Trying to find and identify new stocks, day after day, is a tiresome ordeal that many new investors burden themselves with unnecessarily. New investors are often caught between two-mindsets: Wanting a large enough list of stocks to follow to avoid missing out on great opportunities and Having a manageable workload.
Despite how the idea of a portfolio with more positions often seems better than a portfolio with fewer positions, the chase for excess often leads investors to become too lenient in their stock-selection process. These investors continue to add companies to their watch-lists on account of a strong day or some favorable news they heard, until they eventually dilute the companies they follow from a list of strong companies they know and understand, to a compilation of yesterday’s unicorn and last week’s fairy.
Because of this, it is much better for beginner investors to follow Michael Scott's advice to "Keep it simple stupid" (Great advice… Hurts my feelings every time) and to follow a smaller list of stocks which you can know in greater depth. Maintaining a stronger, smaller list of stocks will help you trade more efficiently than if they were trying to manage a massive list of stocks that inevitably succumbed to decreased standards.
One simple trick to find out if your watchlist standards have fallen victim to this phenomenon is to read through the list and ask yourself "What is this company’s main line of business" and "Why did I add it to my list?" This will help you to discern which stocks you genuinely know, which you may like but are not yet knowledgeable on, and which stocks had a daily move that you wish you had foreseen. If you can’t answer both of those questions, it’s pretty likely that the stock snuck into your list and you should consider dropping it.
Learning how to avoid this pitfall comes from delving into companies and parts of the market to become an expert in those areas, knowing your friends and enemies, creating and maintaining organized watchlists, and using screeners and comparison tools to help you efficiently make your choice.
Become an expert:
One great way to find your starting base of stocks is to find the area of the market where you are already an expert or particularly interested in. After identifying this area, you should study the trends of the involved sectors and industries and develop opinions on some of the main players. Becoming an expert, and maintaining proficiency in these sectors, will be crucial in helping you find high-growth companies to drive gains during economic expansions, while also helping you to navigate away from volatile markets during recessions.
Know your friends from foes:
After gaining in-depth knowledge on particular sectors and developing your opinions on the main players, it’s time to get to know those companies better. You can start by researching the company vertically and identifying its suppliers and customers. It’s also good to know who it may have partnerships with and what they and those partners bring to the table.
After finding a company's friends, it’s time to look horizontally and identify rivals. Knowing who a company competes with, and why customers prefer one over the other, is critical to creating the best list of companies for you to follow and trade.
Create and maintain watchlists:
After gaining in-depth knowledge on a company, its partners and competitors, it’s time to meticulously place them on a watchlist. When creating your watchlists, it’s best to create about three separate lists to help keep track of how strongly you feel about the company. Investors will want their lists to contain an "inner circle", "outer circle", and "fringe stocks".
Your inner circle of stocks is a special group. These companies are your go-tos for trading and are the topic of all of your "did you knows" at cocktail parties. If you have a strong understanding of the company’s products, competitors, recent financial performance, etc. then the company may be a part of your inner circle.
Your outer circle is companies that you follow a little less frequently, but that you still have a solid understanding of the company’s overall business and competition. These companies should only require a little bit of research to constitute admission to the inner circle and may be composed largely of the less-preferred rivals to your inner circle.
Fringe stocks are companies that you do not follow closely, but where you do have some basic knowledge of the company, its products, rivals, and maybe even some recent headlines. These companies likely have unattractive valuations and may be smaller in nature. While these companies are not your first or second choice, they are likely the stocks with the highest upward mobility due to their lower starting points.
The InvestorsObserver Watchlist is a great place to create and monitor your watchlists. Investors can easily use the tool to check the daily change for your stocks, and can quickly add to any of your lists by using the “+” near the stock’s name throughout the site.
Other important tools that investors can use are screeners and comparison tools. These tools help you quickly screen the market for the factors that are important to you and simplify the comparison process.
InvestorsObserver's Stock Screener is a powerful screening tool that lets investors screen the market based on a number of different variables, including by InvestorsObserver’s proprietary stock scores, market sentiment, dividend yield, and many other factors. Additionally, investors can work from the bottom up, using our Sector and Industry Analysis page. This tool allows users to find the highest performing companies within the various industries and sectors. From both the stock screener and Sector and Industry pages, investors can easily identify stocks that are worth monitoring and add them to watchlists.
To avoid diluting your watchlists, InvestorsObserver recommends pairing our screening tools with our new Compare tool. The compare tool allows you to add up to four companies that caught your eye during screening to a side-by-side comparison that allows you to easily compare them against each other. One recommendation when using this tool is to keep a benchmark company sitting in the tool from your outer circle. This company should be emblematic of your outer circle and can easily help you to know which list to add the company to based on how it compares to your benchmark.