How to choose stocks for long term investment?
Whether you are just starting out in investing, or you have been doing it for some time, this question has definitely come to you at some point.
Over time every investor works out their own system and process. While the details may be different, every successful system involves the same basic steps.
There are 3 things to keep in mind to choose a good stock.
- Go where good stocks can be found
- Intelligently determine how much you want to invest in this stock
- Know when to exit and how long to hold to maximize your profits
Let’s look at each of these step by step
1. How to Choose Stocks – Go Where Good Stocks can be Found
Much of the stock advice you find today centers around the idea of buying index funds and just holding on.
This is a massive cop out. There are very real advantages of choosing great stocks. You can choose the right stock if you just know where to look.
To know this, you need to understand a little about the different asset classes and investment styles and where to invest in stock market. In particular, we are concerned with small caps and micro cap stocks (asset classes) and we are concerned with the value investing style.
Why small company stocks and value stocks?
Primarily because there is a lot of research going back decades that prove that small caps and value stocks are the best performing segment over time.
In particular, combining small cap and value and just going after small cap value stocks works wonders for your returns.
To know more about the reasons why this is the case, you can read the research about small cap stocks for long term investment here.
2. Intelligently Determine How Much You Want to Investing in This Stock
Most investors just randomly decide how many shares of a stock to buy. Perhaps it is done based on how much cash they have, or perhaps it is just a flyer they are taking on a stock with no real strategy behind it.
This is unfortunate.
Intelligent position sizing helps maximize the returns of the entire portfolio.
Many methods exist. The two I recommend are
- Kelly Criterion, and,
- Risk Premia Parity (what is risk premium?)
We use the Risk Premia Parity method in structuring our portfolio for the Value Stock Guide Premium members
3. Know When to Exit and How Long to Hold to Maximize your Profits
Do you know what your sell price will be going into the stock? Do you have a strategy to capture as much of profit as you can, with the goal of not leaving a lot of money on the table? Do you know at what point you should sell the stock to protect your investment?
The rule #1 in investing is to not lose money. The rule #2 is to make sure when you are profitable, you are able to capture as much gains as you possibly can.
There you have it. The 3 steps to choose long term investment are
First find the part of the market where the best stocks exist
Second, decide intelligently how much of your portfolio should be allocated to each stock, and,
Third, Know when to sell to maximize your profits and minimize your losses
Check VSG Premium service to get clear and well researched recommendations for the stocks to buy now, price to pay, how much to allocate and when to sell.
