We’ve hit a lot of topics recently. From deep value fundamentals your editor focuses on to the nuanced technical analysis from our new editor, Stephen Oakes.
It’s a lot to take in. I know.
But since it’s the weekend, I’d like to reset a bit.
You see, a lot of your fellow readers have asked for the simplest advice I can offer. That one bit of advice that could make you instantly a more successful investor.
That’s a challenging question. But I’ll give it a go.
You Are Buying the Wrong Stocks
The simplest advice I can give is to buy the right kinds of stocks.
Odds are you are buying the wrong type of stocks.
Even the most devoted investors. Those of you who spend hours pouring over financial statements and annual reports, looking at charts, and scanning financial news sites for new ideas.
Honestly, I respect the effort. But I’m afraid they’re mostly buying the wrong kinds of stocks.
Basically, there are three major types of stocks and only one type worth buying.
Here they are:
1. Hot Stocks Everyone Is Talking About
These are the stocks that get thrown in your face every day by the financial media.
Whether they’re one-off newsmakers or just widely-held stocks like Facebook (FB) or Twitter (TWTR), they’re the most widely-held and talked about stocks.
These are the worst kind of stocks you can buy.
The perfect example is Alibaba (BABA).
If you recall, Alibaba was the hot Initial Public Offering (IPO) of the year in 2014. At $20 billion it was the biggest IPO of all-time.
On the day of the hot Alibaba IPO back in September we warned:
Alibaba does have a tremendous growth opportunity though. And that certainly gives the potential justification for it’s higher-than-average P/E ratio.
After all, it now has more than $20 billion in its war chest. It’s in a country with a GDP growth rate that’s expanding at 7.5% annual rate. And half it’s domestic market, about 600 million people, have never bought anything online.
All that looks great. And odds are the stock will do well...at least for awhile.
The Alibaba story was a great one. And we know the market loves stories. We also know, however, stories don’t last.
That’s why Alibaba did do well “for awhile.” Shares ran from the high-$80s to a top of $120 per share a few months after the IPO.
Since then Alibaba shares have faded just as fast as the headlines. Alibaba shares are now below their opening trading price and they’re still very richly valued.
In the end, stocks like Alibaba, which have so much attention and investor interest, just don’t last.
The odds are against you if you own a stock that’s at the top of the headlines on Yahoo Finance.
There’s just no way to get an edge on other investors with them. As a result, the risks are often great and potential rewards are very little.
Avoid these stocks. They may be popular, but that’s exactly why they tend to be dreadful performers. Alibaba and countless more are proof of that.
2. Middling Roads to Nowhere Stocks
This is the class most stocks tend to be in.
I put stocks like the ever-popular Netflix (NFLX) and stalwarts like Verizon (VZ) and Exxon Mobil (XOM) too in this group.
Most are solid companies. They’re well managed. Make their earnings. Etc.
The problem with them is their valuations. They’re often neither cheap nor expensive. They’re just stuck in the middle.
Some of these stocks go up. Some go down. A diversified portfolio full of them will match the overall markets.
And that’s the true problem with them.
Since they largely track the direction of the overall markets, if you own them, your financial future is tied to the Federal Reserve, Wall Street, and other unpredictable drivers of the overall market.
Those are partners I’m not willing to bet my retirement on and you shouldn’t either. Avoid these stocks too.
3. Cheap Stocks
Least surprisingly for long time readers, the third category is cheap stocks.
These are the stocks you must buy if you want to make real money in the markets.
Of course, I understand “cheap” means a lot of things to a lot of different people.
Since we’re staying simple today, I’ll make the definition of them simple.
As you know, markets, sectors, and individual stocks move on long sweeping cycles throughout history.
If you follow those cycles and move in during the down periods and out during the up periods, you’ll do extremely well in stocks.
The cycles take years to play out, but as long as you are patient enough to stick with them, you’re out-of-favor stocks will be in favor once again.
Think of it like planting a seed. You plant them, watch them a bit, and wait for harvest time.
Granted, there’s a lot more to it than that (that’s why I spend more than 100 hours each month simply scanning the markets), but that’s the simple way to look at it.
That’s my take. It has worked well for a long, long time. And it can work for you too.
If you can avoid 90%+ of the stocks that are out there, you will do just fine as investor over time.