To find great stocks, you should go looking for them.
That’s no Yogi Berra quote, it’s just true! As obvious as it might sound, looking for the stocks you want to find is an exercise that must be done.
One of the most surprising things to hear is actually a common response by investors when asked about their best stocks “how did you find that one?” All too often, the reply is “I don’t remember.”
I don’t think that’s a function of memory or holding time, but rather the lack of a systematic approach to discovering the kinds of stocks they want to own. So, they base their buys on rumors or hunches and maybe one of them will run.
What if instead of doing that, you got clear on the kinds of stocks you want to own and identified some key characteristics of them? Well, that’s the idea I want to introduce here. Specifically, let’s look at a few criteria you could utilize to filter out the noise and narrow down your watchlist to a manageable size.
- Favorites – These are stocks which have shown you some success in the past. They may not do it again, but there was something to them then and they are therefore worth another look.
- Recent Positions – Perhaps you sold too soon or too late, but the trend might still be in effect and that means opportunity exists. Keeping these stocks on your watchlist will help avoid losing sight of them in case they get set to go again.
- Price – Have a preferred price range you’re comfortable with? It’s not about how many shares you can buy, but just a range you like. Maybe it’s stocks in the teens, maybe it’s sub-$50, maybe it’s $100+ that you like. And knowing the limits on both the upside and downside of price which you absolutely do not plan to own is every bit as valid here in order to exclude them from your list.
- Volume – There’s no substitute for liquidity. Being able to trust the presence of a seller when you go to buy, or a buyer when you go to sell is valuable. Tight markets mean less slippage, better price competition, and greater efficiency for you. Deciding your lower threshold for daily average volume will help ensure you’re sticking with liquid stocks and options.
- Optionable – Wait, I thought this was about stocks! It is, but looking to optionable stocks on your watchlist will open countless other opportunities through the options tied to those stocks. It’s the options which provide the Kick!
- Index or ETF Components – Like S&P 500 companies? Put them on the list. Have some favorite ETF’s? Put the heavyweight components on your watchlist, as you just might find they will at times offer greater potential than the group. That can mean outperformance at the risk of less diversification.
- Fundamentals – Knowing that a company is growing their revenue or EPS might help you sleep better at night. If that’s the case, why not include that in your scans so that your watchlist reflects it? The most important factor will ultimately be the price action when it comes to your profitability, but peace of mind certainly has a place in your list if the fundamentals matter to you.
Good starting points?
Remember, there is no magic bullet, but by clearly defining the traits of your best positions and excluding any stock which does not meet that criteria, you end up with a list of stocks that’s tailored to your preferences.
A list you can turn to periodically to discover your next great position.