Investing in stocks rewards you when you have the discipline to keep only the stocks in which you have the most confidence; fewer stocks equals greater opportunities. Over the course of the average month or year, we look at a great many stocks for our portfolio management clients. Of all the companies we look at on the stock market, we add only a tiny minority to those stocks we might think about recommending. There are several very good reasons why we are so particular with our stock choices.
Selling stocks is easier than building a business
First, stocks that are attractive enough for us to want to recommend them as buys are always a small minority. After all, it’s relatively easy to set up a company and sell stock in it to the public. All it takes is some capital, legal fees, input by stock-promotion consultants, and cooperation from a handful of brokers.
Promoters can launch a new company while it’s still living off that initial capital. (They can then add to the capital by selling stock in the company to the public.) Meanwhile, they can maintain investor interest with a string of press releases and other public-relations efforts.
Start-ups and new issues are always highly risky. But even long-established companies can fail to thrive for years, while maintaining a seemingly healthy glow. As their business gradually loses momentum, they expose you to an ever-growing risk of loss.
In contrast, it’s much harder to set up and manage a business, and make it thrive over long periods. That’s why only a small minority of stocks are ever really suitable for serious, long-term investment.
Why some promising stocks aren’t buys
In the initial phase of our research, we eliminate high-risk stocks and those with limited prospects for profit. This still leaves us with many stocks to choose from, however. We have to watch out for well-established stocks that look attractive on the surface, but lack the investment quality profit potential that we seek.
Even if a stock looks like it might thrive, we may still refrain from recommending it for a number of reasons. Our research may lead us to conclude that it presents too much risk of heavy loss if it fails to thrive. Or we may feel that stocks we already recommend offer better alternatives.
Or we may simply prefer to hold off on a promising stock because we feel it has limited near-term potential. This can happen because it has been overhyped in the broker/public relations limelight, for instance. Stocks that fall into this limelight can attract exaggerated expectations, which means any downturns can be swift and brutal.
In many cases, we watch the progress of these stocks-we-like-a-little. We may recommend buying them months or even years later, but only after seeing favourable developments and signs of progress.
This painstaking approach is a lot of work, but it pays off. It has led us to recommend many stocks that subsequently surged in price. For that matter, our recommendations include a remarkable number of stocks that have been taken over at high prices that gave our readers huge profits. In addition, this approach cuts risk. It is the best way to stay out of a lot of duds, not to mention total losers.
Courtesy Fundata Canada Inc.© 2014. Patrick McKeough is a professional investment analyst and portfolio manager. He is the host of TSINetwork.com, where this article first appeared. Investments mentioned are not guaranteed and carry risk of loss.
