A few years ago I realized that I had to change my investment strategy. Until that time I had been playing pretty fast and loose with my investment dollars. I was choosing risky stocks and riding the excitement of the big wins while mostly pretending the big losses didn’t happen. Sure, I was coming ahead overall but I knew one big loser could wipe out my capital. As I got older I recognized that I had less time to take advantage of compound growth to accumulate wealth and I had to start looking for a safer alternative.
That’s when I started working on my own strategy for choosing stocks. I have to disclose that I have no formal education or training in stock investing or financial advice but I do know that nobody cares more about my money than I do! I took it upon myself to start learning everything I could about the stock market and evaluating a stock. Let’s just say that didn’t go well. There were all kinds of factors to consider: beta, price/book ratio, return on equity, net profit margin, EBITDA, blah, blah, blah. When I wasn’t falling asleep reading about all that stuff I was worried about being in over my head and that it would never make sense to me. I quickly realized as an amateur I was going to have to dramatically simplify things so I began trying to figure out what the most important things were.
Maybe I could think about choosing a stock like making any other purchase. What are the factors I consider when buying other things? A car, a TV, a mobile phone, whatever. I like to go backcountry camping whenever I can and that hobby requires some special gear which I’ve slowly acquired over the years. I wondered, when I’m thinking about a new piece of gear, what things do I consider when reaching a decision? First, I want to buy from a company with an established reputation I can trust. I want a company that has proved its longevity and is going to be there if I have a problem. I’m likely going to stick with suppliers like Cabella’s, MEC, or REI and manufacturers such as Patagonia, Marmot, or Arc’teryx.
In the world of stock market investing, we’re talking about the companies on the S&P 100. Companies on that list represent a variety of sectors and account for about 57% of the market capitalization of the S&P 500 (a similar index containing a greater number of companies) and almost 45% of the entire market capitalization of the U.S. equity markets. The stocks in the S&P 100 tend to be the largest and most established companies in the S&P 500. These companies have proven themselves worthy of inclusion on that list and that makes me very comfortable buying them. They’re companies we’ve all heard of. They are Coca Cola, Wal-Mart, Microsoft, AT&T and 3M. Take a look at the list and you’ll recognize many of them. Do I occasionally find a deal so great that I stray from a really well-known camping equipment company and take a chance? Of course! But mostly, I’m sticking with the big guys. That’s also true of picking a stock. Once I gained a little confidence – acquired from seeing the performance of my portfolio – I started to occasionally branch out into companies that aren’t on the S&P 100 if I thought they presented an opportunity. More about that in a later post.
So that’s Step 1. Stick to well-known companies that are listed on the S&P 100. They’re solid, safe, blue chip stocks that have a proven track record.