Principles of Picking Stocks, if That's What You're Into

Some people like playing the stock market. Here are some principles we’ve followed to do that safely and with some success.

So you’ve decided to “play the stock market.” You’re already contributing to your retirement fund — which is the best way to make money over the long term — and you have some extra money lying around. It is in your nature to take risks, and you enjoy the research that goes into picking stocks. Ok! Here are some principles to follow, in case nobody ever explained the market to you.

Disclaimer: First, if you have a few thousand bucks on top of what you need for bills and emergencies, the right thing to do with them is put them away for retirement, or in a CD if you want that money accessible sooner. The “safest” stock market choice will almost always be tracking the S&P 500. Second, we aren’t licensed professionals, this is intended for informational and entertainment purposes only, and should not be construed as professional financial advice. It’s how we invest in the stock market as amateur investors, mostly for fun — but also, for profit.

On to the fun.

#1: Stay within your means.

What does this mean? You should prioritize other ways of saving first — Roth & Traditional TSP, IRA, college funds, and (if the cash-in-envelope method works for you) stationary. If after that you have a few hundred bucks left over, up to a maximum of $3,000 (more on that in a minute) — money you’d otherwise spend on dinners out or lottery tickets or some other b.s. — and you want to see if you can make that grow in the stock market, go for it.

Don’t depend on the stock market for money. And don’t put in more than you can afford. Here, $3,000 is key — this is the amount of money a person can afford to lose in the stock market each year, because this is the amount of money you can write off of your taxes. To put it another way: losing up to $3,000 in the stock market each year is paying $3,000 in taxes each year. In such a way, even people of modest means can afford to put up to that sum into the stock market, because if everything goes wrong and the money vanishes, you aren’t actually out anything.

#2: Buy what you know.

The stock market isn’t totally intuitive. A company will announce record profits and the stock will go down. The same company will announce layoffs and corporate restructuring, a sign of institutional chaos, and the stock will go up. One way to offset the market’s weird twists and turns is to buy what you know. If you’re a firearms enthusiast and you see a new company that has a pistol or rifle that does something special and new, and everyone’s buying it, and the stock isn’t wildly expensive, you might know something other people don’t. Use your experience and expertise to guide you.

#3: Don’t buy what you don’t know or don’t understand.

I missed out on making three fortunes by refusing to buy what I didn’t understand. I’ve never regretted it. A friend of mine got into crypto in 2012. I had an opportunity to buy Facebook stock at $30 a share in 2014 and seriously thought about it. And I could’ve had Microsoft for around $25 per share in the early 2000s, and was thinking about that, too.

Something always stopped me. I didn’t (and still don’t, to be honest) understand why anyone would buy cryptocurrency as an investment. At the time FB was at $30, it wasn’t clear to me how valuable data harvesting would be, or how effective FB would become for advertisers, though I could see that FB was gaining in popularity. And Microsoft at $25 per share hit at the very moment Apple was dominating the music and phone industry with its gadgets.

While those fortunes I missed out on remain notional, the one thing I’ve never done is lost an actual fortune of real money I had. Passing up a “can’t miss” that makes no sense protects you from all the sure thing winners that end up losing.

#4: Buy the dip!

Buy the dip means when (as occasionally happens) the stock market enters a tailspin, and stocks drop across the board, have $3,000 set aside to put on a company that you know was being unfairly hammered by the circumstances.

Let me give you an example. In March of 2020, the stock market collapsed. I had my eye on Boeing, Microsoft, and Tesla. Boeing was at $100, Microsoft was moving toward $150, and Tesla was between $350-$400 per share (don’t remember what the price was exactly, they’ve split a couple times since then). I knew that because of the pandemic that Boeing and hospitality companies would take a hit and recover. I knew that Microsoft and video game companies would boom. And I’d become fond of Tesla over the past year, so I was waiting for it to hit $300 per share before buying (it never did get that low, unfortunately for me).

Looking at Boeing and Microsoft, I ultimately decided to buy Boeing at around $97 per share. Then, I sat on it for a year, then sold it for $245 per share. I’m a doubler — double your money, sell, put the proceeds back in the market.

#5: Always go long.

What does “always go long” mean? It means investing in a company you understand, in which you believe, and plan to own that stock for no less than a year (for capital gains purposes) — typically, 3-5 years, or longer. Making money on a stock that’s undervalued because the market tanks is not a strategy, that’s opportunism. And there’s nothing wrong with opportunism! It’s just not a good or sustainable way to organize your efforts to make money in the stock market.

When you go long, you’re not just investing in a company for money — you’re investing in a business that you believe in — you’re envisioning it in the future. Maybe you’re buying stock in a drone startup, or a company that produces electric battery powered yard maintenance tools such as lawnmowers and weed whackers, and you’re doing it because you think the things are useful. This is basically activist investing. There’s nothing wrong with it, and the pride you take in owning stock will be its own reward (besides the money you make from it).

#6: Consider dividends.

What’s a dividend? Simple: a dividend is money from a company’s profits, which get paid to shareholders. A common share of General Dynamics stock, which is going for $264.65 as of writing, will produce $5.28 by the end of the year. Even before selling shares of stock because they go up (or down) in value, then, you have something for your investment. That’s a dividend.

Making serious money from dividends will take concerted effort, and really isn’t a great strategy unless you have millions of dollars sitting around to begin with. To get $52,800 in dividends from General Dynamics stock, you’d need to own 10,000 common shares, which would set you back $2,646,500. You don’t need to save to be rich. You are rich!

In conclusion, buy what you know, don’t buy what you don’t know (that’s just gambling, calling out red or black as the wheel spins), take a long view of things, and be prepared to pay part of your taxes early with a writeoff if a particular investment goes bad. You won’t go wrong. Have fun with it.

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