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 isnt 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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