Investment strategies - Stock picking

Stock picking is about to pick the right and the most solid shares and holding them in a long term perspective

The Stock picking strategy may sound like a fashion term, as investors probably always pick the stocks that they think is best. But stock picking is a more focused strategy in terms of using the right tools to pick the best stocks

The Stock picking strategy is, if performed correctly, normally a guarantee of long-term returns above the market level, combined with a low risk

Earn more money on your shares with the Stock Picking Strategy

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Author: Johnny Guldager

What stock picking is not about...

Stock picking is not buying stocks on hot tips, in positive expectations for the next accounts, in trust that the new CEO can make a turn around or that company's new product can take market shares.

Stock picking is also not based on technical analyses of movements in stock prices and the stocks are not selected on grounds of technical buying signals.

Stock picking can look a lot like the  Value strategy, and often there will be an overlay between the stocks chosen by the two strategies. Stock picking is however much less than the Value strategy based on financial analysis of financial ratios.

Market position is crucial

Instead, companies with a significant market power will be selected, as they with good reasons can be expected in the coming years to maintain a strong market position. The experience is that these very companies in the long run outperform the overall market index.

The classic stock picker prefer companies with significant market power, a good economy and good cash flow, among other things, this means sustained high profitability, strong market share, stable profits, a low debt level and products which have proven their anchorage in the market. A stock picker is investing in expectation that the strong companies in the long run will always perform better than weaker companies.

The new growth comets is out of interest

A stock picker stays far away from the emerging companies in the market. Companies that rely on new products or new business models are not interesting. Objectively, you can obviously see that these companies can often provide huge growth potential, but just as often you will see the light extinguished in the stars and investors must throw everything they have to minimize their losses. This is an almost unimaginable situation for a stock picker. He buys rather solid papers, which he in good conscience can put to one side and where he has no reason to sit with eyes glued to the screen with his finger on the sale button.

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Long holdings

In stock picking the shares are bought for a longer ownership. Where stock-picking aparts from other Buy and Keep strategies, it is that it is not a goal to buy as wide in an index, that the portfolio automatically shadows the market. It is also not in itself a goal to buy shares from the traditional portfolio thinking, where shares are particularly interesting if they have a mutually low correlation. This is from portfolio thinking interesting because it minimizes the risk. In stock picking, it is not in itself an argument to purchase stocks that are low or negatively correlated. What is interesting is, first and foremost to buy the best and most reliable papers in different sectors.

Insight in companies and business models

In stock picking it is essential for the investor to understand the company. He must have confidence in the business model, have faith in that the products have a long life cycle and that both products as the company's brand has a strong support among consumers. In stock picking investors keep far away from companies, sectors or business models that they do not understand.

The actual price must be attractive

Besides the solidity, the stock price must be attractive. The stock picking investor believes in the long-term value and added value to the companies he selects. Therefore, it is also his view that the short-term value fluctuations that every stock experiences is not a correct pricing of the share. The stock picking investor will therefore follow the fluctuations of his candidates and strike when he find that the price is cheap.

Adjusting the portfolio

Stock picking is a buy and hold strategy, but does not prevent that the investor periodically adjusts the portfolio and sells the companies that yet seems expensive and buys the cheaper new prospects. A typical stock picking investor will change 20 - 25% of the portfolio each year. This equals an average holding period of 4-5 years for the companies in the portfolio. Off course some stock pickers can be more aggressive and others again will prefer longer holdings.