How to Pick Stocks to Invest In

Learning how to pick stocks can be challenging, but it paves the way to achieving market-beating investment returns.
A young business woman presenting her investment strategy

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Learning how to pick stocks is a common endeavour among investors. After all, there are roughly 58,200 publically listed companies to choose from. And the majority won’t deliver market-beating returns.

The art of stock picking is applying fundamental or technical analysis to determine whether a stock qualifies as a good investment. And when executed well, it can generate enormous returns for investors, far exceeding what a mutual fund or exchange-traded fund (ETF) can offer.

It’s how Warren Buffett became a billionaire, and Peter Lynch went down as one of the greatest fund managers in the history of Wall Street.

So, let’s explore the critical factors that go into a stock-picking strategy.

What are the four main investment strategies?

Like every chess player forms a strategy and game plan, a stock picker needs to do the same.

Numerous investment strategies are commonly deployed, each with its advantages and disadvantages. What’s important to realise is that a strategy is only suitable under specific circumstances. That means investors need to pick the approach that’s most appropriate to achieve their investment goals.

Investment strategies can be placed into one of four primary categories. However, it’s worth noting that some investors like to use a combination to meet their investment objectives.

1. Passive Income

A passive income strategy is also known as income investing. This is where investors seek to generate an additional income stream using the stock market. As such, they often gravitate toward businesses that offer a chunky and reliable dividend.

Various financial metrics can give insight into whether a company can maintain their dividends, such as the dividend yield and payout ratio. However, a common shortcut investors can use is to simply look at the list of dividend aristocrats.

These are the dividend stocks that have raised shareholder payouts each year for at least 25 years. And some investors like to take this one step further by only looking at dividend kings – stocks that have paid an increasing dividend for more than 50 years in a row.

Outside the realm of the stock market, fixed-income debt instruments like high-yield bonds are also a popular asset class that passive income investors often explore.

2. Capital Appreciation

A capital appreciation strategy where growth investing and value investing come into play. This is where investors seek to grow their investment portfolio by buying low and selling high. In other words, their focus is on finding a business whose stock price has the potential to surge. As such, they often focus on shares with impressive sales and earnings growth rates.

Investing in a growth stock opens the door to potentially explosive performance. But that comes at the added cost of risk. These shares are significantly more volatile, often falling by double digits when investor expectations aren’t met or when economic conditions worsen.

Investing in value stocks can be equally daunting. While identifying an undervalued business can be a lucrative long-term investment, it can sometimes take a long time for the stock market to reflect the true value of a company. For investors without sufficient patience, even a correct analysis may result in a poor-performing investment.

3. Wealth Preservation

Not every investor is seeking to build wealth. Some are already fortunate enough to be rich and are seeking a way to preserve their wealth. This usually means sticking to low-volatility stocks of mature enterprises in a highly diversified portfolio spanning multiple industries and geographies.

There are also several alternative investment instruments commonly held by wealth-preserving investors. The list typically includes money market funds, ETFs, commodities like gold, and government bonds.

4. Speculation

Investors with a high tolerance for extreme risk can sometimes deploy a speculative investment strategy. This often boils down to investing in a penny stock, micro-cap stock, or leveraged ETF. These are tiny businesses with enormous upside potential. Yet, even the most promising start-up can fail to deliver, and the vast majority end up crashing to zero.

That’s why many associates the speculation strategy with gambling rather than investing. And investors interested in executing this strategy should be prepared to potentially lose everything.

How to analyse stocks 

In their famous book — Security Analysis — Benjamin Graham and David L. Dodd described stock analysis as “the careful study of available facts with the attempt to draw conclusions therefrom based on established principles and sound logic.”

The whole purpose of researching and analysing stocks is to help investors make more informed decisions. And today, a wealth of information is readily available from websites, financial media, regulatory filings, and stock research services like our Premium Platform.

There are two primary methods of stock analysis:

  • Fundamental Analysis – This involves analysing a company to determine its intrinsic value and future potential. The investor seeks to understand the business model, the industry it operates in, financial standing, operating efficiency, management team, as well as other business-specific factors.
  • Technical Analysis – This involves analysing trends and patterns in the share price movements of a stock. Using these technical indicators, the individual investor can make a prediction of what’s coming in the next hour, day, week, or even month. It’s the method of choice for short-term traders attempting to profit from the mood and momentum of the stock market rather than the underlying fundamentals of a business.

There are also two approaches used when deciding which stocks are worth analysing in the first place:

  • Top-Down Analysis – This is arguably the most common approach used by investors and involves using a stock screener to identify opportunities. Instead of looking at companies straight away, an analyst first looks at the state of the economy. From there, they determine which industries have the most potential before deciding which sub-sectors in these industries are looking promising. The analyst then applies fundamental or technical analysis on the pool of companies within the selected sub-sector to pick the best-looking investments.
  • Bottom-Up Analysis – With this approach, investors start by analysing companies directly, either based on fundamental or technical metrics. The businesses are then compared to their parent subsectors and industries to determine whether they are a good pick. This approach can often be more time-consuming than Top-Down due to the lack of initial screening. However, it also highlights which stocks to avoid as well as potential winners.

When learning how to pick stocks, it’s often recommended that investors explore each strategy and use the one that they feel most comfortable with.

What are the main factors to consider when picking stocks?

Beyond identifying which businesses are the best stocks to buy, investors must also consider their personal circumstances.

  • Investment Goals – Does the stock align with the investor’s investment goals? High-growth shares are likely unsuitable in a portfolio designed to preserve wealth.
  • Time Horizon – Does the investment thesis surrounding a stock match the investor’s time horizon? Investing in a business that needs a decade to deliver on its mission is likely unsuitable for an investor seeking to withdraw their capital within the next five years.
  • Risk Tolerance – Is the stock too volatile for an investor to sleep well at night? Investors who have a low-risk tolerance are likely ill-suited to own risky penny stocks.
  • Personal Values – Does the stock meet the investor’s ethical and moral requirements? With ESG investing becoming more popular, some investors are boycotting companies operating in the tobacco, gambling, and arms dealing industries.

Stock portfolio management

Beyond learning how to pick stocks, investors also need to learn how to manage their investment portfolio. Portfolio management is a critical step on an investing journey. And when combined with skilled stock picking can unlock substantial returns while keeping risk in check.

There are two primary ways investors can manage their portfolios, each with its own advantages and disadvantages.

1. Active Investing

Active investing entails the constant buying and selling of stocks or investments to achieve higher returns. In picking stocks, an investor aims to buy stocks low and sell them high, moving in and out of the market frequently.

Can achieve market-beating investment returns.More frequent transactions result in higher trading costs.
Offers greater control over which stocks an investor owns, building an investment portfolio that reflects their goals, risk tolerance, and moral values.Requires high-quality research and analysis that an investor may not have the expertise to execute. Hiring an investment adviser can overcome this problem, but these professionals can be expensive.

2. Passive Investing

Passive investing entails money being invested solely in index funds and not actively checking their performance. This strategy suits investors who want to put their portfolio on autopilot, matching the returns of a benchmark index like the FTSE 100 or the S&P 500.

Matches the stock market’s performance with little to no research or stock analysis required.Investors have limited control over which stocks they own, with morally objectionable shares such as gambling, tobacco, and arms dealing businesses being blended into the mix.
Requires fewer transactions reducing annual trading fees.Impossible to achieve market-beating returns.

This style of investing is becoming increasingly popular thanks to its simplicity and decent returns. By comparison, most active investors fail to beat the stock market mainly due to a lack of skill and emotional discipline.

Who are the most famous stock pickers?

  • Warren Buffett – Considered by many as one of the greatest investors of all time, picking high-quality stocks that are trading below their intrinsic value and holding them for decades.
  • Charlie Munger – Warren Buffett’s right-hand man, serving as a friend and fellow stock picker at Berkshire Hathaway.
  • Peter Lynch – A legendary stock picker on Wall Street who formerly managed the Magellan fund delivering an average annual return of 29.2% between 1977 and 1990.
  • Nick Train – A star stock picker focusing on UK and global investments who co-founded Lindsell Train in 2000. 
  • Cathie Wood – A widely acclaimed stock-picker who founded a $60bn (assets) worth ARK Invest. She focuses on investing in disruptive stocks. 
  • Benjamin Graham – Considered to be the father of value investing, Graham taught many investors, including Warren Buffett, how to identify companies trading below their intrinsic value.
  • Philip Fisher – Considered to be the father of growth investing, Fisher was once one of the largest money managers in the world.
  • John Templeton – Famous for using fundamental analysis rather than technical analysis to find buying opportunities in the stock market. He founded the Templeton Growth fund in 1954, which delivered an average annual return of 15% for 38 years.
  • John Maynard Keynes – Considered to be the father of modern economics, Keynes achieved market-beating investment returns during World War 2, achieving an average 13.2% annual return between 1928 and 1945.
  • John Bogle – The founder of Vanguard, who pioneered low-cost index tracker funds.
  • Jim Slater – Was one of the top investors in London in the 1960s and 1970s, popularising small-cap investing and the use of the Price-Earnings-Growth Factor, also known as the PEG ratio.
  • George Soros – Considered to be one of the greatest hedge fund managers of all time. Soros Fund Management has delivered investors with a 20% average annualised return for more than 40 years.

Alternatives to stock picking

Becoming a stock picker is not an easy task and requires a lot of time, dedication, and skill. While investors can pay for a research service or hire an analyst to take care of the research process, they may still fail to achieve market-beating returns if they lack emotional discipline.

Investing in an individual stock can be a volatile experience that many investors aren’t able to stomach. Fortunately, there are alternative methods of investing in the stock market that doesn’t require investors to learn how to pick stocks.

  • Index Funds – These funds track the performance of a stock market index. By buying an index fund, an investor can match the performance of an underlying benchmark index without having to research any stocks.
  • Exchange-Traded Funds – These funds provide a low-cost method of tracking indices, sectors, commodities, and currencies, with a professional investment manager making all the decisions on behalf of shareholders. 
  • Mutual Funds – These funds can deploy active as well as passive investing strategies and provide a route for investors to potentially outperform the stock market without having to pick individual stocks themselves.
  • Robo-Advisers – Investors fill out a questionnaire designed to determine their time horizon, risk tolerance, and investment objectives. Based on the responses, an automated trading algorithm will invest an investor’s capital on their behalf in appropriate asset classes and investment vehicles.

The bottom line 

Learning how to pick stocks can be a daunting process. There are a lot of moving parts to consider, which require time and effort that not everyone has to spare. However, for those determined to find winning investments, picking stocks is a proven path to market-beating returns.

Discover market-beating stock ideas today. Join our Premium investing service to get instant access to analyst opinions, in-depth research, our Moonshot Opportunities, and more. Learn More

This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.

Prosper Ambaka does not have a position in any of the financial instruments mentioned in this article. The Money Cog does not have a position in any of the financial instruments mentioned in this article.

Written By

Prosper Ambaka, Esq.

Prosper is a self-taught financial analyst and investor with years of experience. Inspired by Benjamin Graham, he employs a value-investing school of thought throughout his analyses. This has led to Prosper developing a wealth of knowledge in equities, foreign exchange, commodities, and global macroeconomic issues.

In 2019, he completed his Law degree and was called to the Nigerian Bar in 2021. Outside The Money Cog, Prosper encourages others to join the investment community through his lectures on financial literacy as well as investing strategies.

Current Holdings


Edited & Fact Checked By
Zaven Boyrazian MSc

Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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