Posted on November 30, 2009 - by Aaron Lau

Shopping For Stocks

Photo by antwerpenR

A question often asked by my clients looking for the holy grail is “How to pick the right stocks?”

It is still an ongoing debate if fundamental analysis (FA) or technical analysis (TA) is more superior. It is important to learn both, only by applying them together will you “FA TA” (mandarin for prosper). Long term investors believing in value investing will rely more on the FA aspect and short term traders rely more on the TA. My opinion is to use FA to select the companies and TA to plan your entry and exits. Details of either method will not be discussed here.

Instead, I’ll touch on “How to avoid picking the wrong stocks.”

1. Looking for sales or discounts

Many are familiar with the mindset of shopping when making purchases, i.e. look out for a sales and discounts to determine a good deal. So when making purchases for stocks, many tend to apply the same method. They look for stocks that are “On Sale! It has fallen 50% from its peak, that is a 50% discount!”. Make the decisions based on that only to find that its prices were further slashed.

Buying stocks is like employing a worker to generate income for you. Good workers are not cheap and cheap workers are normally not good. Would you pay top dollar for a good worker or low wages for someone who does not work at all?

Change your mindset when selecting stocks. I am not saying to not buy them at a discount. But discount is a relative word, cheaper compared to what? Do not use past performance of its peak as the benchmark, instead determine its intrinsic value to compare against.

2. Going for the HOT stocks
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Related posts:

1. Categorize Your Stocks
2. Why Stocks?
3. 3 questions to ask yourself before investing in stocks