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Business

5 Rules for Picking the Right Stock

by The Frisky November 3, 2018
by The Frisky November 3, 2018

Picking the right stocks isn’t necessarily always easy, however, these tips will help you and are five rules to live by when choosing stocks.

Rule 1: Choose stocks that offer a straightforward and easily understandable business model. Starbucks (NYSE: SBUX) -0.74%, McDonalds (NYSE: MCD) +2.03% and Apple (NASDAQ: AAPL) -0.23% are some examples. If you have specific knowledge about a company or understand an industry that might confuse other investors, those stocks are worth a look.

Rule 2: Invest in “best in breed” companies. Look for stocks that are in emerging companies or an established brand. You want to find strong companies. This strategy is the key to choosing the best stocks for your portfolio.

Buffet has spoken in-depth on the topic of a brand being a “moat” around a business. If you look at the best-performing stocks, historically they all have one thing in common, which is their brand.

In addition to the previously mentioned stocks listed n the first rule, you might also consider companies like Pepsi (NYSE: PEP), Google (NASDAQ: GOOG), Ralph Lauren (NYSE: RL), and Nike (NYSE: NKE). Most people do not have Buffet’s assets, but if you invested in these stocks over the last 5 to 10 years, you’ve probably trounced the market.

image source: videoblocks.com

However, it’s important to remember, in some sectors “brand” does not have the same importance as in other market areas. For example, branding in the mining sector does not have the same impact as in retail. When buying stock, stick with highly admired, preeminent, ubiquitous brands.

You should also look for underweight sectors where stocks that fit this framework generally do not exist or are difficult to locate. If you invest in industries that are not “brand conscious” make sure to select “best in breed” companies. You’ll also want to follow the other strategies listed here.

Make your decisions based on past performance, this will help you find the best nasdaq penny stocks.

Rule 3: The investing axiom, “past results do not guarantee future performance” is correct. Many investors will repeat this saying, but it can be misleading. For a stock to meet this strategy’s criteria, the stock must be a strong past performer. The stock does not need to be up over the last few years or even the last year. however, the long-term chart should be compelling.

Before you invest your money, ask yourself a few questions. Do you want to invest in a brand, management team, or a business that has made shareholders rich? Or do you want to invest in a stock where the stock’s long-term value has been destroyed? The answer is obvious.

image source: indianmoney.com

Basically, you want to choose a stock that fit these metrics, one that has an excellent long-term performance history. This data allows you to sort through established companies, as well as rapidly-emerging brands easily. Most companies fitting this investment profile will have an excellent long-term track record of shareholder value.

Rule 4: Try avoiding small-cap companies. Instead, choose mid-cap and large-cap companies. This strategy isn’t a hard rule since there are great small companies that would fit into this framework. However, most of your investments should conform to this advice.

These tips, like most of the ones listed, are from the Buffet and Benjamin Graham schools of thought. If you invest in preeminent brands and “best of breed” companies, this rule should not cause an issue. And, you should be able to easily locate stocks to add to your portfolio.

Rules 5: Try to look for companies that pay dividends. Again this is not a strict requirement. For example, many of the stocks recommended in the follow-up article do not pay dividends. Apple only recently announced dividends, despite fitting into this investment framework in other ways. Google does not pay dividends, but it is a highly recommended stock.

businessBusiness ModelNASDAQPenny StocksStockStock MarketStocks
The Frisky

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TheFrisky.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. Amazon, the Amazon logo, AmazonSupply, and the AmazonSupply logo are trademarks of Amazon.com, Inc. or its affiliates.