MENU

How to Find the Right Stocks for You

There are currently more than 700 companies listed in Singapore’s stock market. With that wide a selection, it might seem like it’d be very difficult to pick the right stocks for us, especially for those who are just starting out in investing.

I understand the difficulties involved. But the thing is, the selection process does not have to be that hard. If we’re out looking for great businesses to buy and hold for the long-term, we just have to understand what the few characteristics are that such great businesses tend to possess.

In my opinion, these defining characteristics are: 1) Management must be honest and have integrity; 2) the business must be able to grow without severe dilution of existing shareholders’ stakes in the firm; and 3) the business must have the ability to generate lots of free cash flow. Of course, we must also make sure that we can understand the business.

With those four short criteria, we can form an opinion on the companies that we read about rather quickly. For every company that we come across, we can keep asking ourselves if it can clear those four hurdles that we’ve set. If a company can’t, we can simply move on to study another firm.

Sooner or later, you will get a sense of which are some of the higher quality businesses listed in Singapore and you can then focus your energy on just them.

The key here is to not hang on to the companies that do not meet your criteria. It can be tempting to keep checking back on them for the fear of losing out on a potential investing opportunity. But, it’s worth bearing in mind that there is no way anyone can be invested in every winning share out there.

To the point just above, it’s worth noting what investing Peter Lynch once said in an interview:

“When I ran Magellan, I wrote a book. I think I listed over a hundred stocks that went up over ten-fold when I ran Magellan and I owned thousands of stocks. I owned none of these stocks. I missed every one of these stocks that went up over ten-fold. I didn’t own a share of them. And I still managed to do well with Magellan.”

For some perspective, despite missing “over a hundred stocks that went up ten-fold”, Lynch still managed to clock phenomenal anunualised returns of 29% for over 13 years from 1977 to 1990.

It is far more useful for us to focus our energy on great companies which are more likely to do well over the long-term than to focus on sub-par companies that might enjoy a sharp spike in their share price once in a while.

Foolish Summary

Finding the right companies for you to invest in need not be an insurmountable task. Even if there are more than 700 companies listed in Singapore, you’d still be able to get a good sense of which are some of the better businesses in the market once you’ve gone through the process of understanding these companies based on the few simple criteria that’s mentioned earlier.

To quote from my own personal experience, I’m concentrating on only less than half of the companies listed in Singapore. And no, I do not miss the other half at all as I know my attention’s locked onto where it really matters.

For more investing analyses and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest,better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.