How to find great stocks when you don’t know where to start
Hey there! Despite being excited about investing in the stock market and feeling ready to pull the trigger, you may be asking yourself which stocks to buy and your answer might be “I don’t even know where to start!” But don’t feel bad! I remember when I felt exactly the same way. I had no idea where to look for stocks, all I knew was that Apple and Amazon were great stocks but that was it. And I knew I needed more than 2 stocks in order to properly invest.
It wasn’t until I came across a video from Peter Lynch that I had my A-HA! moment. Up till then, I had been taking a really complicated approach towards investing which only made me feel discouraged about the stock market. Since I don’t want you to go through the same experience, I want to share a proven step-by-step process for finding great stocks when you don’t know here to begin.
Step 1 – Start with what you know
This is an easy step that we tend to overlook. Many of the brands, products and services that we like and use daily are probably traded in the stock market. Let’s see how many stocks we can find in this story:
You wake up in the morning and proceed to clean your teeth with toothpaste (Colgate-Palmolive Company, CL Stock). Since you are running late you decide to have a quick bowl of cereal (Kellogg Company, K Stock). As you leave your house in a rush, you jump into your car (Ford Motor Company, F) and you realize that you have to stop for gas (Exxon Mobile, XOM Stock). Before running into the office, you grab a coffee (Starbucks, SBUX Stock) and call your friends on your cell (Apple, AAPL Stock) to check if they also want a coffee.
I could go on and on but I think you have a good idea of what I’m getting at, we are surrounded by stock market traded companies!
Action time! Write a list of 5-10 of your favourite brands, services and products. Google search them adding the word “stock” to check if the company is traded in the stock market. While you are doing this, write down the Share Price and the Ticker because you want to get familiar with this kind of information, and the sooner you do it, the better.
Step 2 – Research competitors
The next step in finding great stocks is researching competitors. The 5 or 10 stocks that you initially researched might indeed be great stocks, but in the stock market investing world it is better to have a global view which includes knowing your stock and it’s competitors. To do this, you can search the name of a stock (for example, Starbucks) and see what info our old friend Google comes up with.
You should add 2-3 competitors to your list for each stock that you identified in Step 1. In the case of Starbucks, Dunkin’ Donuts and McDonald’s are considered direct competitors. The great thing about researching for competitors is that we can come up with better stocks that we had initially not thought of.
Don’t underestimate this step because is a critical one. In my investing journey, the best stocks I’ve owned are not the ones that I initially picked but the ones that showed up while doing my research. This step is also crucial because you can’t fall in love with your stocks.
Yes, you can love the brands, but not the stock. Why? Because the brand is there to give you a great service or product, but the stock is there to give you value for your money. A stock’s whole purpose is to give you the best return on your investment.
Step 3 – Cutting out the weeds from your garden
So now you should have a list of 10-30 stocks. These may or may not be great stocks, we still don’t know. Remember, steps 1 and 2 were about finding stocks for your watchlist, now we have to reduce the size of that list to only the good ones!
Now, grab a cup of coffee or tea because this is when the fun starts (my favourite step by far!) We now have to research the fundamentals, financials and trend.
Fundamentals: What is the company’s story? How does the company make money? What do you like about the company and what do others like about it? Is it a leader in the industry? These are the kinds of questions you need to ask for every single stock that is on your watchlist. Why? Because this is the only way to fully understand your stock. If there’s a press release or something happens to the economy and you don’t know the fundamentals of the company, then how can you assess if those changes are going to have a positive or negative impact on the stock?
Financials: The whole purpose of a business is to make money. Business is not charity, especially for stock traded companies. Research the financials to determine if the company is making money or not. If the company is regularly bringing more money to the table, great! If not, then it might be headed for bankruptcy and you don’t want to invest in a broke business.
Trend: This is often overlooked, but the trend is a powerful tool when used to your advantage. Trend refers to the share price action during the past 1, 5 or 10 years of the stock. Trends are difficult to break and you should never bet against a trend, no matter if the Financials and Fundamentals look amazing. If the stock is on a downtrend, the odds are against you. Instead of betting against it, wait for the trend to change and then invest your money in the company.
After reviewing these 3 parameters for all the stocks on your watchlist, you now probably have between 5-10 good stocks. Since you have a curated watchlist, it is time to take action and buy the stocks!
But there’s one more thing to ask yourself for each stock on that list: “Would I be comfortable holding this stock for +3 years?” If the answer is no, then remove that stock from your watchlist because we are investors, not traders.
Step 4 – Pulling the trigger
This is the most crucial step because you can find a great stock, with great financials and fundamentals, but if you buy it at the wrong time then you are probably in for a lot of pain. There are three elements that can determine if you are buying a stock at the right time or almost at a discount:
1 – When the stock is undervalued according to the fundamentals (P/E, P/B, EPS) and against its competitors
2 – When the Technical Indicators (Chart) show that the stock is coming out from a recent pullback
3 – Major Stock Market pullback, this must be done properly and you can read more about it here
Now don’t just sit and wait around for the perfect moment to buy a stock. The only thing you really need to avoid is buying the stock at the very top before the pullback. If you are trying to buy it when it’s at the very bottom, you might get lucky. But the easiest way to buy the stock is right after it has hit bottom and starts climbing back up.
The reason I like doing it this way is because if you are trying to time the market, you might buy the stock when there is still some room for it to go down. You don’t want to buy a stock and be losing money immediately afterwards.
Last but not least regarding pulling the trigger, you shouldn’t wait and wait and wait to buy the stock. It is better to be fully invested than to wait around for the ideal time. You will most likely get better returns if you buy the stock right after a pullback (or sometimes at the very top) instead of just waiting. If you miss the really good days of the stock market, you will have a poor performance. You can check the graph on page 4 of this PDF by Carson Institutional Alliance to understand how much your return is affected by missing the best trading days of the market.
Step 5 – Keep an eye like a hawk
The last step is to keep a watchful eye on the stocks you bought. I don’t mean that you have to double check them every five minutes, but you should check your stocks for news or earning reports at the very minimum of once every 2 weeks. You don’t have to do full research again, you only want to check if the stock story stays the same or if it got better. If the story is getting worse month after month then it is time to reconsider owning the stock.
And remember, you are buying stocks for the long term! This means holding them for +3 years which is easier said than done.
Learning how to invest in the stock market should not be a tedious and boring task, that’s why I created a private FREE Stock Market Freedom Facebook Group where you can learn how to invest in the stock market in a safe and and fun environment. Click the join button and join the party 🙂
If you would like to learn more about the Stock Market, check out my Stock Market 101 series.
Stock Market 101 Part 1: What are stocks and more
Stock Market 101 Part 2: Stock Analysis
Stock Market 101 Part 3: Types of Stock Market Orders
Stock Market 101 Part 4: Technical Analysis
Stock Market 101 Part 5: Mindset and Psychology for success
Or, If you would like to learn more about my strategy and how to invest in the stock market, you can check out my course Money Making Bootcamp where I teach you my in-depth, step-by-step strategy to go from lost to pro.
Thank you so much for stopping by, make sure to leave a comment below with any questions!