Resumo de On Picking Stocks - Enrique Hernandez

On Picking Stocks

In this article, writer Enrique Hernandez goes over some of the historic and traditional methods of Stock investing. Over long terms, it is clear that stocks outperform other investments. Bank accounts that collect interest, bonds, and speculations often provide solid growth over a long run or sometimes-rapid growth over short periods. These investments are either too stable, in that they don?t provide high rates of return, just stable flat levels, or they are too risky. Stocks provide an excellent combination of long run stability and risk potential. Over any long term, as in 10 years or longer, the stock market has registered excellent gains (Index funds).

The trouble is not with stocks but with picking the correct ones then. In any short period of time, a stock price can be determined by anything from interest rates in investor sentiment and even the weather. But in the long run, it is earnings that are most indicative of a stock?s performance. The ability to consistently put up high earnings is what attracts investors because earnings indicate a growing company with high value. The first rule then in investing is identifying a company that will have high earnings. This could be a company that exploits the latest fad (Toy stores that make beanie babies for instance) or it could be an old stalwart whose product will always be in demand( something like toilet paper). Of course the strategy by which you should play different kind of companies varies, but for maximum returns, holding strong stocks for a long time is the best strategy.

For the individual investor there are certain measures that can serve to be excellent indicators of a company?s growth and earnings potential. The P/E ratio or price to Earnings ratio is a good measure of investor confidence in a company?s earning potential. The higher the price is the more people are buying which means that there are many that believe the earnings will be going up. Hernandez believes that a high P/E is a good indicator but other investors have gone the opposite direction, believing that a low P/E and good fundamental measures are better than a high P/E because a high P/E can mean that a stock is overvalued.

In the end, even solid individual stocks can have erratic behavior and aren?t sure bets. The best long term investing strategy is diversification. Diversification, or investing in a variety of different kinds of securities removes idiosyncratic risk and allows for short term stability and long term growth. There are many ways to diversify but the two most popular ways are mutual funds and index funds. Mutual funds are run by professional money managers that put your money in with a bunch of other people?s and invest it full time. Index funds are funds that generally have low management fees and invest in stocks that are usually the ?indicators? of the market?s overall performance. Mutual funds will often outperform index funds since they are managed full time but Index funds sometimes beat mutual funds because mutual funds charge more expensive management fees and are subject to more risk.

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