The Independent Market Observer

1/28/13 – How to Invest in Stocks: Applying the Knowledge

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 28, 2013 10:44:18 AM

and tagged Economics Lessons

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Last week, I discussed three books that offer a good basic overview of how to invest in stocks. The next step—and, in many ways, a more difficult one—is to figure out how to apply the conclusions you’ve drawn. How can you identify the stocks that meet your criteria?

There are several services that rate stocks. Value Line is one of the oldest and apparently has a great track record. Its rating system is fairly simple, and its data sheets present a lot of information very effectively. Many other screening systems rest on a Value Line base, selecting their stocks from among those that VL ranks highest for timeliness or other factors. Another significant advantage: The weekly hard-copy version of Value Line is available in many libraries for free, which is how I used to use it. It’s definitely worth a look.

Other companies like Morningstar and Standard & Poor’s also offer stock summary and rating systems. Many brokerage companies provide access to them as part of the package; if you have that access, both are excellent. With these services, as with Value Line, you get two different things: information about the company and the security, and a rating or ratings. Be sure to use the information to understand and interpret the rating; don’t just rely on the rating.

These services are good for investigating and evaluating companies you’re interested in, but how can you identify those companies? This is where stock screeners come in.

You can find the simplest versions on Google Finance and Yahoo! Finance. These tools let you screen by a wide range of metrics, both market and financial, and can be quite useful for the price (free).

Other screening software allows you to build more complicated screens, with multiple criteria, conditionality, and other multi-level factors. There are a number of these programs, many of which are very good. The one I use, from the American Association of Individual Investors (AAII), allows you to build custom screens on multiple metrics and includes all the data needed, updated weekly.

The best screeners also include multiple pre-built screens to help you get started. The AAII software, for example, has screens based on its interpretation of different investors’ strategies, including Graham, Buffett, Zweig, O’Neil, and O’Shaughnessy. None of these men have approved these models, but you do get multiple examples of how to build a worldview into a working stock screen.

Of course, from the stocks that pass the screen, you have to pick which ones to actually invest in, and that’s where things get really difficult. Personally, I prefer a fundamentally based screen to identify candidates for investment; then I look at technical factors to determine which candidates to invest in.

The stock market appears to be gaining traction again. As prices rise, it starts to become a self-supporting trend. Remember, though, that as an active investor, you will certainly have exposure to the growth but also to the downside. One of the hardest parts of investing isn’t deciding when to buy but when to sell, particularly when you’re selling at a loss. Keep that in mind when you buy and start thinking about when to sell—whether you’re right or wrong.

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