If you do a quick keyword search on the best stocks to buy then you will quickly find articles filled with opinions of why you should buy this stock or that stock. In reality, no one has a crystal ball so no one really knows what direction a stock will go. I am not a stock picker. I have tried in the past but failed miserably. Today even though I am a failure at picking stocks I want to talk about how to find the best stocks to buy.
Best Stocks to Buy: Principles.
We need to buy on principles.
What is a principle?
A principle is a truth or proposition that serves as the foundation for a system of belief or behavior or for a chain of reasoning.
Now principles are not promises
For instance in the Bible it says
Honor your father and your mother, that your days may be prolonged in the land which the LORD your GOD is giving you. Exodus 20:12 NASB
Question. Does everyone who follows that live a long life? Of course the answer is no. Why? Because that is a principle not a promise. A principle is something that generally if you follow it then this will be the outcome. So in trading if we pick a stock but we have no principles to trade by then what is going to happen. The answer is disaster. You can listen or follow the best stock picker in the world but if you don’t trade by principles or rules then you will be in trouble. Principles are the foundation of picking a stock. You need to know exactly how you will trade the stock you pick. Principles do not change.
Best Stocks to Buy: Do not Change.
If we say that someone is a person that has principles then we probably mean that they live by a set of rules that do not change. In trading once we have established our principles they don’t need to change. A trader should trade Apple stock the same way that they trade corn futures. There should be no difference. Your system or trading principles should tell you how to trade.
Best Stocks to Buy: What?
Now our system or our set of principles works the same on everything we trade. We do not treat anything different. If we are trading silver, we do not go into the system and change the parameters because it is silver. The principles do not change. What we do is take the symbols and test it in the system. From that, we build a list of stocks or ETfs that have done well in the past. For instance if we tested the 20-year price on Apple it might give us 10% and if we check Exon it might give us a 4% average.
Every signal will not give you the same result. The results will be different. They still should be traded the same way. Just because the market or stock has done well in the past doesn’t mean it will do well in the future. There are many stocks. We like to pick the ones that have done well in the past. Once you build your system then you have to know when.
Best Stocks to Buy: When?
The when is the tricky part for some people. For us it is the easy part. Once you have a foundation with the principle then the when becomes easy. I am not sure what type of trader you are but at The Market Engineer, we are trend followers. When our system tells us, the trend has begun then we trade. It is just that simple. Maybe you do not want to be a trend follower. Maybe you follow some guy on the internet. Maybe you have a guy that picks penny stocks. Maybe you have someone like Cramer. If that is how you want to pick when you get in that is fine.
Of all the parts of a trading system, the entry is the least important. I have never tried but I believe that if you took Cramer’s picks and ran them thru our system that we would make money.
We have our own way of determining when we will get in the market but as I said the when is the least important part of the trading system.
I think that if we took the when to buy out of our system and used screaming Cramer’s picks we would still make money as long as we follow the system.
Best Stock to Buy: Stop!
Once we have our trading system then we have a stock that we want to buy or we have a way of getting in the market. We then need to know when to get out. When will we stop trading?
Have you ever driven something that you just enjoy? For some it is a sports car. I had a 350Z one time and that thing would move. Really as fast as that car would go I didn’t get much out of it.
You know what I like? I like climbing into the cab of a Caterpillar D5 Dozer and pushing dirt and trees around. When you get in that thing, you smell the smell of diesel exhaust. It is relaxing to push things around.
I guess you could say I have some brand loyalty to Caterpillar.
In 2016, it was one of the stocks on my radar that hit a buy signal. I bought it a 70 per share and sold it at 92 per share. I am going to be honest here even though I am a systematic trader. Even though I understand the way to trade. Even though I trade by a set of principles. Even though I have my own trading system that tells me when to buy and when to sell. Even with all of that when it came time to sell Caterpillar it hurt me just a little bit. Just a little part of me did not want to sell because I like Caterpillar.
That may sound stupid to some of you but others know what I am talking about.
Best Stock to Buy: Conclusion.
Maybe you love Apple products. That does not matter. When your system tells you to get out then get out. Stop the trade. I understand that people fall in love with a brand or they have brand loyalty. That is fine when you are buying a product. There is no place for brand loyalty in trading. Get out when your system tells you to get out.
If the stock you trade clouds your judgement then do not trade it. The best stocks to buy is the ones that are trending.
We are trend followers and as the saying goes, the trend is our friend.