Disclaimer: You probably shouldn’t follow my stock picking advice. I really have very little idea what I’m doing. But almost everything I read about how to pick stocks is super overwhelming to me and I thought I might not be the only one who feels the same. So… from someone equally overwhelmed, here’s what I do when I’m thinking it’s time to buy a stock.

I’m also pretty sure, with my very limited knowledge again, that it’s usually safer and easier to buy index funds. Also, I really think you should max out your retirement accounts like an IRA or 401(k) before worrying too much about buying stocks. And you should absolutely have an emergency savings account and be debt free.

Ok. Enough with the disclaimers. Onto this idiot’s guide to picking stocks.

Step #1: I start with just keeping an eye and an ear out. I subscribe to Kiplinger’s and they talk a lot about different stocks. They are actually, probably, my number one source of initial stock information. So pick a trusted source, whether it’s a magazine like Kiplinger or Money or an established website like Morningstar or Yahoo Finance, and make it a regular read.

Example: I read about Carriage Services, Inc. (CSV) in some edition of Kiplinger’s. Carriage Services is one of America’s largest funeral and cemetery providers. Because I’m a sort of morbid person who talks and thinks about death too much, it caught my eye.

Step #2: I take stocks that have caught my eye and read up on them – on them, not on their financial or stock info, but what they actually do. And it has to make sense to me immediately. I’m not saying that I have to actually know how to mine for ore, but I can comprehend what they’re doing there and how it is an effective business.

I am all for Warren Buffett’s stance “we try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character.”

Example: So, not say I understand death, but I get the function of these services and I’m pretty darn sure they’re recession proof. I also had pretty much no idea about the death industry back then, and was surprised to find there were a few other “death stocks.” As I researched Carriage Services, Inc., I also found Service Corporation International (SCI) and Hillenbrand (HI).

A little research later and I quickly figured out Service Corporation International (SCI) and Hillenbrand (HI) were worth my time too.

Step #3: Now I check out what their stock looks like and more financial information on the company.

You want to make sure you compare the stock to other similar stocks. Things like the P/E (Price to Earnings ratio) and Price to Book should be sort of similar among say Buffalo Wild Wings and Chili’s but would be really different between Buffalo Wild Wings and Microsoft, since they are two different sectors.

I try to find a P/E under 15. If all of my reading on the company has made it seem like a solid company before getting into the numbers, then the lower the P/E the better. It means they’re being undervalued for some reason.

For the Price to Book, I look for a number around 3. Under 3 means it’s either undervalued (which is great) or fundamentally flawed (which is really not great). Hopefully, having researched the company beforehand, I’ll have an educated guess at why that number is what it is.

Example: After checking out the financials on all three companies, they were still looking promising, but Hillenbrand was now the top contender with the lowest P/E and the best stock price.

Step #4: If the company makes it through all those hoops successfully, I start tracking their stock. When I find an interesting one on in Kiplinger, I add it to my tracking database.

In that same vein, I believe it doesn’t hurt to keep an eye on stocks in the main category you feel you know. I work in the entertainment industry, but I also worked for a cruise line for years. I feel like I still follow events in the cruise industry without any effort, so I also track a few different lines stock (FYI – I haven’t seen anything that made me ready to take the plunge, but Royal Caribbean has been moving up on my radar).

Tracking stocks is super boring, so I use Wall Street Survivor, which just does it for me. The website gives you X amount of money and lets you “invest” away. When something catches my eye, I add it to my fake portfolio and start checking in regularly. They also have a bunch of great, free investing classes you can take.

Example: I added all 3 to Wall Street Survivor and started checking them pretty much daily. I did this for a month, keeping an eye on their stats and doing a quick Google for news on them.

Step #5: Take the plunge and buy the stock. After you’ve researched it thoroughly and tracked it for a while, there’s nothing left to do but buy. After buying, I make sure to check in on the company a couple times a year to make sure they’re still as great as I thought in the first place.

I haven’t had to worry about figuring out how to know when it’s time to sell yet, since my stock is trekking along just fine and I’m in this for the long haul unless I notice something going really wrong with the company.

Example: By the end of August last year, I was already leaning toward Hillenbrand (not gonna lie, the fact that their symbol is HI seem friendly to me – yet another reason you should take all my stock picking tips with a major grain of salt), I read about pretty much just the tiniest whiff of a rumor that Hillenbrand was about to buy out a major funerary company and become one of the biggest contenders in the American funeral service industry by doing it.

So I make took the plunge the next day. They did buy that company about a month later and my little investment has solidly shot up 16% since then. I expect it to keep doing well too because Hillenbrand is a solid company, with a past of strong leadership, a wide variety of well connected services and an eye to the future. I’m sure it’ll dip sometimes, but I still think it’s a solid buy.

The other method I use from time to time is shaking a Magic 8 ball and doing what it says.

Nah, just kidding.

…or am I?

Any savvy investors out there? How do you guys pick your stocks?

 

*Part of Financially Savvy Saturdays on Femme Frugality and Debt Discipline*