The Art of Finding Stocks

Before I get into it, let me first say that I am not a qualified stock picker, so run everything I’m about to say through your own investing filter.

I recently finished Peter Lynch’s book One Up On Wall Street, and man was it great. When you first start out investing in the stock market, it’s really hard to find your own direction. You hear all sorts of things from friends, family and the news. One person tells you to buy mutual finds (Yuck!), another person tells you to trade options, and CNN tells you to day trade. How do you figure out what to do? We’ve already covered a few methods in prior posts, so today we’ll talk about picking individual stocks.

As mentioned above, I’ve just read Lynch’s book so a lot of these ideas are related to the book. Every day, millions of people go shopping at all sorts of stores. People are buying food, furniture, cars, tools, and endless lists of other items. Buy who really cares what some random person you don’t know is buying? You do, and I’ll tell you why. Every product, whether it’s a manufactured gismo or a service, is made or provided by a mother company. There are no exceptions to this rule. The overriding company may or may not be a public company, but if it is public, you may have a great investment opportunity.

Let’s use an example to demonstrate this idea. You go to your local sports store and you casually browse through the aisles (You aren’t looking for anything in particular). You’re near the back of the store and you notice a bunch of people on one aisle of the store next to the running shoe section. You decide to check out what all the fuss is about and you see ten people trying on the newly released Nike Air Max shoes.

Your initial reaction is one of surprise because you didn’t realize Nike had just released a new shoe, but you decide to get a closer look at the shoe (you happen to be an avid runner yourself). You get a closer look at the display shoe and you decide to try on a pair for yourself, just to see if they apparent hype is justified. You reach down to grab a box labeled with your size when you discover that your size is completely sold out. This is the point where the average person disappointedly leaves the store, but this is also the point where an investor can gain some valuable insight.

Now that your investing hat is securely placed on your head, you ask the shoe department worker when the new Nikes came in? She says that they just started selling the shoes the day before and that they only have fifteen pairs left in stock. You ask a few more questions and you learn that the store has sold fifty pairs in the last two days and that another twenty customers have made orders for shoes in their sizes. All this information points to one thing; Nike has a hit new product. You have just found yourself a valuable piece of information that may lead to an investment.

Of course your research doesn’t stop there. The next step is to run the stock through your own set of standards and evaluations. The point here is that just by observing customers around you, you have gained insight into what consumer’s demand (and as we know demand rules prices). The idea seems so simple, yet every one of us has probably walked past countless investing tips throughout our lives.

It’s very difficult to find quality stock tips, and if you rely on analysts, you’re already behind the ball. By observing the markets you’re familiar with, you can find companies that are producing great products before the analysts catch on. This idea doesn’t just apply to established brands who are launching new products, you can find brand new companies that are just as good (if not better) investments.

Just please remember that just because a company has a great new product doesn’t mean it is a quality company. The product can be a tip for a company on the rise, but make sure you do your own full analysis. Well cover some common ways to evaluate stocks in future posts, but now is a great time to start observing the markets around you.

P.S. I highly recommend picking up a copy of One Up On Wall Street.

Signing off,

The Stock Jock

I am not a professional investor and do not offer professional advice. This is simply my opinion and effort to share information with other investors.

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