stock screener to a strong current ratio and low-ish p/e) and then looking for advice on them to see if it matches or why it doesn't. One place for advice that my grandfather recommended is "value line" which you can probably find at the reference desk of your local decently-sized library.

The other alternative that always gets recommended is using an index fund. These will always have average performance, so you can only (reliably) beat them by being more above-average than everyone else is.

HSO• 16 years ago

There is more out there than just stocks but since your question mentions stocks explicitly, here is a practical suggestion:

Pick an index fund. Boom, you're diversified. Now, keep an eye on developments, read newspapers (I recommend FT, NYT, and Economist), something will start to tickle your fancy. When you feel like something looks interesting or resonates with you or your background, dig into it. Allocate, if you can, at least 2 full days, for example a weekend. Do on-the-side reading beforehand, gathering all sorts of material (reports, statements, articles, interviews, customer opinions, etc.), just read superficially, the goal is to get an idea and to narrow the sources down so you can do your final research in the 2 pre-allocated days. When after a while, your interest is still there or better yet growing as you find out more, and only then, pull the trigger and invest those 2 days. If you can't stomach the risk at the end of them, forget about the opportunity. If you feel good about it, pull the trigger again and take a position.

Start with a small position, shifting some of your index fund into the stock. Maintain and see how it feels to have the position "on". If it feels good, take more (long _or_ short). If it feels wrong, get out, whether you're ahead or behind.

Forget all about diversification too. Your goal is to iterate this until you have a portfolio of perhaps 4, 5, 6 positions. You are substituting "diversification" (you can't be better diversified than a broad index fund) with knowledge or insight or whatever you call it.

Just my 2 cents (har har, I know... ;)

DeusExMachina3• 16 years ago

There is more out there than just stocks

I mentioned stocks because they are the only investment I was able to find that gives a decent return against inflation and is possible to do without huge amounts of money (like real estate).

But if you would like to elaborate, I am interested.

slpsys• 16 years ago

Options, warrants, futures, currencies, bonds, ETFs, et al. Check out: http://en.m.wikipedia.org/wiki/Financial_instrument, but obviously, these are often or the more advanced (with the exception of ETFs, which are traded as stocks, or bonds).

cynicalkane2• 16 years ago

It's worth pointing out that index funds can be overvalued and undervalued. For example, the S&P, up until recently, had been overvalued for a long time.

The advantage, though, is that whereas it takes days to figure out whether a stock is overvalued, it takes minutes to do the same for a broad-market stock index. Just look at price:long term earnings ratio. In general, under 15 is a probable buy, over 20 means sell if there are better priced assets out there. And don't put all your eggs in one asset class.

yummyfajitas2• 16 years ago

Don't pick an index fund, pick an ETF which tracks an index. The tax savings are considerable and they usually have lower fees.

cynicalkane2• 16 years ago

Depends on the index fund and depends on the tax situation. Some index funds are extremely low-cost.

frognibble2• 16 years ago

I recommend that you read the book "A Random Walk Down Wallstreet" before you invest in individual stocks. The book argues that you will be better off investing in broad index funds.

osipov• 16 years ago

And after that, read Mandelbrot's "Misbehavior of Markets" to understand the limitations of the random walk model.

frognibble2• 16 years ago

What are the limitations described by Mandelbrot? Does Mandelbrot show that active investing produces better returns than passive investing?

damoncali• 16 years ago

The easy answer is to index it.

The hard way is to make your own portfolio. Playing around with fewer than 30-50 stocks exposes you to unnecessary risk, however. At least according to modern portfolio theory.

The way I would pick stocks (if I didn't just buy an index) would be to calculate a reasonable, rational value for the security based on its financial performance - sort of simplistic discounted cash flow model. Then you just repeat, over and over again with lots of stocks, observing trends and buying when the market gets out of whack. There is judgment involved, so you can't fully automate the process. Done right, it's a full time job and takes a good chunk of change.

marze• 16 years ago

In his book "Rocket Boys", Homer Hickman tells how his mother saved a little from her household budget and invested it in stock of companies that made bandaids, and eventually used the proceeds to buy a summer house in Florida. Her children needed bandaids requently, and she could tell which were the ones that really worked, so she invested in those firms.

Lesson: invest in companies where you have a good/deep understanding of the product/industry.

patio112• 16 years ago

Don't miss the important bit in that anecdote: save a little money, consistently, over a long period of time. Do that and your stock selection scarcely matters. (Indeed, you'd probably do better with index funds.)

DeusExMachina3• 16 years ago

Lesson: invest in companies where you have a good/deep understanding of the product/industry.

I already invest in a company that I know well, Apple. Being a hacker, a Mac/iPhone/iPad developer and a fan (no so much lately) I know and understand the company quite a bit. I bought some stock in 2009 and it's performing quite well. But I know the risks of falling in love with a company, that's why I'm trying to differentiate.

save a little money, consistently, over a long period of time

I'm lucky that I have learnt this a long time ago, coming from a family that had economic problems since I can remember. My parents taught me the importance of saving with bad examples.

Regarding index funds, I don't live in the USA and I'm trying to figure out how I could invest in them (it does not seem so simple, from here).

dedward• 16 years ago

I was going to write a big long explanation - but if you don't like investing in stocks - then DONT. Put your cash in the bank, maybe a few currencies (long term, I don't mean currency trading) - and different banks, possibly some offshore (not to dodge taxes - but to avoid banks going under - foreign banks have different rules, some much stabler than the US banks)

Sure, inflation is there, as will be deflation and all that jazz - but one bad stock pick will do more damage to your finances than inflation will.... and if you're thinking you can head off, like, financial collapse by investing wisely when you admittedly hate the process... it's a no brainer.

Put your cash in the bank, leave it there, and built up a big nest egg. If you ever want to start making that money work for you, there are lots of ways to do it - save it up until you have lots, then take the time and make really good decisions - you'll be in a far better position to take advantage of real opporutniteis if you are liquid - and nothing beats having cash in the bank when you watch the stock market tank and all those who were pressuring you to invest are freaking out.

orangecat• 16 years ago

Put your cash in the bank, leave it there

That guarantees a negative real return. If you can accept short term fluctuations, you'll be much better off with an index fund.

beagle35• 16 years ago

That's true if and only if, by "short term" you mean 15 years in nominal terms, and 20 years in real terms.

That's from history (1929 to 1944-49). Perhaps this time it might take longer.

rameshnid• 16 years ago

Don't pick stocks if you are not a trader.

Some rules I love-

1. Buy a house that you want to live in and after that stop speculating on houses.

2. If you need to pick stocks, pick ones with trustable management and with low p/e ratios.

3. Also buy some gold as a hedge occasionally. (not more than 10 pct of your net worth)

4. Don't get obsessed about your savings. Invest in yourself, invest on your skill sets so that you can earn more later.

Good luck

yummyfajitas2• 16 years ago

1. Buy a house that you want to live in and after that stop speculating on houses.

That's a truly terrible idea right now, at least in most parts of the US. Houses, apart from "distressed properties" (read: people who need liquidity and must accept market price) are still wildly overvalued due to an irrational market. Additionally, many states will be raising property taxes in the near future, which would make the house into a potentially large and uncontrollable liability.

DeusExMachina3• 16 years ago

I'm leaving in Amsterdam and here the housing situation seems a little different. There is a really high request for rooms and a big scarcity of them, so I was thinking of buying a house with many rooms and rent them (while leaving in the house).

But for now I can't afford to buy one, so that's why I'm looking at the stock market.

natrius• 16 years ago

https://personal.vanguard.com/us/funds/vanguard/core

cadalac• 16 years ago

I personally think its best to think short term with stocks. Who knows what will happen to a company 10 years from now. If your careful, you can continually buy stocks when the're at a low and sell at a high. Here's some guidelines for doing this:

buy stocks only from the large stable companies, because they pretty much never do radical or unpredictable ups or downs. The're are also the most liquid so you can buy or sell them pretty much instantaneously any time.

Buy the stock when you see the markets moving up, and sell the stocks quickly, before it goes back down. Don't try to sell at the peak because it's almost impossible to know that point. Quit while your ahead.

If the stocks goes down just sell it right away to minimize your loss. if you always do this you won't run the risk of significant losses, but you will have modest gains, which will add up in the long run.

bufordtwain• 16 years ago

If you're worried about inflation, consider TIPS (US treasury inflation-protected securities) or an index fund that consists of them (e.g. TIP or VIPSX). That way you're less likely to lose a lot of your savings suddenly. The stock market can be flaky so the usual advice is not to invest money in stocks that you might need in the next 5 years or so. Also you might try going to the Bogleheads forums and ask for their advice, they are a helpful bunch: http://www.bogleheads.org/forum/viewforum.php?f=1

ct• 16 years ago

Right now we're in a bear market which I see lasting for a loooong time aka the Japenese Nikki market where it didn't go anywhere for a while (also known as the lost decade).

I'd recommend putting most of your money in a safer place like low risk bonds just get past inflation instead of losing it in the market. You can allocate maybe at most 10 to 20% in some ETF funds of your choosing though just to have some stock market exposure.

honopu• 16 years ago

Sure, I really don't believe in diversification. Here are my thoughts, maybe someone else will come along and cut me down or whatever, but that's ok.

Diversification to me is like shooting a shotgun. Most stocks are profitable(they'd be delisted otherwise) so the scattershot(shotgun shot) is a nice way to handle that, and that is diversification.

I kind of like the sniper rifle, where you invest in one stock which when you boil it down to what you're buying is a share in the company. If you are into stocks. They are pretty liquid, and you aren't managing a physical asset.

So after typing all of that, there are other avenues of investment aside from stocks. How about tax-free muni bonds?, vacation rentals? buying land and lobbying to get it re-zoned(from agricultural to residential(house density per acre)) etc.

beagle35• 16 years ago

> Diversification to me is like shooting a shotgun. Most stocks are profitable(they'd be delisted otherwise) so the scattershot(shotgun shot) is a nice way to handle that, and that is diversification.

That's not true. Continuous loss is not a ground for delisting. Going below a certain per-stock value (e.g. $1 or $0.01 depending on trading value) is, and that can be fixed by a so called "reverse split", without making the stock any more valuable.

arthurdent• 16 years ago

i typically recommend Magic Formula Investing to people who don't want to spend a ton of time looking into/maintaining stock portfolios but want a reasonable chance at outperformance.

http://en.wikipedia.org/wiki/Magic_Formula_Investing

A lot of the literature around this, including the website sound really gimmicky, but the book itself is very well reasoned and presents a rational, easily udnerstandable case for outperformance and is backed up by historical performance.

One metric i found compelling was that, over one test period, the author ranked 100 or so companies by the magic formula criteria. the top 10 performed the best, and each successively lower ranked set of 10 performed progressively worse.

The author is a fairly well reputed hedge fund manager and has written a few gimmicky sounding titles, but for the most part the principles are fairly sound and compatible with general "buy and hold" investment strategies a la "intelligent investor", but rely primarily on easily attainable quantitative data and can be parsed very quickly with minimal effort.

swedegeek• 16 years ago

If you haven't already you need to check out the StockTwits community. They tend to be more traders (short term) than investors (longer term), but a lot of their discipline and decision making process will apply regardless of the time frame.

There can be a bit of noise, but I think there's a recommended stream of quality posters you may want to start with.

Personally I lean more towards the trading timeframes. Mostly use options to limit risk and sell time premium. Actually had a fantastic day on Friday with a position in SPY (S&P 500 ETF) and AAPL (yes that Aaple). Made ~20% in 24hrs and ~9% in 4hrs respectively. By no means happens all the time, but nice when it does.

Either way, very successful investing or trading is a buttload of work. Stay on it and you'll get better over time. Good luck!

jeffepp• 16 years ago

You do not need to read balance sheets or dig into financials (you can find general info) about nearly all listed stocks on financial websites and message boards.

Then think about your risk profile. If you are relatively risk averse (hoping to beat inflation) then it is more prudent to diversify into some ETFs. Not necessarily the broad market but maybe some macro strategy.

I prefer to look at the Risk/Reward profile. More akin to VC investing: I look for 20x based on macro trends or interesting opportunities (scalable growing companies in a huge market).

One really basic way of looking at this is something like Baidu and Google.

Baidu (BIDU) is the Google of China. The market cap is ~ 25b while GOOG is ~130b.

With the growing middle class in China and the sheer market size, it would seem more likely that BIDU would become the size of GOOG rather than go bankrupt.

This is just an example, but I have owned BIDU, based on this principle for 4 years (it was under 100 and it recently split 10-1)

Another sector where this strategy works is in biotech. I have already commented about a similar investment in ARNA -- feel free to check out my past comments.

Ask HN: How do you pick stocks?

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