What I know about picking stocks (or what I learnt from the pros)


Disclosure: This article is not intended to be financial advice and information should be taken as educational only. Read the disclaimer.

One strategy to build an investment portfolio is to pick stocks or shares of individual companies. 

When people start to think of investing in shares, many immediately see ‘picking stocks' as the primary way to do that. Picking stocks is purely the process for investing, and needs to make up a part of your investment strategy. 

For me, I like to pick stocks as part of the satellite component of my investment portfolio. These are bets or estimations on specific companies that I like the sound of (because of several factors). I definitely don't rely on stock picking as a core component of my investing methods, I leave that to the more passive options.

Even though it's not something I do often, I've read a heap of articles from prominent figures on how to select and own shares in a company. 

I've summarised what the likes of Warren Buffett, James Altucher, Motley Fool and Phil Town all say is a few helpful rules to follow when investing. After the summary there are more detailed suggestions of each author's ideas of a wonderful stock selection.

There are four rules with picking stocks

I found some similarities in the mantras shared from many of these successful investors and worked a way to package them into four types of rules. 

  • Invest in companies and funds you know of and understand. These are companies that will be around in 20 years, have a good moat from its competitors and decent management. These factors are subjective, but ideally you'd be more comfortable than not of the stock you are buying into. 
  • Invest in trends and solutions that solve problems for billions. Areas like healthcare, AI, batteries, temp staffing, energy, internet are all in demand and should be valuable to mass population for the long term. It's much easier to justify investments in areas you see obvious value in.
  • Think of the investment as if you were buying the business. Focus on the value, buy into it at below sticker price then stockpile it. When you own act like the owner – and keep knowledgeable on it.
  • Invest intending to hold – time horizon is decades. This is a very much a sit and hold type of investment which is a minimum of 5 years. You should sell only because of better opportunities, changes, max valuation, moat breaks – aiming for at least a 20%+ profit gain.

I found four prominent rules to picking stocks, listed above. These are simple but effective suggestions to immediately determine which stocks suit you. 

What I found interesting was what I didn't see or read from these pros. Advice such as:

  • Diversify as much as your can
  • Buy in a certain country/sector/currency
  • Pay attention to the media
  • Trade often
  • Buy property

Let's have a look at where I got the above advice from and the investors who can detail it in length, all based on years of experience. 

Warren Buffett

Everybody in investing likes to reference Warren to sound more credible and I'm no exception.

Warren Buffett
  • A company will be around 20 years from now.
  • At some point, company's management has showed that they are honest, talented people.
  • The company's stock has crashed (think American Express in early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
  • The company's name is a powerful brand: American Express, Coke, Disney, etc.
  • Buy and hold (the patient investor will ultimately be rewarded if they hold on to their stocks )

James Altucher 

A more alternative opinion on long term investing – James has a cheat sheet that he's made available which is to the point and derived from his own unique experiences.

Some of his advice contradicts with other investors, but is valid to his situations.

James Altucher
  • Hold no more than 3% in one stock
  • Only hold 30% of your portfolio in stocks 
  • Invest in trends
    • the internet baby boomers retiring – healthcare, senior homes, energy temp staffing, batteries

The Motley Fool

A service that provides stock picks, model portfolios and tools for the active investor, suggests that we:

  • Buy stock in solid businesses. We expect to be rewarded over time through share price appreciation, dividends, or share repurchases.
  • Don't time the market. Certainly don't speculate when you buy stocks. Speculation is what day traders do.
  • Focus on the value of the businesses we invest in. We try not to fixate on the day-to-day movements in stock prices.
  • Buy to hold. We buy stocks with the intention of holding them for long haul. (That said, we are willing to sell for reasons we’ll share with you in a few days.)

As part of the Motley Fool's product suite, Tom Gardner has an everlasting portfolio that he builds based on certain rules:

  • All EP stocks must be held for a minimum five years from the time they first enter the EP.
  • If a stock has been purchased multiple times for the portfolio, each batch of shares must independently be held for at least five years before that batch can be sold. 
  • Once a stock has been held for five years, it can be sold on the same quarterly transaction schedule on which buys are made. 
  • When a stock is sold, the resulting cash will be immediately reinvested on that same quarterly transaction day.

Phil Town

Phil suggests 8 simple steps to create genuine wealth. These steps are based of the best investors and the most wealthiest people in the world have gone through these steps. It really is a great guide to simplifying the process. 

Phil Town
  • Think of stocks as if you are investing in businesses (treat as if you bought the entire thing)
  • Focus on industries that we have some kind of understanding (need to be capable of knowing it)
  • Understand the 4 Ms
    1. Meaning of the business – know it
    2. Moat – barriers for entry
    3. Management
    4. Margin of safety
  • Watch a stock until its under the margin of safety price – be patient like a sloth
  • Start acting like the owner of the business (only aim to own 3 (Charlie Munger) – 10 stocks (Phil
    • Listen to CEO, read reports, pay attention – for anything happens to Moat or management
    • Start stockpiling it as it gets or stays cheap
  • Pay attention to big 5 numbers
    • earnings growth
    • sales growth
    • book value growth
    • cash flow growth
    • ROI capital
  • If moat breaks, sell or when the price gets too high (on greed) – 20% or more on sticker price
  • Repeat

So should I use this advice and start picking stocks to buy?

Picking stocks is what professionals do. I would say it's something only keen investing hobbyists do as well. A hobby is not a business and generally won't provide you a return on what you spend. Go into stock speculation with that mindset and you won't be disappointed. 

If you are a beginner investor, there are so many better options available for you. There index funds, LIC, ETF and investment app options available that are all setup to provide options for you based on your preferences 

For me, I like the idea of winning big on a stock – but it really is a lottery. You don't have the faintest idea of what could happen. History is a decent guide, but I'm only willing to bet with what I'm prepared to lose. With everything else I have an investment plan in place that focusses on slow and steady growth.

Still keen? Here is some further viewing.

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Tim Ellis, creator of DadInvestor.com.au, helps people confidently invest and manage their money. Inspired by his own experiences, Tim is passionate about creating a financially secure future for his family and sharing his personal finance knowledge with others.