Smart stock investing

Smart stock investing

Look at the big picture

Even the most famous and successful investors such as the great Warren Buffet advise people to stick to what they know, don't get lost in detail and always take a step back when analysing the merits of purchasing stock in a company. The average person, with little stock picking experiance, can have a fair degree of success by simply applying common sense to the process.

The idea behind this strategy is to stick to what you know about. Many investors make the simple mistake of ploughing their hard earned savings into the latest stock tip that they have little or no knowledge in. This is a sure fuire way to lose money in the long run, just look at the large numbers of amatuer investors that lost thousands on dot com stocks during the dot com bubble crash a few years ago. Instead this approach advises investors to only invest in companies or sectors that they have experiance or knowledge of.

One great example are the people who invested in Apple stock off the back of seeing or playing with an ipod. Many investors were blown away when they first saw an ipod. You didn't have to be a financial guru to understand that here was a device that could easily catch on and achieve huge sales. It was incredibly easy to use, could replace an entire cd collection, was ultra portable and to top it all off incredibly stylish, especially when compared to to the usually unstylish black or grey portable music devices. In fact the little white heaphones that came with i-pods quickly became a fashion accessory for the youth of the time, turning the i-pod into a must have item for much of the younger generation.

If you had taken this common sense approach and invested in Apple during 2003 when the iPod was first starting to take off you could have picked up the stock for as little as $6.36. The highest the stock reached during 2007 was $202.96. That represents a 3,191% return in just over 4 years which by any means is an incredible return. The point to take away from this example is that simply by keeping your eyes open it is perfectly plausable for you to spot the next big thing or trend and and apply this smart stock investing approach in order to make gains.



Spotting Mega Trends to invest in

As well as spotting new innovative products that you feel may take the market by storm and become a cash cow that sends the stock of the producer rocketing it can even pay to take a step further back and look for what are called mega trends in the economy.

A great example of this is the boom in recent years of the commodities markets. Much of this boom has been attributed to the rapid growth of the economies of China and India. Again it would not have taken an economist to spot that with booming populations and economies such as these the demand for commodities such as iron, steel, oil, wheat etc was and maybe still is likely to outpace supply. To apply a smart stock investing strategy you would just need to identify such a trend then attempt to pick individual stock or fund investments with exposures to these sectors or industries.

Don't forget the fundamentals

Ok so lets assume you have identified a mega trend or particular industry for smart stock investing, it would be suicide to just pick a random stock and pile all of your investment money into it. Once you are confident that you have a growth or income rich sector to invest in, you'll need to assess individual company fundamentals such as dividend yields, earnings growth, p/e ratio, balance sheet health before purchasing the stock. This micro analysis is covered in our how to pick stocks article.