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HOW TO PICK THE RIGHT SHARES
This is one of the questions that I’m asked the most and
it’s an answer that I like to answer in two ways.
The more technical or objective way to answer it is to
compare your performance to something concrete. For example the market average
in your own country. For us here in Australia it’s the All Ordinaries index
which has returned well over 40% in the last few years and has averaged over 10
percent per year over the last 25 years.
If you haven’t made a return of at least this rate then you haven’t
performed at a satisfactory level. I know it’s a fairly cold way of looking at
things but that’s the facts.
So consider this, it is a well known fact that 70% of
fund managers don’t actually beat the market average. However, being an
individual investor and not faced with the same constraints you should
comfortably be beating this average to consider yourself successful.
How do I beat the average you ask – well there’s a very
logical answer to this question. It comes from three very important
characteristics of any share.
Firstly, the share should be a leading company within the
industry. For example within the top 100
largest companies. Those with a proven
track record of success.
Second the share’s price history should exhibit the
characteristics of a long term uptrend.
When you look at chart of such a company you should see it starting in
the bottom left hand corner of the page or screen and finishing in the top
right hand corner.
Thirdly the share itself should be outperforming the
market average. That makes sense if you
want your share portfolio to outperform the market average as well.
If these three criteria are applied to all shares within
your portfolio you will be selecting shares that are performing well
fundamentally. You will be selecting shares have been moving in an upward
direction so it is easier to make money from them. And you will be selecting
shares that are already performing better than the average. So logically the
shares that you have will be giving you the best possible chance to outperform
the market average.
<b>What do you want?</b>
The second way I answer questions on how well people
should be doing is by asking them how well they want to be doing. It is always
fun to hear people umm and err at this question because they simply don’t know.
They don’t know what returns they want so how will they ever know when they’ve
achieved what they want. It is much
easier to reach a goal if you define it up front. You also know if you are not reaching it and
so can do something about it.
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