Stock Starter Series, Part 2:  Finding Stocks to Buy

Welcome to Part 2 of a 5-part series for the brand-new stock investor – or the person still thinking about it! My goal in this series is to try to simplify how to get started in this most exciting financial journey.

If you didn’t read the first post, then you should really read it before this one.

If you did and you sincerely answered ‘yes’ to the five questions near the end, then you’re reading this post because you’re pretty convinced that stock investing is for you.

Or, maybe you’re reading this one in spite of your answers because you’re looking for a quick fix – some “hot” stock picks and ignoring the rest of my boring “long-term investing” advice.  I hate to disappoint you:  I won’t be giving any stock recommendations, plus you’ll NEVER get rich quick in the stock market – at least not any wealth that will last.  I speak from experience, so, with all due respect, don’t even try to dispute me on this point.

Cynicism aside, I realize that there are those of you who are very serious about learning more, in which case your honesty and diligence will likely pay off.  I know that it has for me and for the other very successful stock investors that I personally know and have learned about.

To clarify before we move on, somebody saying that they own a “stock” is really a lazy way of saying that they own ‘shares in the stock of a publicly-traded company.’  But of course, you need to find the right stocks first to invest in.

So let’s get right to it: how can you find which stocks to buy?

To answer this, I will list ideas in order of least recommended to most recommended, which incidentally is the same order as most popular/well known to least popular/well known.  Here goes.

Ask a non-professional

People ask for non-professional advice all the time.  It amazes me how, mostly to try to save a buck, somebody will go in way over their head to try to do something that would be better off done by a professional.  Electrical work.  Plumbing.  Construction.  Auto repair.

Aside from trying to save a buck, I think sometimes people do it out of pride – not wanting somebody to tell them they can’t do it or appearing as though they aren’t smart – or to try to get a sense of accomplishment.  I’m the type who, rather than taking the risk that it might cost a lot more to fix any mess that I might make, would rather hire a pro to get it done right the first time.  Then I can use the money, time, and mental energy that I save toward other, more important things.

It also amazes me how so many people ask for non-professional stock investing advice.  A lot of people have lost a lot of money by investing in a stock that was a “hot tip” they heard about in the office or at a social function.

Sometimes, people look for a “hot tip” because they’re looking for a quick fix.  They’ve lost money in another investment and they want to make it up quickly.  They want to pay off their mortgage sooner and so they try to beat the interest rate with a higher stock investing return.  They want a new car or to pay for a big expense that’s coming up real soon.  In short, they “don’t have time” to do their own due diligence – at least, that’s their lame excuse.

These people lacked the foresight to think about the possibilities of emergencies or big expenses down the road and so now they’re in a bit – or a lot – of a panic.

Without exception, I have never known of any person who started investing in stocks with this mindset who actually succeeded.  In every case, they ended up losing.  Stock investing with this mindset is equivalent to relying upon the “one-armed bandit” in a casino.

I know somebody who bought into a “hot tip” back in the early 1980’s.  He sunk over $100,000 into one stock at a time when the market was hot and it seemed as though nothing could go wrong.  Soon after, when the market crashed and most of that money simply disappeared, he spent the next decade bailing his family out of the huge hole that he had dug.  They lived on a shoestring because of his belief that the stock market was a way to ‘get rich quick’ instead of its true power, to ‘grow wealth slow.’

Incredibly, years later he blames the stock market for being rigged and manipulated instead of admitting that he was to blame.  To this day he still doesn’t understand how the market really works.

So even though word-of-mouth from unsuccessful investors is a way that many people learn about stocks to invest in, it’s also the most risky.  Here are some things to think about when you overhear – or are part of – a conversation about stocks and start to get excited about some of the companies that somebody is chattering about:

  • Has that person invested in the same stock himself?
  • If so, then how has he done and can he back it up with numbers?
  • What’s his overall investing record?

A person worth his weight in gold as a stock investor will have no hesitation opening the books and showing you exactly how good he claims to be.  If he tries to laugh you off or change the subject, it’s time to get your advice elsewhere.

Ask a professional

People who are willing to swallow their pride and admit that they should probably get some good stock investing advice can turn to an investment advisor/stock broker.  In the first post, I gave some ideas about where to go to find one.

As I also mentioned, you should ask around for recommendations for a good advisor/broker, much like you would for a doctor, dentist, plumber, etc.  In addition, you should also seek out people who are successful at investing who won’t charge you money to sit down and do some “stock talk.”  They’re also a potentially great source for finding a great advisor/broker or online stock recommendation service (see next section).  A relative is the most likely to oblige.

I do have a few misgivings about my experiences with an investing firm from the mid-1990’s to 2006:

  • If you have a small portfolio value, like less than $20,000 when I started out, you might get treated like an after-thought.  In my case, I received a phone call about once every six months, but only because my portfolio had switched hands to yet another entry-level portfolio manager, i.e. new hire, and they wanted me to come in so we could “evaluate” things.
  • When we did, they always recommended nice, “safe” investments like mutual funds that either didn’t earn much or ended up losing me money.  I got the sense that they weren’t recommending securities they themselves chose to own, but rather ones that were paying them a nice commission.
  • Regardless of how much I was losing, they still collected my annual management fee.

Again, this is where being serious about finding a good advisor/broker is so critical.  If you can find one that is genuinely interested in your success and not just their commissions, then you, my friend, have found a diamond in the rough!

Subscribe to a stock recommendation service

You just read about my frustrations with using an investment firm and feeling as though, being small-time, I wasn’t exactly on their priority list.  This might be the case if you’re just starting out unless your research can turn up an advisor/broker who has produced very good results for their clients and seems to want the best for you no matter how little you have to start off with.

In 2006, I had gotten past the point of trusting ‘professionals’ like this and struck out to start making my own investing decisions.  I opened up a self-directed online investing account with RBC Direct Investing in Canada, but I didn’t have good resources and thus I was a failure in the beginning.

Then one day at a family gathering, I saw an uncle of mine who always had a story about some stock that did really well for him and so I humbled myself to ask where he found his stock picks.  He answered, “Newsletters,” meaning subscribing to a stock recommendation service that would send out a monthly newsletter with their latest “picks.”

I was familiar with these, but had never known a good one to subscribe to.  Besides, to that point I had been too cheap:  I didn’t want to spend money for good advice because I naïvely thought that someone out there would be stupid – er, willing – enough to share it for free.  However, my portfolio by the end of the 2008-09 recession was a complete disaster, so obviously free advice hadn’t been working for me so well.

I left that day with the newsletter idea stuck in the back of my mind when, a few weeks later, I was looking at the Stocks app on my iPhone and came across an article by a rather odd-sounding publication called The Motley Fool.  I’m not exactly sure how I ended up subscribing to their mailing list, but I do remember being impressed with their depth of inquiry yet easy-to-understand writing style.

Not long after, I received an e-mail about getting a deal off of a one- or two- year subscription.  Still being cheap, but realizing that I really had little left to lose and needed all the help I could get, I subscribed to their Stock Advisor service for one year.  I figured that for less than $100 USD for a one-year subscription, I could hopefully make at least that from some of their recommendations.  (Even paying regular price, currently $149 USD per year, is WELL worth it for the wealth of information you get.)

I was immediately impressed by their transparency:  they keep a record of every recommendation they have ever made, the date and the stock price, plus the current price no matter how fantastic the gain or utterly terrible the loss (a loss, incidentally, is only ever 100 percent whereas a gain can be unlimited!).  I was also impressed by not just the picks, but the articles I was getting by e-mail that began to teach me the mindset of a successful investor.

To make a very long story short, I began to buy some of their recommendations that I was familiar with, U.S. companies that were big and that nearly everybody had heard about and some that I had even used and loved personally.  But I had to discipline myself to get over my habits and mindset of failure to that point.  So even when the waters were a bit rough at the start, with some of those stocks taking a bit of a dip or even larger ones, I decided this time to hold on, believing in the companies that they and I had chosen and not wavering.

Several years later, most of those stocks recovered and have earned me very solid returns, some of them even multiplying in value as mentioned in the first post.

The Final Word

As a beginning stock investor, I would highly recommend subscribing to something like the Stock Advisor service AND also finding a professional investment advisor/stock broker.  However, I would recommend subscribing even before setting up your first appointment with an advisor/broker.  If you can walk into their office with the confidence that comes from knowledge, then you’re less likely to be ‘easy prey’ – that is, less likely to be taken advantage of if they happen to be disreputable.  If you’re also aware of some of the better and worse stocks out there, your b.s. detector can be triggered before you’re sucked into buying a stock that is a bad idea.

One thing to mention:  advisors/brokers get paid commissions whether you win or lose, so they may be more interested in getting the commission than finding you the best-performing stocks.  But don’t worry; you’ll find out soon enough which advisor/broker actually cares about your business.  If they don’t, simply find another one.

However, your best source of advice will be Stock Advisor or some other stock recommendation service that you can easily find through an online search; just only look into ones that actual subscribers rave about.  In my experience, however, The Motley Fool is very tough to beat.  Their various services (for different styles of investor) consistently give their subscribers some of the best returns out of all stock recommendation services, so I would start with them first and only look beyond if you somehow feel the need to.

——————–

One last thing:  be sure to click the Follow button near the top of this page.  Next, click here to go to Stock Starter Series Part 3:  Buying Your First Stock.  See you then.

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