5 Keys to Success in a Stock Picker’s Market

Picking stocks is intimidating, but far from impossible. The stock market has really been humming along lately for stock pickers and armchair investors alike. Consider that the Dow Jones Industrial average is up 22% since September 1, the S&P 500 is up 27% in the same period, and the tech-heavy Nasdaq is up 33%. Since January 1, all three indexes are up about 6% in about 6 weeks. But the best news of all is that this is a broad-based that isn't just for sophisticated traders and hedge funds. This is a real rally for real folks, for hardworking Americans with 401k plans and buy-and-hold retail investors who actively manage their own small portfolios. Picking stocks clearly isn’t as difficult as it seems. Take Dow components. McDonald's (NYSE: MCD ), IBM (NYSE: IBM ), Caterpillar (NYSE: CAT ) and Wal-Mart (NYSE: WMT ). All are up more than 30% since Oct. 9, 2007. That's an annualized gain well over 10% for the group when you add in dividends – great returns in any market, and even more impressive considering it's based on buying at "peak" valuations as the stock market hit its pre-recession high in fall 2007. And who says buying and holding blue chips is an extinct investment strategy for the timid or naive? Certainly, there are some dogs of the Dow too. Cisco (NASDAQ: CSCO ) is off -42% since Oct. 9, 2007, Alcoa (NYSE: AA ) is off -52% and Bank of America (NYSE: BAC ) is off -68%. And GM and AIG complete wiped out investors who didn't bail out during the death spiral during the financial crisis. But that's my point – it's a stock picker's market, and just buying the indexes gives you a share of the worst duds and the soaring successes. For a long-term investor picking stocks with an IRA or a few thousand dollars in a brokerage account, all you have to do with your picks is focus your cash on fewer losers and more winners to beat the market. Easier for me to say, right? Well hopefully with these five stock picking tips you'll see that it's not quite as daunting as some think to pick the right stocks, even in a challenging market like this one. Stock Picking Tip #1 – Making Money Should Make Sense Warren Buffett jokes that he isn't smart enough to understand how many companies make their money. Whether you believe him or not, you should certainly have faith in his message – don't buy a stock if it doesn't seem like a good business model.  (You can read 10 Warren Buffett quotes here.) Take everybody's darling tech stock, Apple (NASDAQ: AAPL ). How does the company succeed? By creating innovative products consumers can't live without. Unless you've been living under a rock you know how the iPad is a runaway success, that the iPhone remains a dominant smartphone and that the iPod and iTunes are the standard when it comes to digital music. Apple is up 115% since Oct. 9, 2007, when the Dow Jones "peaked" before the financial crisis. It's no wonder that 71% of AAPL stock is in the hand of mutual fund managers and institutional investors – including over 16 million shares alone in the portfolio of Fidelity Contrafund (MUTF: FCNTX ). Owning Apple just makes sense. Stock Picking Tip #2 – A Bad Rap Doesn't Equal a Bad Investment One of my personal favorite stocks right now is Bank of America (NYSE: BAC ). Why? Well, partly because I see improving metrics that appeal to me – more borrowers making payments on mortgages and credit cards, primarily – but also because sentiment on the stock remains overly negative. Yes, I suppose we could see a surprise glut of foreclosures or a shocking revelation from Wikileaks about corrupt executives and cooked books. But come on – BofA just posted a $1.2 billion loss due to bad housing loans, and by its own estimation will be on the hook for $7 billion to $10 billion to settle lawsuits over defunct mortgages securities. You're telling me there's something uglier than that lurking on the books?
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