Strategy in Stock Selection

Which stock to choose?

If we could not make decision in stock picking, we would definitely love to invest in all the stocks out there. Unfortunately, with the limited capital that we have, it is a mission impossible. Hence, we need to make decision in stock selection in order to maximize our returns on the capital invested.

Now here comes the big question.......... is there a systematic rationale to follow in stock picking?

The answer is YES but it requires quite a bit of research to draw a conclusion in the end. Let's follow through my thought process in this.

Research using Bloomberg Terminal

Overall, there are 3 stages in my strategy. Firstly, we look into the country, then industry and finally individual stock. The first 2 stages are to screen and narrow down the choices left in the final stage.

Stage 1: Country

Generally, we look into the country risk. To put up an example of extreme comparison, we prefer to invest in a stock that operates in USA over another that operates in a middle eastern country that is in the middle of a war for obvious reasons.

For the purpose of my article, I will skip this stage because my blog has been using Malaysia as a base all this while. 

Note: If you wish to invest in an overseas stock, you might want to look into the emerging countries that offer good potential returns.

Map of Emerging Countries

Stage 2: Industry

Generally, a particular market can be segregated into the following industries. The recommendations for respective industry are as per CIMB's recommendation as at March 2015.

Source: CIMB Research

Logically, we should eliminate those which are "underweight" and perhaps "neutral". Hence, we only look into stocks in the industries with "overweight" recommendation.

Note: Apart from CIMB, other research houses would have similar kind of segregation.

Stage 3: Individual Stock

Finally, we have arrived at the stage which we can drawn conclusion in stock picking. 

For us to gain on our investment, the stock can be rated as "market performing", i.e. the industry overall is doing well (hence, we need Stage 2) and "stock performing", i.e. the stock individually outperform its peers regardless of the market condition.

Hence, the aim in Stage 3 is to identify "stock performing" shares. A short cut method is to refer to reports issued by research houses (e.g. CIMB Research) and identify those top picks and perhaps select from the list itself.

Source: CIMB Research

Otherwise, we will need to perform fundamental analysis on potential stocks. Fundamental analysis would be a whole new chapter by itself. For now, you may refer to my fundamental analysis column via this link.

Thanks for reading!