5 tips for investing in stocks

It's not hard to find and buy good stocks, but it takes a lot of work and a disciplined approach. Includes video.

By Kim Peterson Apr 13, 2011 7:11AM

See the end of this post for a chance to win a $100 gift card.

 

A good friend recently told me his retirement savings strategy, and I use the word "strategy" loosely here. He was terrified of stocks, so he chose to put his savings in bank certificates of deposit.

He now has $40,000 in cash earning less than 2% interest, and at that rate will retire with, oh, about two years of spending money. But who can blame him for his fear of the market? The ups and downs of the past few years have wreaked havoc on nest eggs everywhere, and no one wants to get burned again.

But how to do it? How do you avoid the investing pitfalls yet still build that fat mountain of cash? One key step is confronting your fears about stocks and building the knowledge and confidence to invest. It will take work and you'll do it one baby step at a time, but soon enough your inner Buffett will lead the way.

Speaking of the Oracle of Omaha, he gives his tips for basic investors in the following video. Below the video are my five steps to get you started on finding great stocks:

Post continues after video:

1. Invest in what you know. A stock price is based not on past performance but on what investors think it will do. People expect big things from Apple (AAPL), whose price has hovered between $330 and $360 all year. Not so much with Wal-Mart (WMT), which has been stuck in the $50-$60 range for years.

You must know a stock so well that you can set your own expectations. Learn how to read stocks, and buy the ones you think will go up. One way to do that is with a good stock screener like MSN's StockScouter.

Another way is to get down and dirty with the numbers. Find the price-earning ratio not only for your stock but for others in the same industry. Same with the price-to-book ratio. Get the four most recent earnings reports from the company and read the transcripts of earnings calls on Seeking Alpha. Read analyst reports while you're at it. Become so intimate with a stock that you'll want to make it breakfast in the morning. It's hard work, but it's an absolute must.

2. Follow dividends. Dividends aren't that important for younger investors who have the luxury of time and can take on a little more risk. But as you get older, you start to like the comfort and stability of a solid dividend-paying stock. In fact, many investors aim to live off dividends when they retire.

A company with excess profit usually reinvests it in the business or pays it to shareholders through dividends. Get to know a dividend's yield, which tells you how much in dividends your stock is earning for you. Calculate it by dividing the annual dividend by the stock price. One of the best dividend stocks, Procter & Gamble (PG), has raised dividends for 54 years in a row, giving investors an annualized total return of 7.5%, according to the Dividend Growth Investor blog.

Other good dividend bets are PepsiCo (PEP), Kimberly-Clark (KMB), Abbott Laboratories (ABT), Walgreen (WAG) and Johnson & Johnson (JNJ).

3. Find a strategy and stick to it. I wasn't kidding about channeling your inner Buffett. One of the many reasons Warren Buffett is so adored is that he sticks to his investment philosophy through thick and thin.

Buffett all but ignores the stock market, calling it a popularity contest. What he likes to see are companies that can make money. He wants results. He recently said that if given the choice between all the gold in the world and all the farmland in the United States, he'd take the farmland because it produces and delivers returns.

Even the most amateur stock pickers need their own rules. Maybe you're another Buffett looking for companies that consistently perform well with high profit margins. Or maybe you want to focus on companies with lots of cash on hand. Maybe you're a contrarian investor who wants to zig when everyone else is zagging. The point is to find a strategy you like and find gurus who share your philosophy and follow them.

4. Diversify. No matter how much you love the solar industry, don't put all your money into solar stocks. Key to building a good investment portfolio is diversification -- and luckily, all the new exchange-traded finds coming online offer great ways to do that.

There are plenty of ways to diversify a portfolio. Consider investing in other countries, perhaps with iShares MSCI EM Eastern Europe (ESR) or Vanguard Total World Stock (VT). Or maybe you'll want to mix some small-cap stocks like the popular iShares Russell 2000 Index fund (IWM) with your blue-chip corporations.

And your portfolio should go beyond stocks to include bonds and various forms of cash, such as Treasury bills and money market funds. Also consider investing in precious metals like gold and silver and perhaps a dividend-heavy real-estate investment trust like Brandywine (BDN) or Liberty Property (LRY).

5. Be disciplined. This is probably the hardest advice to follow, because it's nearly impossible to keep your cool when your stocks are taking wild swings up or down. Even financial guru Jim Cramer got caught up in the madness, telling investors in 2008 to take any money they needed for the next five years out of the stock market immediately. In hindsight, that was one of the best times to get into the market, as just about everything went back up.

If you followed steps 1-4 above, then you will have the knowledge and confidence to act very deliberately in the stock market. Don't let your emotions lead you by the nose, and don't overreact. Think about how disciplined Buffett is in his approach. He's methodical, nonjudgmental and consistent.

Here are a few of my favorite sites to get more information about investing:
  • Investopedia has the best basic definitions to get you started.
  • MSN's New Investor Center has timely news and tips, with something new every day.
  • Seeking Alpha has a ton of opinions from regular investors.
  • Morningstar has some of the best ways to research a company's price-to-book ratio and other key screens.
What's important to consider before you buy stock? We want to hear from you on Twitter!

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10Comments
Apr 13, 2011 9:25PM
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Kim Peterson

 

I have read many articles from msn. I have to say this is one of the better. Thank you for writing about a topic that should be reflected more here (stories about stocks and how to make money). Most stray from this type of straight-out advice.

 

99% of comments on other writings are pure rubbish and lead to childish ways. None of the responses have anything to do with the article in the first place.

 

p.s. I like Cramer maybe not perfect but still fun to watch and think about what he has to say

Jun 8, 2011 1:25PM
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why we making this about cramer?  he's one sentence in the article. 

 

So lets be complete ...  Cramer sent out an email titled, "My portfolio is CRUSHING the S&P 500," the email said Action Alerts PLUS is "producing some truly incredible results." From Jan. 1, 2002, to April 1 this year, said the email, the portfolio's "total average return has averaged more than DOUBLE the return of the S&P 500."  An accompanying bar graph showed the S&P 500 returning 15.5%, versus 39.2% for Mr. Cramer's portfolio.

 

And that's true ... if you include dividends for Mr. Cramer's portfolio and exclude them for the S&P 500. With dividends, the total return of the S&P over the same period was 38.3%.  Action Alerts PLUS didn't double the market's return; it squeaked past by a cumulative 0.9 percentage point. That is before tax, trading costs and before the annual subscription fee ($299.95 the first year).  And not only that but it would require over 700 trades a year to mirror the Action Alert PUS newsletter portfolio.   So for all the Cramer worshipers,  you might be drinking a little too much koolaide. 

Apr 13, 2011 10:53AM
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"Even financial guru Jim Cramer got caught up in the madness, telling investors in 2008 to get out of the stock market immediately. In hindsight, that was one of the best times to get into the market, as just about everything went back up."

 

First of all, Cramer didn't tell everyone to get out of the stock market in Oct 2008, but to take out any money they'd need for the next 5 yrs.  Sensible advice as the market plunged an additional 35% to it's low in March.  I'd hardly call that being "caught up in the madness."  In fact, sometime in March if I remember correctly, Cramer was saying he thought the market couldn't sustain much more down and things were far more likely to go up from there, as they have some 80%.

Oct 11, 2011 10:24PM
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We had a sizable amount of money in a 401k. All four family members became ill at different times requiring extended IV treatment. Despite having a "Cadillac PPO" through my husbands jobs in the corporate world much of this extended treatment was "denied".

We had no choice but to pay put of pocket. It caused astronomical medical bills over 20 years and continues since I remain chronically ill requiring continued treatment.

My husband also lost his corporate job at age 55. He will not get a pension. After numerous job interviews and almost running out of cobra he investigated a small limousine business with lawyers. He even worked for this man for three months.

Finally he paid to become a "partner" in this small existing business. Unfortunately within six months we discovered this person turned out to be satan on earth. My husband did 90% of the business. It was a nightmare.

I was very ill and am disabled. After 5 long awful years we walked away with nothing.

We depleted all our life savings and moved in with my mother 3 years ago.

Obviously, now that my husband has been declared disabled and surprising to us was then given his full social security he was dropped from medicaid. Medicare won't begin for 2 years. In the meantime, nobody will give him major medical because he has "pre-existing conditions".

We are struggling to get his prescriptions at a discount. He has no coverage for anything.

We bring in a grand total of $35,000 a year. Wondering, in our situation if it would be wise at all to invest in a very few solid stocks.

My mother just passed away and I received about $5,000. We are extremely nervous about doing anything but at 59 and 62 wonder of we are just hopeless cases or if anyone would advise that we look into something.

My husband hopes to bring in at least $10,000/year to make our life livable.

We are legally allowed to live here at my mothers home for the next 3 years. Past that my two sisters would understand but naturally would like to sell it sometime/ It isn't worth much but everything counts.

Thank-you for any input.

We did move a lot due to corporate moves and have bought and sold 4 different homes. We declared bankruptcy several years back due to job loss and chronic illness. However we've put extensions on a federal school loan that we're sure they'll want payments from now that my husband is getting SSD.

Helen

 

 

 

Apr 13, 2011 1:53PM
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Not that I'm a Cramer cheerleader, but I still think being "caught up in the madness" is an inaccurate reflection of Cramer's advice, nor was Oct 2008 one of the best times to get back in, hindsight or no.
Sep 10, 2013 9:49AM
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6) Use an app to follow your stocks. Such as StockPortfolio from http://www.bastaware.com
Apr 13, 2011 12:37PM
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AG999, you are correct. He said to take out money needed for the next five years. I clarified the post to reflect that. Thanks for taking the time to comment.
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