There are more than 3,000 stocks in existence just here in America. Count every stock in existence and finding a great stock pick for your portfolio becomes a difficult task. There are many people who will tell you what a great stock pick is but very few tell you what they aren’t. We’re going to look at the four enemies to great stock picks.
The first and biggest enemy to a great stock pick is leverage. Leverage is Wall Street’s term for debt. Warren Buffett says to avoid leverage. Avoid it in your home finances and avoid it in your stock picks. Companies with large amounts of debt will always be bogged down with mediocrity. Debt causes a company to move backwards so before they move forward, they have to at least get back to zero.
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The only exception to this rule is a small startup company that has to finance their startup and R&D costs. This, still, is very risky. A small company in debt is still not a good company but we are willing to overlook the problem if we see promise. Be very careful and know that you can lose a lot of money by taking a chance like this.
The second enemy is their sector. A good company that is part of a sector that the investing community doesn’t like is nothing more than the best of the worst. An airline stock that has had a good run quarter is still in a sector that isn’t favored so their upside is quite limited until the investing community find confidence in it again.
The third enemy to a great stock pick is an abnormally high dividend. This is often too good to be true and many questions need to be asked before putting your money to work based on the dividend. Abnormally high dividends will often get cut.
The forth and final enemy is yourself. Your emotions, your feelings, and your preconceived ideas. Too often, we make decisions about our investments that have no basis in the data that is sitting on our computer screen. A trusted expert said it was a buy but we don’t see it in their balance sheet. A friend told us that he has made a lot of money so we pull the trigger for that reason only. Stay as unbiased as you can to find the next great stock pick.
If you don’t have the time or don’t feel confident that you can make the best investment choices, consider subscribing to a service like Action Alerts Plus where an expert like Jim Cramer is doing your research for you and all you have to do is buy and sell when they tell you to execute the trade. My secret is that I don’t have enough time to do all of my research so I let Action Alert Plus do it for me.
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The first book I ever read about investing was Jim Cramer’s Real Money. Click here to go to the elementary finance bookstore to order your copy. You can also take a look at the book in the box above. Although the first book, it is still the book I reread once every year.