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How To Choose Stocks

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by Jan K. Allen

SBJ Contributing Writer

Strategy is a word used often in the stock market investment strategy, equity strategy complicated lingo for a complex subject. Brokers agree, probably the best strategy a person can use in selecting stocks for his or her portfolio is to pick a good broker from a reputable firm and rely on his or her knowledge and expertise.

That is not to say people shouldn't take an active role in the management of their investments. Brokerage firms produce a steady flow of up-to-date material in which professional analysts dissect information on companies and draw conclusions, but the ultimate decision falls on the investor.

According to Audry Gilbert, broker at A. G. Edwards, some of the first questions to ask are: What is the objective? Is the purpose to produce income or add to income? Does the investor want a moderate stock, a slower but more reliable stock or an aggressive stock? Higher gain with more risk? What are the risks?

Gilbert said she feels the best overall investment is to buy into "core holding companies," those with long-term track records, such as AT&T, Pfizer and Johnson & Johnson.

As with any company, these huge conglomerates may have ups and downs, but for the long haul, they continue to produce profits and add stability to an investment portfolio.

It is good to study not only a specific company, but the industry as a whole to determine factors that have an effect on that segment of the economy year after year, Gilbert said.

For example, a company that does a lot of exporting may not be doing as well in today's economy with the dollar so strong, but companies who import a lot of products are faring well in this marketplace because their buying power is strong.

Although the strong dollar has been a fairly long-term trend, one may ask how long it will continue with Europe and Asia struggling to equalize the situation.

Pricing pressure is another factor to look at when eyeing a particular stock purchase, Gilbert said. The high-tech industry is doing well right now, and it is certainly here to stay, but it is also more volatile than some other categories.

Industry leaders, such as Microsoft and Intel, are likely here to stay, but others may be jumping on the bandwagon, only to fall off when things get tough.

Also, Gilbert pointed out, over-supply forces everyone to lower prices, which can affect yield on investments. A business owner who has a flow of replacement income to rely on from his company may want to take advantage of the high yield produced by an aggressive stock, but the investment bears watching, she warned.

Another important factor to consider is liquidity. This is especially important for a businessman who may need to tap into the funds available in his portfolio on occasion.

Darron Hemann, broker with Edward Jones, said one of the first things he does with a potential investor is check the strong-buy list, compiled by professional analysts for his company.

Some of the factors the experts look at are whether an industry has room to grow and what its price/earnings ratios have been over time. Comparisons are made to see how a company stacks up with its peers.

It's also a good idea to study the company's long-term debt, to determine how much harder it may have to work down the road to hold its position, Hemann said.

Hemann said he likes to quote stock expert Warren Buffett: "If you can't look at the stock for five years, don't look at it for five minutes."

Hemann's philosophy is down-to-earth and common-sense: "Buy for a reason, pick companies for the long term and make a decision based on research."

Like Gilbert, Hemann said he cringes when a customer wants to purchase a stock based on a hot tip from his brother-in-law or the guy next door.

"Some people spend more time planning their vacations than picking their stocks," he said.

Gilbert commented that she has actually refused to buy into some high-risk ventures for clients. The odds are too great and there are too many safe alternatives, she said.

Both Gilbert and Hemann recommend buying into stable, well-managed companies with a history of growth, and then be prepared to ride it out for the long term.

There may be some slow times, but a solid company will continue to grow over time. Usually, when the stock prices are down is a good time to add to the portfolio, Gilbert said.

"Patience is rewarded if you've done your homework," Hemann added.

A.G. Edwards and Edward Jones both subscribe to a number of resources, like Standard and Poor's, and can access up-to-the-minute information online.

Gilbert offered one last piece of advice to novice investors who don't want to spend the time on research. These folks can buy into a mutual fund, which is already diversified, and let the experts manage the the fund for them.

Some of these funds can be started with as little as $250 and can be added to in increments of $25 to $50. The investor can make a monthly contribution and then forget about it, if they want to, she said.

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