Investment professionals generally recommend index funds to new investors because index funds buy and hold many stocks at the same time, and are therefore considered safer. However, frequent readers of this blog will know that index funds also have their disadvantages.
There are many reasons why you should make your own investment decisions when choosing stocks. The question is though, which stocks should you choose to buy, especially when you have less investment experience? Newer investors should take these three rules into consideration, which now also apply to our Top 10 lists:
The first rule is to only buy stocks from the largest companies. Large companies have an advantage in that the managerial arms of these companies work to ensure you get a profit as a shareholder. Their success can vary but, in the long run, they are generally successful because they will look after their own interests, as well as yours. In our opinion, there are around 1,200 companies worldwide with a size that could be described as XXL and XL, which you can see in our ranking database file. It is included in our premium subscription to the weekly Obermatt Stock Update. In Switzerland, there are 29 companies of these sizes, which is a number that is easy to manage.
The second rule is to avoid the hot tips from the stock investing press and financial consultants, as many other investors will already be familiar with these tips. They lack novelty and value. It makes much more sense to rely on financial data to reveal companies that are less publicized and have greater value and growth potential. These companies can be found in our value ranks. Because we buy stocks with better value, our stock picks are often untypical and sometimes even controversial. We choose high-value equities because they have a higher return over the long term. We did not reinvent the wheel. This method has been proven many times over, for instance by by Robert Shiller, who recently received the Nobel Prize for it. Investing well requires patience.
The third rule is to avoid stocks you don’t understand. These may be well-known shares such as Warren Buffet's Berkshire Hathaway, whose business activities are too broad for a balance sheet analysis and require more accurate, manual analysis. Or, they could be biotech companies, whose value is largely speculative and heavily dependent on future growth. These are not bad stocks per se, but they are shares that may not be suitable for novice investors, because of the time and analysis it takes to fully understand them.
For these reasons, Obermatt is redefining the criteria for our Top 10 shares to consistently meet these three rules. On most of our Top 10 lists, you will only find stocks from large companies and from those whose financial analysis you can understand. And, last but not least, we primarily use our value and combined ranks for our stock selections.
If you stick to these three rules, you should always be successful when investing in stocks in the long term, barring any natural disasters, epidemics or wars. You will receive a few more tips in our free Obermatt Investing Manual (free download after subscribing to the Obermatt Stock Update).