How to choose stocks for long-term investors

If you’re wondering how to pick stocks, chances are you already know that. The question is not How? ‘Or’ What to choose stocks. The question is or look for stocks. Sometimes the market can be confusing. You can keep it simple by sticking to the stocks of companies you’re familiar with.

For example, if you are a doctor or a pharmacist, you may know the best new pharmaceuticals. If you are a real estate agent, you may be very familiar Zillow (Nasdaq: Z) or RE/MAX Assets (NYSE: RMAX). If you work in a bank, you may know more about all banking stocks than you think.

Your eyes can tell you how to choose stocks to invest in

The good news is that you don’t have to have a particular profession to pick stocks. Get this; the popular iPhone was released in 2007. Apple quickly sold 6.1 million iPhones. Anyone who bought the phone or even noticed its popularity could have bought Apple (Nasdaq: AAPL) shares at $3-$7 per share that year. Today, Apple stock is around $170 per share.

Famed investor Peter Lynch got one of his best stock ideas from his wife. She introduced him to L’Eggs tights in the early seventies. Mr. Lynch purchased shares of the company for his mutual fund. Later, his position in The Eggs rose to about 10 times its original price before being bought out.

Recently a friend of mine started investing in stocks with some other friends. The group was seduced by high-flying stocks from companies they had never heard of before. My friend decided to give his son a small amount of money to participate. When my friend asked his son what business he wanted to invest in, he said Home deposit (NYSE:HD). “Why?” asked my friend. His son replied, “Because you always go there.” Of course, the son’s stock was the top performer!

What is a good price for a stock?

Believe it or not, the owner of the shares is the owner of the company. It is therefore crucial to ensure that you are not paying too much for your investment. Think of it this way: if you could buy the whole business and pocket the profits, how much would you be willing to pay? In other words, what will be the rate of return on your investment?

Typically, investors use standard tools to determine the fair price to pay for a stock. The process of selecting a reasonable price range to pay for a stock is called valuation. One of the most popular valuation tools is the price/earnings ratio (or P/E ratio).

A stock’s P/E ratio can be compared to its average P/E ratio in previous years. Also, the P/E ratio can be compared to similar companies. Simply put, the numerator is the price per share and the denominator is the company’s earnings per share.

These numbers should look familiar to you. They are the stock price and the profits made by the company. Alternatively, if you reverse the formula (E/P), it might make more sense. When you divide earnings by price, you get your stock’s potential rate of return.

A lower P/E ratio could indicate that stocks are a good investment. On the other hand, the higher the E/P, the more attractive the stock price.

How to choose stocks for long-term investors

Many successful investors view stocks as long-term investments. Unsurprisingly, one such successful investor is Warren Buffett. Mr Buffett is famous for saying, “Our favorite holding period is forever.”

Now, you can’t hold a stock forever. When you find a business you like and buy for a reasonable price, you should be prepared to keep it for years to come.

While investing in a business, you need to monitor it closely. Stay up to date with press releases, news and quarterly earnings reports. Often you can subscribe to alerts directly on the company’s website.

Things will change. When things change, remind yourself why you love the company in the first place. Ask yourself if the change makes you like the company more or less.

Also, keep an eye on the rating. If the P/E ratio becomes significantly above average or much higher than similar companies, that’s good news! It could also indicate that it is time to sell.

Keep in mind that companies that are increasing their earnings rapidly may have a higher P/E ratio. If you think income will continue to grow, you might want to hold on. The P/E ratio can also change over the years.

The psychology of investing

Stock prices can go up and down quickly in the short term. Plus, your friends might think your stock is a bum. Worse still, the stock market could crash. These things can cause you to question yourself.

For example, during the financial crisis of 2008-2009, many investors panicked and sold off. It was a scary time to be in the stock market, that’s for sure. Additionally, it has provided investors with plenty of opportunities to invest in large companies with low valuations.

Take Nike (NYSE: NKE), for example. Many readers are familiar with the Nike brand. You’ve probably owned Nike shoes. NBA endorsements of Nike are well known. However, in 2009, shares sold at less than $10 per share at one point. According to Value Line, the average P/E ratio for the year was 15.3. The long-term average P/E is around 20. That was excellent value for the stock!

Today, the stock is around $145 per share, a nice reward for investors for almost eleven years. You don’t have to be a genius to know how to pick stocks. In fact, it is better to keep it simple!