Your Questions About How To Pick Stocks To Buy

Jenny asks…

What stocks should I invest in for an online game?

I’m in econ at school and we are playing a virtual stock game on the internet. Which stocks should I invest in? I’ve invested in the obvious stocks such as Google and Apple but I need to invest in more. I’m just not exactly sure what I should be investing in.

John answers:

What’s your strategy?

Picking stocks isn’t a strategy and if you don’t have a strategy, you’re just putting the cart in front of the horse by picking stocks.

A very important decision is how much of your portfolio to keep as cash. Once you have your portfolio percentages decided upon, you need to keep them. For example, if you have 50% cash and the rest in one stock and the stock goes down, you buy stocks till you’re at 50/50 again, if it goes up, you sell stocks till you’re at 50/50 again. Always rebalance to the targets you decided on. That way, you can take advantage of a downturn as well as growth.

As to stocks, I’d stay away from airlines for a while, there’s the Continental United merger underway, first round of layoffs just occurred and regulations about the amount of rest the pilots need to have has just changed. I would estimate that the airlines will have to either double the number of pilots they have or cut their schedules by 30%. Continental and United will probably use the merger as an excuse to cut schedules so they’ll be the first out of the block in restructuring to the new regulations but that industry is a difficult one at the best of times.

When in doubt, you can go with ETF’s, the idea of ETF’s are that they are a blend of stocks so that it’s like buying a share in the entire S&P 500 index or some other index.

There’s a lot that may happen in the next few months, retail stores have their inventories at all time lows and are counting every dime which means they’re in survival mode and won’t be in a good position to take advantage of any increase in consumerism but online outlets like Amazon will benefit from that. Grocery stores are probably going to do well cause food is the last thing people want to skimp on. Oilfield services might be good now that the spill is over with so business can pick up again (slb is pretty good in that sector). Of course the October timeframe is usually when bad things happen so keep cash ready to take advantage of opportunities.

Mary asks…

If you knew the stock market was going to crash in a certain month, how could you make money on that?

Would you short random stocks? Would you buy puts on random stocks? Or what?

John answers:

If you know the stock market is going to crash, then why would you short random stocks or buy puts on random stocks? There are stocks that go up during a crash. What if you happen to pick the one that goes up? Here’s what to do: You would probably buy a bunch of cheap out-of-the-money puts on the S&P500 ETF (SPY), and sell short the SSO, which is the ultra long S&P500. When the market crashes, this fund crashes faster than anything, so it’s a good candidate for shorting! Similarly, if you knew that the market was going to go up for sure, then you would sell short QID and SDS and buy QLD, SSO, and out-of-the-money call options.

But let’s be realistic. I might be able to know that the market is going to crash before it does, however I probably won’t know exactly WHEN. In this case, buying options is not a good idea. The market may take 2-3 months to crash or 2-3 years to crash. If we’re uncertain about the timing, it’s best to leave the options alone and just deal with ETFs.

Chris asks…

What is the best sector of the stock market as a beginner, to buy stock options?

I want to begin buying stock options, but I do not know what sector of the market to start in this economy. I am looking only for moderate return on my investment. I only want to get my feet wet so to speak, and not get burned. My funds are very limited. Any suggestions?

John answers:

If your just starting out you may want to just buy the stock, unlike the options stocks won’t expire. A stock option will let you enter a position at a lower cost but you assume more risk. The values associated with options are time value and intrinsic value, the further out in time you are from the expiration date the more valuable the stock is but the closer you get to that date the cheaper it becomes. The stock however will go up dollar for dollar and then you can sell and take your profits.
As to what sectors are good right now, there are a lot of undervalued good stocks that are ripe for the picking and you can hold them and realize a nice profit in a few years. But for safety sake you may want to stay with basic grocery,material, energy, metal stocks. They will always be in demand and there is only so much to go around. Watch Jim Cramer on Mad Money and he will help you understand more of what the market is all about.

Betty asks…

What attributes do you screen for when choosing a stock to buy?

What kinds of statistical data would you find useful in a stock picking screener?

John answers:

I like to screen for Market Cap, price, and insider ownership.

Market cap because it is easier for a small business to grow than a mature business to keep growing at a high rate. (except Google )

I need a price over $6 so that I can margin it. Other than that price means very little as the price only tells you how much each “slice” of the company sells for. The market cap tells how much the whole pizza costs.

Insider ownership is very important. I want to see the insiders own 20% plus of the company. I want to know that they have faith and have their money on the line. Insiders with a large ownership will give you confidence that they are looking out for the long term interests of the stock holders.

Also I would want to screen out sectors that I have no interest in buying: Oil, Biotech, Gold, Banks etc

Donna asks…

What are your picks for three safe stock picks and three risky stock picks?

We are discussing the equity markets in a class and I was wandering what are three safe stock picks and three risky stock picks. Also, which sectors are attractive and which ones should I avoid! Anything will help!

John answers:

Safe. SO, FCX, BHP

Risky. WIND, AAI, WB

Sectors in which the companies are involved in producing things needed in the emerging third world countries, and that might include food, copper, aluminum, titanium, gold, industrial diamonds, clean water, all sorts of energy.

Sectors to stay away from are ones where the value is based upon people’s knowledge of how to make money. Now this is sort of incosistent with my stock picks. I picked GS as safe because they stand head and shoulders above the rest of those rascals who don’t really produce anything. GS people seem to be bulletproof. I picked WB because it is way down, and I wouldn’t recommend it yet, but in a few days after the dust has settled, it might be a very good buy. AAI is very risky, but they have some good advantages on their side.

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