Tuesday 11 September 2007

Best Stock Picking Strategy?

Arguably one of the best strategies around and used by over 70% Fund Managers across the world is the one which Combines the strength of Fundamental as well as Technical Analysis. I wouldn’t deny the fact that i too use this methodology for Value Investing.

So, how do you pick stocks using this strategy?

First pick stocks that are Fundamentally strong. What stocks fall under this category? Stocks that have shown growth consistently, have improved their Profit Margins, have shown at least 15%+ of ROI (Return on Investment), i would say are reasonably good stocks to own Fundamentally. Much more analysis should follow including Ratio Analysis. However, we will try to limit the same for now.

Once you have picked the Stocks you would like to own for a reasonable period of time, you should then try to pick the right time to enter the stock. How many times have you bought the stock just to see it go down? Such instances may be avoided, if not completely, by following the underlying Stock Chart Pattern and Technicals.

While looking at the Technicals, you might want to check out the Long term Trend using Long term averages such as 50/200 Day Simple Moving averages as the basis. Weekly Chart should be used instead of the Daily chart, because your Investment horizon too isn’t a few days after all. Make sure MACD is bullish, which will add to your theory of Good long term of the stock.

However, you should not mind minor fluctuations here and there.

Timing the entry

One very common mistake made by investors is to try and pick the bottom. Well, for starters, Nobody can pick a bottom. So, why waste time doing so. Instead follow Nike. Just Do it . Meaning, if you have done all your research and are more than confident that the stock will move up and is a good investment for the long term (few months/year(s)), then do you really think it makes any difference if you bought the stock at 100 or 90 when you expect it to go past say beyond 150 or 200? It really doesn’t. Then just do it. Go for it and buy the stock rather than just thinking. If you keep thinking, you will end up doing just that. Thinking.
Hence, never try to time a stock when you are looking for a long term investment. Time is right when you think it is. If you keep researching, you may never find the right time.

Stop Loss for long term?

This is the most difficult question to answer. Ok. If you are investing into a stock from a long term perspective, should you really bail out just because the stock moved say 20-30% down? There are of course two sides of the coin.

One. You may say, that i am confident about the Research that i did and will stick with it and will NOT get distracted with these minor fluctuations. Moreover, nothing really changed fundamentally for me to bail out of the stock. If i am unable to hold my emotions and take 30% loss then i should not be investing in stock market.

Two. You may say, i did do my research right. However, the stock is moving in the opposite direction which means, the stock has proven me wrong. Is it worth holding a stock that has already proven that my decision was wrong? You should probably bail out in that case.

Now, you may ask, i have given both sides of the coin here which one should one follow. Well, as i stated earlier, this one is a difficult one. It completely depends on You, your research, your confidence on the stock and your success percentage doing what you did earlier.