I like to read up on general investment advice. “10 Ways to Wealth” or “Eight Mistakes To Avoid”… yiada yiada. Yet the “Six Rules to Follow When Picking Stocks” (Forbes Intelligent Investing, 16 June 2012) is one of the more sober collection. What’s more, it makes mentions of two investing names, one past and one present, that usually make sense. Here is a modified version of that Bezinga Editorial.
Rule ONE: Invest in stocks that offer an easy-to-understand, fairly straightforward company business model — e.g. McDonald’s, Apple and Starbucks; unless you have or understand specific industry knowledge — is one of the hallmarks of Warren Buffett’s long-term investing philosophy.
Rule TWO: Invest only in companies that are “best in breed”, including companies that have tremendously-established brands or extremely strong emerging brands. This is key. Keep in mind that in some sectors, the concept of “brand” means less than in other areas of the market – for example, means less in the mining sector than it does in retail. Warren Buffet describes a strong brand as a moat around a castle, and if you look at many of the best performing stocks in history, all have one thing in common – a tremendous brand – e.g. Nike, Ralph Lauren, Google and Pepsi.
Rule THREE: While past results do not guarantee future performance, in order for a stock to meet the criteria of this investing strategy, it has to be a strong past performer; not over the last year or even a couple of years, but the long-term chart has to be compelling.
Rule FOUR: Invest mostly in mid-cap and large-cap companies and try to avoid small-cap names. This too is from the Benjamin Graham and Buffett school of thought.
Rule FIVE: Focus mainly on companies that pay out dividends – just make sure that a majority of your portfolio’s companies pay out a quarterly dividend.
Rule SIX: Ideally, buy stocks that fit this framework on either significant market pullbacks or when the stock is breaking out from a large consolidation area or base; as per the legendary investor and founder of Investor’s Business Daily William O’Neill’s CAN SLIM strategy. In particular, look for this pattern with emerging brand stocks and try to buy the more established companies as cheap as possible to hold onto for the long haul.