1/24/13 – How to Invest in Stocks

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jan 24, 2013 11:05:02 AM

and tagged Economics Lessons, On My Bookshelf

Leave a comment

With the economy recovering, the market doing well, and the politicians seemingly getting down to the business of actually negotiating rather than yelling at one another, people are feeling more cheerful, especially about the stock market. Investor surveys are at very high levels for confidence, volatility is at historically low levels, and U.S. markets are closing in on all-time highs. What’s not to like?

Actually, there are a lot of reasons to be concerned—which I have written about in the past and will do so in the future—including the fact that high levels of bullishness are themselves contrary indicators. Today, however, is about how to invest in individual stocks, rather than about the market as a whole, and here there are encouraging signs.

One of the best signs for stock pickers is the decreasing correlation among the performance of individual stocks. Since the financial crisis, stocks have tended to move together to a much greater degree than in the past; as a result, stock pickers, or active managers, could not get any traction since their presumed good stocks were going to act the same as the bad stocks. In other words, the action of the market as a whole trumped the facts about any individual stock, so you couldn’t make money off an individual stock’s outperformance.

This is now changing, with correlations coming down and investors starting to focus on individual stock characteristics, which should mean that stock pickers will again start to add value. It also means that it may now be time for investors to start looking at individual stocks. Note that I still have concerns about the market as a whole, but given current market conditions, looking at individual stocks can make more sense than it has in a while.

There are thousands of books on the stock market and investing, and I certainly have not read all of them, but I have read a bunch—here are a few that I believe are worth a look.

The first, and probably the best for people who are starting out, is The Intelligent Investor, by Benjamin Graham. The bible of value investing, it also is recommended by Warren Buffet, who said that it is “[by] far the best book on investing ever written.” Hard to argue with that.

For people who are looking for something a little more prescriptive, I like William O’Neil’s How to Make Money in Stocks. This gets away from the fundamentals presented by Graham and goes into what O’Neil sees as the actual characteristics that define a winning stock. His CANSLIM methodology gives a framework for evaluating stocks and the market as a whole that’s worth a look.

Finally, James O’Shaughnessy’s What Works on Wall Street adds a lot of value by identifying different factors that can make money in the market and analyzing when and how they do so. This is not a book to read cover to cover, but rather to look at when you are considering different stocks and how best to compare them. Not everyone will like or agree with O’Shaughnessy’s approach, but I believe it adds a layer of deliberate thought in terms of which factors work that I have found valuable in my own analyses.

There are many more books I could and do recommend, but these three provide different looks at ways to consider the market. I own all three, in multiple editions, and go back to them periodically to refresh my knowledge.

Tomorrow, I will discuss different ways to apply the knowledge and methods in these and other books.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®