How do I pick stocks?
One of the most commonly asked questions in mankind is “how do I turn my money into more money?”. “Which stocks should I buy, when should I buy them” etc… There is no straightforward answer to these questions. However, from my experience of investing over the last few years, I have some suggestions.
Ownership
I always try to imagine myself in a position of leadership of the company or stock I am considering buying. When you buy a stock or a share or two in a company, you are part owner in that company (granted a very small one). However, having the mindset of being involved and invested in the company makes me more thoughtful as to whether or not I should put my hard-earned dollars into their stock. You are buying an ownership stake in a company, and I believe if you take it that seriously, you will become much more selective, and you will likely have better long-term results because of your due diligence.
“Blue Chip” Stocks
This term refers to stocks of companies that tend to be industry leaders with an overall solid reputation. Think McDonald’s, Walmart, Visa, Disney etc… While it may seem a little more “sexy” to make millions off of speculative Bitcoin plays or meme stocks on Reddit, that is not investing (not to mention that it is next to impossible). It also seems like too much stress. My method of investing is very boring. I love it.
One of my personal checklist items before I purchase a stock is whether or not I can buy the stock and not think about it for a very long time (years). If I am about to purchase a stock and think I am going to have to sell it soon or change my position soon, I do not buy that stock. Needless to say, my personal trading account is not very speculative.
Longevity
Which companies are going to be around for a long time? The better question is which companies have been around for a long time. The companies that have been around the longest tend to be the ones that have provided their customers and/or shareholders with good long term value. These are also companies that people trust and need to use; examples might be Google and Visa. Other companies with longevity include businesses like Starbucks and McDonald’s; companies that people don’t “need” but use on an extremely consistent basis (and are borderline addicted).
Recession Proof (as much as possible)
There is not a company in the world that is entirely immune to the moves of the overall market. However, there are companies that are more “recession proof” than others. Take a second and think about companies or services that you use on a daily basis.
I will discuss this in more detail in sections below.
Personally, the stocks that I have found to be the most recession proof in my portfolio are McDonald’s and Waste Management (more listed later). No matter how bad the economy gets, people are still going to eat cheap fast food at McDonald’s. This is not to imply that McDonald’s’ stock price will stay the same (the price will likely go down), but McDonald’s is going to be around for a very long time no matter what happens to the economy.
The same goes with a company like Waste Management. No matter how rough the economy gets, their core business of picking up people’s trash will continue.
Dividends
A dividend is a quarterly cash payment that a company distributes to its shareholders. It is a sort of incentive for being a part owner and holding stock in that company.
It is important to recognize that not all companies offer dividends, however, most blue chip companies do.
Dividends are great and they really do add up. Many people who hold dividend stocks in blue chip companies for decades end up being millionaires from dividends alone (depending on how many shares you own in the company and how long you have had stock in that company).
I personally reinvest dividends back into my trading account. You can do this through most brokerages (E*TRADE, Ameritrade etc…) by enrolling in their DRIP (dividend reinvestment program). I found this to be the best method for me and it is common among a lot of investors holding dividend stocks.
While dividends are great, it is important to mention that the decision to buy stock in a company should never be solely based on the dividend amount or whether they even offer one. If the company is not fundamentally sound, a good dividend does not matter. It is an anomaly when a bad company has a good dividend, but nonetheless doing your due diligence on the company itself and not on the dividend payout is vital.
Here is a short list of my favorite dividend stocks in my personal portfolio (in no particular order):
Chevron (CVX)—Annual dividend payout: $5.16
IBM (IBM)—Annual dividend payout: $6.52
UPS (UPS)—Annual dividend payout: $4.08
Cisco (CSCO)—Annual dividend payout: $1.48
Coca Cola (KO)—Annual dividend payout: $1.68
Home Depot (HD)—Annual dividend payout: $6.60
Where are YOU a customer?
This is my favorite method. If you really think about it, wherever you do business, you are a very small part of raising the stock price of a company. For example, I recently got a membership at Planet Fitness (true story). The only reason I got a membership there is because it was the most affordable gym near me. Now I go to Planet Fitness every day to work out; the environment is great, their credo resonates with me and most importantly I get a lot of bang for my buck! A day or two after working out at Planet Fitness, I bought a share in the company because I am a happy customer.
Admittedly, my stock purchase could be seen as an emotionally attached one (because it was), but it was supported by the fact that there are Planet Fitness gyms all over the country packed with people just like me (and the company is financially sound).
I suggest setting aside a few minutes to think about where you spend a lot of your money. Chances are that if you are spending money there, others are too; people drink A LOT of Starbucks…
Final Notes
No matter how much company loyalty you have, it is always necessary to do your own due diligence on the company. Is the company still growing? Has their dividend been increasing over time? Did the company recently secure a key exclusivity contract?
While there is a lot to think about, keeping it as simple as possible has worked for me in the past. Am I ok with owning a tiny portion of this company for the rest of my life? Is this company going to be around for the rest of my life?
If you have any questions or thoughts please feel free to reach out by emailing macrohint@protonmail.com or fill out the form on our Contact page.
Stay informed and take the hint