Your life can provide good stock tips
Vail, CO, Colorado
When selecting stocks, how do you locate the companies with a glittering future — the ones with a new product, a new service, or a better way of running things that will turn out to be the keys to long-term success?
You read business news in magazines and newspapers, talk with your financial adviser, and dissect the reports he or she gives you. Those are perfectly sound ways of gathering information, but it is information that many other people looking for investments already have. It is largely factored into the price the market is setting on the company’s shares.
But often, you will have information ahead of the crowd ” or pay attention to things that others ignore. The trick is to recognize what you know ” and how to use it. Retirees, with a bit more time to devote to checking out a hunch, are in a perfect position to follow up on their observations.
Keep your eyes open, and always have in mind how the developments you notice could translate into good news for a particular company. A prospective buyer of a Sun Belt condominium unit who sees developers offering fewer incentives than their friends got a year ago may decide that the market is firming in that locale. A cycling enthusiast who sees that a new model beats anything on the market may expect the manufacturer’s profits to rise.
If your physician says, “I’ve found this new drug to be better than anything else on the market,” or the pharmacist notes, “We’ve had to reorder that drug twice this month,” take it as in investment clue. The news that the new drug is on the market is public, but few may have zeroed in on how well it is selling.
Once you identify a company as a potential good buy, you have to do some basic research: Ask your financial adviser for a research report, and read the company’s most recent annual report ” or perhaps the more detailed 10-K report that the company files with the Securities and Exchange Commission. You want to see overall financial strength, evidence of good management, assurances that the hot product is part of a stream of smart research and not a one-time fluke. Your financial adviser will also be able to tell you what the market buzz is about the company, whether the development you noticed is already widely recognized or not.
You also should talk with your financial adviser about how the investment fits your overall portfolio strategy. A keen biotechnology firm that isn’t anywhere near turning a profit but has strong long-term potential may not be the right choice if you are looking forward to heavy travel spending over the next few years.
You also want diversification in your portfolio. You may recognize most rapidly the import of new developments in the industry in which you worked, but you don’t want all of your holdings in that one field.
Bad news can be an investment signal as well. Some highly-touted products have initially been overrated by the investment community, so if you buy such an item and find it disappointing, you may want to consider selling the company’s stock short ” betting that sluggish sales of the product will drive down the stock price. But that is a technique only appropriate to those with a strong tolerance for risk.
Of course, it’s illegal to base your trading decision on insider information about a company. Unfortunately, it is not at all clear just what insider information is. Obviously, if you are consulting with a company, you cannot use what you find out about unannounced new products. But even if you have no ties to the company, it is against the law to trade on such information if it was told you during a golf game with the corporate CEO ” or even with a friend of the CEO who is passing on what the executive told him. If you are not sure whether something you are told, first-hand or second-hand, from a company official is publicly known, the safest course is simply not to trade on it.
However, you can trade on your own insights ” insights that other investors and analysts may not have.
Provided courtesy of Fraser M. Horn and Dudley M. Irwin, Investment Adviser Representatives with Berthel Fisher in Edwards.