Investing in Stocks

I sometimes get asked about how I decide what stocks to buy for client portfolios.  The answer is not easy or simple, however, a general summary might give some insight into the process.

Investing in stocks requires original research.  Research can be looked at in two ways:  macro and micro.  I define macro as looking at “the big picture”.  This includes international economic trends, international politics, domestic (U.S.) politics and domestic economic trends, what is happening in the bond market and commodities markets.  Macro research also covers industry trends.  For example, I ask the question: Which economic sectors should outperform and underperform, given the outlook for international and domestic economic and political trends?  Normally, in a bad economy, or heading into a bad economy, so-called “defensive” industries tend to do better than ones that will suffer in an economic downturn.  Procter & Gamble is a classic “defensive” stock.  Everyone has to wash clothes, eat, and spend money on grooming products, regardless of the economy.  People might trade down from name brands that P&G sells, but nevertheless, companies that sell everyday necessities that are consumable products are a natural investment option in a bad economy.

Micro-level research involves researching specific companies.  For example, before I invest in a stock, I look at research reports from various research providers, but I also do my own research by looking at the current annual report and SEC-mandated 10-K report to assess a company’s prospects.  I have specific criteria that I use when evaluating a company’s financial strength, future prospects and ownership structure.  Once I decide that a company meets my criteria, and if the time is right from a macro level, that stock may be purchased for client portfolios.

Because I am more a strategic than a tactical investor, I tend to hold stocks for a longer time than a typical mutual fund.  This holds down taxes for clients who have standard accounts that are subject to tax whenever a sale is made in their portfolios.  It also helps hold down transaction costs for all clients, including clients who own IRA accounts and other types of tax-deferred accounts.