My Thought Process Of Picking Stocks

I got an email from reader Brad who asked:

I wanted to suggest a post that goes into some more detail about your thought process as you decide whether or not a stock is a good investment and how you use that info to identify reasonable targets and expectations for performance. Is it based on financial data? Common sense? SEC filings?

As a novice trying to get into the mindset of a more experienced investor, that would be very helpful.

Thanks for the question Brad and I hope you are not disappointed with my answer. There isn’t a magic formula and there isn’t a secret filter or analysis system I use to weed out the best stocks. 

Things I Like In A Stock

1) A dividend – I always prefer a stock with a dividend because at least you are making money while you wait for the stock to go up. Or you lose less if the stock goes down. Especially now, with interest rates at historically low levels, a stock with a dividend looks even better than it might if interest rates were higher. So, I am more inclined to buy a stock if it has a dividend.

2) A low P/E – To really see if a stock’s P/E is low you need to compare it to all its competitors. If you are looking at a stock that has a P/E of 40 and all the other similar companies have a P/E of 20, then the stock is probably expensive. That doesn’t mean the stock won’t go up. It just means there must be a reason why investors are willing to pay more for that company than the others. Paying more for a company is riskier than paying less and I prefer to pay less whenever possible. But many high flyers (Amazon, FB, etc.) have huge P/E’s and have made investors a lot of money so there is no right or wrong here. 

3) The company has a business that will allow me to own the stock for at least 1 year – I don’t always stick by this rule and have already broken it twice in the portfolio for this website (CHL and YHOO). However, in an ideal situation I like stocks I can buy and hold and the longer the time period, the better. That means I look for companies that have products or services that will stand up to competition and I can confidently own their stock for an extended period of time. I’m not a trader even though buying and selling stocks frequently seems to be the fad now days. I’m an investor, a long term investor.

So, What Do I Do And What Am I Thinking During The Stock Picking Process?

Warren Buffet Quote

I think the above quote from Warren Buffet can make you and I a lot of money. I wish I had more time and patience to do what he says because THAT is a great way to think about and pick stocks. Remember, when you buy a stock you are buying the company and the business they are in. Some companies are better than others and some businesses are better to be in than others as well.

I pay as much attention to current events as possible. Simply put, the more information you have in your head, the better you should be at many things and that includes investing. The stock market is all about picking the companies that are going to lead us into the future successfully. If you can pick the right industries and the right companies within them, you will undoubtedly make money. 

Right now technology as a whole is hot but within the technology sector there are still winners and losers. Its that way in every industry: some companies just perform better, have better management, and plan for the future better than others. Picking the winners can be done by reading, research, listening to other people’s opinions, and ultimately making a decision yourself which stocks to buy. Again the more information you consume every day and the more you are aware of what is going on around you, the better stock investor you will become. 

I Think Common Sense Is Very Important

Brad briefly mentions common sense and yes, I think that is vital. You need it in all aspects of investing because remember, it is your hard earned money you are risking when you buy stocks. You, and you alone, must figure out how much money to allocate to each stock and what types of stocks to buy: risky, not risky, or somewhere in between. Additionally, only you can decide at what price you are willing to buy a stock and after that comes another difficult decision of when to sell the stock.

There are decisions to be made every step of the way and common sense, at least your version of common sense is important!

You have to feel comfortable with the decisions you make. I always say that sleeping well at night is a personal priority to me. That means I may be a more conservative investor than someone else is but that is okay. Every person has to get used to what they are comfortable with in regards to risk and that may influence many of their stock investing decisions. 

Buying Stocks Of Companies You Like

You might be able to get started looking for good stocks by thinking about all the companies and brands you like to use. Of course the brands you like may not be good stocks but it is a good place to begin. If you like certain brands then perhaps other people like them as well and you should check out their stock. 

Here is an example: I have a couple of Under Armour (UA) shirts that I absolutely love. Back in May 2014 I looked at their stock for the first time after seeing more and more people wearing the logo. The stock was in the $45 to $50 range and on a 2 month downtrend. The P/E was also more than double that of Nike’s so I held off, hoping the price would come down some more and then I would buy. Unfortunately, about a week later the price shot up into the $50’s and now the stock is about $70 a share. I missed out and never bought and I HATE that. 

But the point is that I picked a winning stock just by paying attention to what I liked and what I saw that other people have started liking. Being aware of everything that is going on around you can really pay off. Again, you should try to become aware of what clothes people wear, what and where they eat, how they spend their free time, what they buy, etc. so that you can better figure out what stocks may be profitable. 

I hope that helps everyone who is trying to get a better understanding of what is going though my mind and what I do when I’m looking for stocks to buy. I’m always interested in finding the next stock in my portfolio! 

10 Responses to “My Thought Process Of Picking Stocks”

  1. Enid says:

    Hi Bruce,

    I am very much new to stock trading. Thank you very much for all your posts. They are all very helpful.

    The passed two weeks, the whole market is not quite good. It might turn to bearish, as some experts predict. I was told that “when the stock market is bearish, the best choice is to stay away from stock instead of leaving the money in the market and hoping the market recover in the long run, even though the market will boost up in the long term.”. I wonder what strategy you recommend to deal with the bearish market based on your past experiences.


    • Bruce Alan says:

      If you sell your stocks because you think the market is going down that is your choice. The problem is, when do you get back in? The stock market goes up and down and no one can see the future and say “now the bottom is here and I am going to buy stocks again”.

      Chances are, if you sell your stocks because you think the market will go down (and you are right) then you will probably not get back in soon enough when they go back up. If you sell your stocks and your are wrong (the market soon starts going up again) then you lose out because you sold everything,

      Selling your stocks also means you have tax consequences right now. So trying to “time the market” (guess which way it is going) is very difficult if not impossible.

      I am a long term investor and when the market is going down I may sell a stock or two that I don’t have confidence in but for the most part, I hold on. I may also sell a stock that I want to protect gains in if it is near the top. What I do with each stock is a case by case basis but I always have cash available so that I can buy more when the prices are cheaper.

      If you do believe that the market will go back up again, then selling and trying to time the market is futile. The bottom line is: what makes you think that you know when the market will go up or down before it happens? Looking back it is easy to see but correctly guessing what will happen before it happens is next to impossible.

      Hope that helps a little.

      • Enid says:

        Hi Bruce,

        I greatly appreciate your prompt reply.

        Your point of “case by case” really enlightened me. I was wrong for always seeking for the “best” choice.

        You surprised me by telling me “correctly guessing what will happen before it happens is next to impossible”. Contrary to your attitude, many stock trading experts spend a lot of effort to predict the trend using all kinds of technical analysis techniques. As a new trader, I am learning those concepts. Although I am not fully understand those techniques, I tend to think that the trend of stock is somewhat predictable. That’s why I am surprised by What you just told me. If you had 25+ year experiences and still cannot correctly guessing, I need to reconsider my attitude to stock trading.

        Actually, I have spent the past month watching and learning the market without real money trading, because I am very much afraid of unknowns. I am curious how you maintaining the confidence while admitting “cannot correctly guess”? I guess the keys are wisely choosing stocks and holding them, which needs practice and experiences.

        My last question is how often do you check your stock position? Do you feel nervous when the stock price goes lower than your expectation? Thank you very much.


        • Bruce Alan says:

          I check my positions every day. Honestly, probably everyone tries to guess what will happen with the market when they first start out. Its a natural tendency as no one likes to lose money. But over time you may realize that going in and out of stocks is a losing battle (for most people) and requires a tremendous amount of skill. Picking good companies that will prosper over the long term is just the best way to make money in stocks. Quality stocks that are well positioned to make money in their industries will win out in the long run.

          When a stock of mine goes down, I try to figure out if there is a reason for it that I am not aware of. If the market is dragging it down then it is no fault of the company and I hold or could even buy more. Sometimes I can just be flat out wrong about a stock and after it keeps going down, I have had enough and give in and sell. It just depends on how convinced I am about the company. Buying good companies and not super speculative ones helps in my mental ability to hold a stock in the face of it going down.

  2. Paul says:


    What is the after hour trading? Does the last minute stock price during the ‘after hour trading’ before the stock market open become the opening price on the next trading day? (ex: the stock price is 15 at 4pm trading day today but going up to 16 overnoight trading, is the price on tomorrow opening will start at $16 or $15?

    Can I buy or sell stock after the hour using TD Ameritrade?


    • Enid says:

      Hi Paul,

      It might be too late to answer you. :)

      You can easily Google what is after hour trading. And yes, you can buy or sell stock after the hour using TD Ameritrade. The stock price can change every second: the opening price of next day might not be the same as neither $15 nor $16.

  3. Paul says:


    I know nothing about the stock before the BABA craze. I am glad I didn’t buy BAB share at any price on opening day.

    1. BABA is dropping. In your thinking, do you think BABA will continue to grow to buy and hold the stock? I know there are many negatives about the company structure I read from your blog.

    2. For picking stock to buy, there are too many stocks/companies to look for info. What is your best way to do this. I know there are several sectors (technology, services, banking, agriculture, oil, etc) and each sector has thousand of companies. How do you market search for the companies with the good indicators taht you wnat to buy? I open TD Ameritrade and not sure where to go to do that. Do you use Investools?

    What are the important indicators of any company that you use to compare with similar companies in order to buy? Where do I have info about those indicators?

    BTW, how do you know so much?


  4. Demetris says:

    Hi Bruce,

    I see the page “buys and sells” is empty. Is this normal?

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