Wednesday, September 1, 2010

How to pick stock for you

One day my BOSS asked me, how I picked stocks for investment and my answer was

Picking a fundamentally strong stock is not that very important. You can simply pick any of the blue chips in the indices.

Detailed Fundamental analysis is difficult, why???

- Financial Data available is dated
- Account statements are subject to many assumptions and qualifications
-Difficult for outsiders to get full facts underlying the statements
-Requires industry knowledge

FA is not only analysing a balance but also understanding business models, technology, inputs, impact of changing economic conditions, exchange rates, interest rates, information asymmetry, etc.etc.

Technical Analysis is comparatively easier and will be much more useful for a retail investor;
the most popular strategies for finding good stocks (or at least avoiding bad ones). In other words, we'll explore the art of stock-picking - selecting stocks based on a certain set of criteria, with the aim of achieving a rate of return that is greater than the market's overall average.

Before exploring the vast world of stock-picking methodologies, I should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks! If you are reading this in search of a magic key to unlock instant wealth, I am sorry, but I know of no such key.

This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock-picking as an art rather than a science. There are a few reasons for this:

  1. So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.
  2. A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.
  3. Because of the human (often irrational) element inherent in the forces that move the stock market, stocks do not always do what you anticipate they'll do. Emotions can change quickly and unpredictably. And unfortunately, when confidence turns into fear, the stock market can be a dangerous place.
The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory - a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits your personal outlook, time frame, risk tolerance and the amount of time you want to devote to investing and picking stocks.

Picking a stocks technically is better than fundamental analysis if you want to gain in shorter period of time, though it never guarantee wealth creation. It gives instance reflection of investors mind which one can in-cash very easily. No matter what strategy you choose, just stick to it and it will open doors to real happiness of stocks picking. Just try it ... !!

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