The secret to choosing good common stocks is that there really is no secret to it.
The winning techniques are tried and true; instead, it’s how you assemble and apply them that makes the difference. The techniques don’t work all the time, but they work often enough so that the methods employed by successful stock investors tend to be more alike than different.
The right way to succeed in the stock market is to invest for both growth and "value." That means concentrating the bulk of your portfolio in stocks that pass a number of tests and holding them for the long term--three, five, even ten years.
For those in search of income, not growth, it means applying the same tests so that you don’t make any false and risky assumptions about the stocks you buy.
The right way is not based on buying a stock one day and selling it the next. It does not depend on your ability to predict the direction of the economy or even the direction of the stock market. It does depend on your willingness to apply the following measures before you place your order.
The aim: an average 12% to 15% annual total return (price increases plus dividends) on your investments when the market is performing in its historical range, plus the opportunity for much bigger gains when economic forces push it to much greater heights.
You’ll have no trouble finding candidates for your investment dollars. Brokers are full of suggestions, of course, and you may come across intriguing products or companies while walking through a store or leafing through a newspaper. Or your eye may be caught by one of the gorgeous "corporate image" ads that run in upscale magazines.
Most of the information you need to check is readily available from a number of sources and can be calculated from the data you find there.
You’ll quickly discover that the number of stocks that meet all these tests at any given time will be low. So what you’re really looking for are stocks that exhibit most of the following signs of value and come close on the others.