Investing for Noobs: 3 Basic Steps for Picking The Right Stocks

If you’re a finance noob like I was, chances are you have no idea to begin with stock investing. I’ll bet you that the moment you hear friends talking about Tesla going up again due to Elon’s crazy antics that you jump in and buy – only to have the stock sink back due a correction after heaps of you all impulse buy.

Well fortunately, you can fret no more. After years of reading books, studying finance, and experiencing the stock market, I am here to help you make your best, self-decided, stock-picking decisions!

1. Do a little critical thinking

When it comes to handling money, I believe that people should be the decision-maker on where they invest the savings they worked so hard for. With more than 630,000 publicly-traded companies in the world (yes, that’s over 630,000 stocks you can pick from!), I know it’s extremely nerve-wrecking to take the responsibility of choosing where your money goes. 

However, let me just say… most of the time, even the most common of finance noobs have the most basic idea of what a good company is! 

When my friends ask me “what stocks should I invest in?”, the first question I ask them is: “what companies do you think would do well in the next few months/years?”

For example, when Covid first hit and all stocks crashed into Earth, I asked my friends what businesses they thought would recover most quickly. Most, if not all of them, said tech, online shopping, manufacturers of medical equipment, and essential companies such as groceries would do well. Guess what – they were completely right. Tech stocks such as Afterpay and Zip, online retailers such as Kogan, essential companies such as Woolworths and Coles, all thrived in the midst of the pandemic. 

While there is no harm in googling for advice from experts or from redditors (the latter of which I highly un-recommend), ultimately, you choose where your money goes. If you find yourself stressed or confused, my most basic stock-picking tip is also the easiest: choose companies you, yourself, can’t live without.

      2. Invest in value

Now that you have an idea of what kind of company you are interested in investing in, I’d like to talk to you about the value of a stock.

Imagine this question: What would you buy between a $1000 price tag on a dozen eggs vs. $10 for a kilo of bacon? 

Naturally, you’d answer “Duh I’m a pro at food, obviously bacon would be a better choice!”

And you know what, it’s not a trick question because I agree! The $1000 price tag on the eggs would be considered insane – because we know that the fair value of eggs to be less than $10 a dozen, based on supply and demand and economic activity.

This analogy of value investing is what I would recommend for stocks. Mastering the concept lets you understand whether the stock you want to buy is currently cheap or expensive.

Value investing is very widely used as an investment philosophy by many professional investors, including Warren Buffet. It is also the reason why large financial institutions look for financial analysts and researchers who specialize in calculating the intrinsic value of a stock. 

For you to go forward with value investing, you naturally have to know how to calculate the value of stocks. 

The most structured analysis in value investing is called “fundamental” analysis, where you as the investor, would actually study a company’s financial statements to understand how much assets (property, cash, etc.) and liabilities (debt) they have, what their investments are, how much dividends they may be able to give, etc. in order for you to determine whether their current market price is over or under-valued. Events surrounding the company such as their opportunity for growth, any legal problems, or changes in government regulations also affect the value of the company.

Now this all sounds hard to us noobs, so I would recommend checking out Simply Wall St, a stock investing website and tool that shows you whether a company is over or undervalued. They use the same metrics that research analysts use to back their analyses.

Additionally, what I would recommend for value investing could be summarised in a few steps, which could you read in this article I wrote on Warren Buffett’s value investing.

      3. Keep updated

Now that you know how to pick a stock and understand its price, this last part would be the easiest. With your money invested, it would now be your responsibility to decide when to sell. 

The stock market moves EVERYDAY, and more often than not, these changes are based on a company’s (for individual stocks), a country’s (for a whole index) or the world’s economic activities. For example, when I was trading in the ASX (Australia’s stock exchange), I sold the majority of my shares at the ASX’s peak in February and early March – when Covid-19 was starting to spread across the world.

February 2020 had the markets at all-time highs – and other people expected the market to go even higher. However, I knew I had to sell; I did this because from my research that it was only a matter of time until Australia would be affected and go into lockdown, which would consequently damage the economy.

I was right. By the third week of March, the ASX crashed alongside markets in the whole world. And because I pulled out my capital, I was able to buy shares at EXTREMELY low prices – in fact, my friends and I amusedly called it the “stock market super sale”. 

The first step to keeping updated is to read newspapers specifically for finances and business (I subscribe to the Australian Financial Review for Australian stocks, and Bloomberg for the rest of the world) and read everyday. In extremely volatile periods such as now with the Covid-19 affecting the economy, choose to buy stocks of companies that have good news surrounding them.

As mentioned earlier, stocks in tech, consumer needs, and online shopping did especially well due to the Covid-19 positively affecting their balance sheets. Banks on the other hand, were struggling due to so many changes in government policies, interest rates, and defaults on loans. Naturally as time goes and circumstances change, the dynamics of the stock market will move alongside it.

Stock picking is a skill that once learned, will help you with investments for the rest of your life. The ultra-wealthy all have investments in the stock market alongside other financial instruments like real estate and private equity, and they (or their financial managers) constantly rebalance their investment portfolios as frequently as daily, monthly or quarterly, picking stocks to buy or sell depending on the investing environment.

I hope this article has taught you how to pick stocks for your own investments. Once you have picked, be wary about buying the stock when it is considered too expensive for what its value is. To supplement your knowledge in buying for value, I recommend once again my article on value investing.