In this chapter we'll look at several techniques that some of today's leading money manager use for picking stocks.
First, though, it's worth repeating that for most investor, selecting individual stocks is unnecessary-if not inadvisable. The fact that most professionals do a poor job of stock picking does not mean that most amateurs can do better.
The vast majority of people who try to pick stocks learn that they are not as good at it as they thought; the luckiest ones discover this early on, while the less fortunate take years to learn it. A small percentage of investors can excel at picking their own stocks. Everyone else would be better off getting help, ideally through an index fund.
Graham advised investors to practice first, just as even the greatest athletes and musicians practice and rehearse before every actual performance.
He suggested starting off by spending a year tracking and picking stocks (but not with real money). In Graham's day, you would have practiced using a ledger of hypothetical buys and sells on a legal pad; nowadays, you can use "portfolio trackers" at website like www.morningstar.com, http://finance.yahoo.com etc.
By test-driving your techniques before trying them with real money, you can make mistakes without incurring any actual losses, develop the discipline to avoid frequent trading, compare your approach against those of leading money managers, and learn what work for you.
Best of all, tracking the outcome of all your stock picks will prevent you from forgetting that some of your hunches turn out to be stinkers. That will force you to learn from your winners and you losers.
After a year, measure your results against how would have done if you had put all your money in an index fund. If you didn't enjoy the experiment or your picks were poor, no harm done-selecting individual stocks is not for you. Get yourself an index fund and stop wasting your time on stock picking.
If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks-but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad.
- The Intelligent Investor, Benjamin Graham
After a year, measure your results against how would have done if you had put all your money in an index fund. If you didn't enjoy the experiment or your picks were poor, no harm done-selecting individual stocks is not for you. Get yourself an index fund and stop wasting your time on stock picking.
If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks-but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad.
- The Intelligent Investor, Benjamin Graham
