Finding Interesting Stocks to Put on Your Watch List
A big to successful investing in the stock market is maintaining a watch list of corporations that you intend to follow for a while before deciding if you want to invest in them with your hard earned money. One of the things that separates pro investors (those who make a lot of money in the stock market) from amateur investors (those who lose a lot of money) is that the pros are able to identify the characteristics of the most interesting stocks and single them out for further analysis before pulling the trigger on a purchase.
The amateur on the other hand, will follow stocks that they already know about or, even worse, already own. They don’t know what characteristics to look for in a potential investment and they basically just follow the crowd. Now, in investing the crowd is what actually makes you your money but not if you follow it. Far better it is for you to act (and invest) in advance of the crowd and in some ways be a leader of the crowd. Quite simply, it is the crowd behavior that pushes the stock price of your investments higher and higher.
So, what are these characteristics that define an interesting stock? Well, there are several of such characteristics and I will be defining them one by one.
The first thing that you want to look for when singling out a stock for investigation is to figure out whether the stock can go higher. Assuming the multiple (the price to earnings ratio) stays the same, this can only happen if the earnings increase. The easiest way to get ahead of an earnings increase is to anticipate a trend in advance of the crowd.
For instance, let’s say that you became a popular user of computer bulletin boards in the early 1990s and you came to realize that a great many more people would use such technology if the interfaces were easier and more standardized. As internet service providers became popular and started to provide easy-to-use internet services to people you could have predicted the trend in the rise of the internet and made yourself a lot of money.
In short, when it comes to investing in stocks, identifying the trend is mostly a case of predicting that something will be more popular in the future than it is today. As such, you can think of this as sort of financial future telling only it is based much more in logic and data than superstition.
So, if you can make a case that a stock might be going higher, you can begin to make a rationale for watching it, ie placing it on a watch list. The key is that every stock on your watch list should be a stock that you can make a case for it tripling within five years. If your stock is already so expensive (on an earnings to price basis) that you can’t see how it could possibly triple in only five years then do not even add it to your watch list as it doesn’t have enough upwards potential to be interesting.
Another thing that you want in a stock is some controversy about the story. If everybody already predicted the trend and agrees that it is reality then you are simply too late to the party. Therefore there should be some disagreement among investors. This may seem like something negative but it is actually something that you must have if you want the stock to go a lot higher.
Therefore, I would argue, that those are the two things that a stock needs to have in order to be a suitable investment going forward. So try to keep both factors in mind when singling out interesting stocks for your watch list.
About the Author
Bryan Davieson encourages all Americans to get active in investing and discusses recommendations of stocks to buy despite the roller coaster ride that the markets have been on in the last year. He frequently writes for several online publications. His most recent article is titled Stock Market Investing Strategy.
