Stock picking tips
Though it may be helpful to start a thread with tips on stock picking. Below are a couple I’ve found helpful, feel free to share yours.
1) Do your own work, particularly for valuation.
Don’t just rely on analyst price targets or what a friend or Reddit user tells you.
2) Be conservative with assumptions for valuation.
If you’re assuming a significant change in revenue or margins vs historicals or consensus estimates, you better have a good reason for why. Also if your DCF relies on an aggressive discount rate or exit multiple, the stock is probably not cheap.
3) Focus on not losing money.
Don’t just think about how much you can make, but also consider what can go wrong and how much you lose when things inevitably don’t go as planned. I personally rather own something with 20–30%+ upside and 10% downside than something with 100% upside / 50% downside, unless the odds of the 50% downside scenario are fairly low.
4) Keep it simple.
I have found avoiding overly complex situations/businesses (hello life insurance) has saved me time and money. Avoid situations where you need a multitude of different items to go right / as planned for the stock to work.
5) Be extra cautious of businesses with significant cash burn or leverage. A lot of these businesses may seem cheap but are trading where they are for a reason.
6) Size accordingly.
Everyone has different risk tolerances but a stock that’s safer / has good risk reward should probably be sized larger than something riskier, e.g. a highly leveraged or cash-burning turnaround situation.
7) Find your style.
I think over time most people develop an investment style/something that works for them, e.g. buying high-quality companies after large earnings misses / overreactions. Figure out what your style is, and seek out stocks in that sweet spot.
Happy investing!
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