How to Choose which Stocks to Follow

Steve Kanaval |

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The thing I learned from a mentor about doing equity research was to pick a few sectors and become an expert. That’s why I try not to pick too many wide ranging fields that I don't understand, forcing me to cut a broad swath. It's too much work, which is why I recommend picking three to five sectors and three to five stocks and getting to know them well.

What my mentor was saying was to listen to every quarterly call the company had, and second was to understand how they make money. It’s important to keep your own spreadsheet on revenues, or at least understand how the CFO was using his spreadsheet. Do this for 10 to 20 stocks while keeping good records, and don't kid yourself about how much commission will cost and where you could potentially enter or exit. 

Company data is easier to track at smaller companies, and it’s usually best to pick stuff you like, so I follow beverages, gaming stocks, software gamers, and technology that I think is cool or will contribute to the growth of the internet of things. I then think how these stocks are directly related to the consumer, stay away from oil and gas, biotech and banks, because I am not a scientist or a drilling expert – and anyway, banks are boring.

Don’t Expect Trends to Turn on a Dime

I have experienced four distinct cycles in my career:

  • 1980-1990 – The market took off from a base.
  • 1990- 2000 – The market peaked and incorporated the Internet.
  •  2000 -2010 – The market gave it all back because it was ahead of itself.
  • 2010 – Present – The market bottomed out after the mortgage crisis and the rally resumed.

It is better to look at market movements and break them down in a simple way, keeping in the back of your mind that trends rarely turn on a dime – they normally last seven to ten years. The internet move from 1995 to 2005 was irregular relative to other periods in history. It was because the internet raised the velocity of change with disruptive technologies where few understood valuations, no one really knew how to value Internet stocks. They may tell you they knew, but they didn't. Only today, after the up and down over the last 30 years can any analyst value technology stocks. What the market went through in those 30 years was only equaled during the 1920's and 30's and in previous trade markets, because listed exchanges for stocks were not around yet, and trading and investing common stock didn't exist.

Going back further in history, you may have heard about the Tulip Craze in the 1600's as part of the madness of crowds. However, exchanges and stock trading was only 200 years old when the NYSE launched under the Buttonwood Agreement and instituted new reforms in 1817 as the broker organization the New York Stock and Exchange Board began renting out space exclusively for securities trading. So, trading regulated common stock is relatively new.

In short, go out there and pick a sector. Pick a few stocks and follow them, and pick something you like, and keep good records. It's fun, and will only help your wallet and your understanding of consumer spending, market economies and how and why they work. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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