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Pick Stocks

Updated: Jun 17, 2020

Generally, I/people/economists don't recommend picking individual stocks. You could have invested all your money in Snapchat because it was such a thing, only to lose it all in 2020. No company is invincible.

On the other hand, if you had invested $10,000 in Apple in 1980, today you would have $6.7 million. That is a pretty fantastic turnover.

My rule is to never invest what I couldn't afford to lose. My dad's rule is to never invest more than $10,000 in any single company, pick the company carefully, and don't get too emotionally attached to the money. Chances are you won't lose it, but also won't become a millionaire from it.

So far, I have bought 1 share of stock in each of 6 different companies. It sounds kind of stupid, but it's taught me a lot. And unless you're looking at penny stocks (where a share is < $5, usually because the company is desperate), 1 share can be quite expensive.

Try it out and watch what happens. And who knows what your investment could be worth in 40 years.

Here's some advice to help you get started:

1) Find a good company.

Ya know, a company that has a product you really like, that's high quality or low cost or just really fun and cool and new.

Or a company that cares about the same things you do, like renewable energy or black lives matter or treating their employees well or Catholicism.

Or one that is good to their customers, that gets good reviews and has great customer support and listens to feedback, both positive and negative.

Ideally, you'll find a company that is all of these things. When you find something you like (truly, anything) such as a restaurant, a car, a condiment, solar panels, or a clock, do some research on the company itself and consider investing.

2) Look for recommendations online.

Google "the best stocks right now" and you're sure to get a million results. Sites like The Motley Fool, Nerdwallet, and Investopedia are more than happy to suggest stocks for any type of investor.

Are you looking for penny stocks? Small-cap, mid-cap, large-cap? Blue chip?

Are you looking for eco-conscious companies? Low risk? High growth potential?

You can be sure, there's advice out there for you.

Of course, take this advice with a grain of salt and do the research yourself. Be particular about the source of your advice and don't do anything without looking up the stock on Morningstar, MarketWatch, or your online broker.

3) Look carefully at the numbers.

Okay, you ready? Here are a few things that you can look at before buying a stock.

  • Price-to-earnings (P/E) ratio: This tells you how much you need to spend to get $1 of earnings. This value is often provided on investing research sites, but if not, just calculate the stock price divided by the most recent earnings per share. A ratio of 10 is considered normal, and above 20 is considered expensive. For example, Amazon has a ratio of 179, so you would need to spend $179 to earn $1. A high P/E also means that investors expect growth, because they are willing to pay a lot for it.

  • Price-to-book (P/B) ratio: This is the stock price divided by the "book" price. The stock price is what investors are willing to pay for the stock, and the book price is the calculated worth of a share. So, a P/B ratio greater than 1 indicates that investors think the stock will continue to grow and perform well. A P/B ratio less than 1 means that the stock is under-valued by investors.

  • Percent growth: A good growth company should have ~1 year of sequential sales growth. You should look for ~10-20% growth.

  • Earnings vs Revenue: Earnings is what the company has left over after paying their expenses. Revenue is just the amount of money a company makes from sales. Typically, both values should grow. If revenue increases faster than earnings, the company may be working to pay off debt. Look for quickly increasing earnings in a company.

  • Relative Strength (RS): The stock's performance when compared to the S&P 500 or another stock/index. The higher the number, the better. This one is complicated and I don't want to go too far into it, so here's the Wiki page:

TLDR: There are lots of numbers that tell you whether a stock is good to invest in or not. Try to pick out a metric for the stock and use the explanation above to decide if it's good or bad.

4) Know that the stock market is fickle.

There are all sorts of really stupid tendencies the stock market has.

For example: The longer that the market has been rising, the more likely it will fall.

Another one: "Buy on the rumor, sell on the news." That's a saying about the stock market. People tend to buy stock when they hear that the market is going to do well, and then they sell when it actually does well.

In some ways, it makes sense to buy a stock when it is abnormally low, because if it comes back up you'll get all the profits. For example, Boeing was doing poorly after the 737 Max crash and again during the Covid pandemic. But odds are, the company won't be down forever. Boeing is an enormous, powerful monopoly and I bet their stock is headed (eventually) for an up-swing. On the other hand, I would feel like a real idiot if Boeing went bankrupt tomorrow, which isn't impossible.

So on the other side of things, you might want to buy a stock when it is high and getting higher. That indicates that the company is doing well and it might continue growing! On the other hand, maybe you're buying it at the maximum and you'll just start losing money.

You never really know. Not even Warren Buffett knows, which is why he recommends low-cost index funds.

On the other hand, gambling can be very fun. So go ahead and roll the dice. Best of luck to you!

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