My nine tips for picking shares – for growth, dividends or fun (2024)

Buying shares in individual companies can be an important part of personal investment and can be very rewarding if you are prepared to carry out a little research.

However, you need to be aware of the traps. I shall point out a few of them. First, let us look at the reasons for buying shares in quoted companies.

Essentially there are two: for capital growth and/or for the dividends. Quoted companies should be managed to grow profits and an increase in profits should enhance the company’s value. For example, if a company is paying a dividend of £5 a share, it becomes more valuable if the dividend doubles to £10. An increase in share price is the most obvious return from improved profits.

However, the actual dividends are an essential part of the investment return, especially if they increase year by year. Very few assets have the potential for an increasing yield. A rental property may, but shares do not require repairs or involve the loss of income between tenants or the hassle of ousting bad tenants and of finding new ones.

The yield on cash deposits is constrained by the vagaries of prevailing interest rates. Cash can provide an acceptable yield when interest rates are high but they can decline just as the cost of living has increased.

Shares that produce a growing income therefore become an essential part of a retirement portfolio. Growth stocks are different and are deemed riskier. Companies that don’t pay dividends tend to use their capital to achieve a certain objective, such as the creation of a clever internet idea that could be used by millions of people. Bringing to fruition such a concept can cost millions but be worth many millions if successful – but of course many fail.

There are however growth stocks in less technology-oriented areas. Sometimes even established, profitable companies don’t pay dividends. This is likely to be because their managers believe they can reinvest their profits to further enhance the value of their business. A simple example might be a successful restaurant chain that will reinvest profits in opening new branches.

Often the greatest return is from businesses that focus purely on growth, although often the share price will be more volatile.

A good philosophy is to buy a share at a price that you feel will give you, in time, the opportunity to sell at a profit. It sounds obvious but many shares are bought on a whim and without that simple aim in mind.

Indeed making such an appraisal is not simple. On the stock market there will be shares in good investable companies but at certain times they may be so expensive that the potential for profit is reduced. Wise investors follow individual companies and buy when the share price is more reasonable. All companies’ share prices fluctuate on sentiment as well as fundamentals.

A good guide is the price-to-earnings (p/e) ratio. A high p/e ratio indicates that the shares are expensive, although there is usually a reason. If the p/e ratio is higher than it has tended to be in the past, there could be a better opportunity to buy in the future. This simple valuation yardstick is not infallible, however, and considerably more information will be needed, which is likely to require you to delve deeply into the company’s accounts.

In truth it is rare for private investors to have either the knowledge or the information needed to assess properly if the share price of a particular company is too high or represents value; there are so many variables.

A good philosophy is to aim to hold for the long term. All companies’ share prices fluctuate and you will profit only if you hold for the long term – trying to second-guess short-term price movements is a hopeless ploy.

One rewarding strategy is to use your own eyes and ears to judge a company. If you see many people buying a company’s products or visiting its outlets, that could be a good buy signal.

I remember when 30 years ago a David Lloyd tennis centre opened near where I lived. I considered the membership very expensive but thought that would make it easy to get a court. We joined and much to our amazement the place was buzzing; the high membership charge was clearly not a deterrent. I bought the shares and my profits paid for 20 years’ membership.

Another example is Fever-Tree. I noticed that from nowhere its mixers were everywhere, and not just in this country. The share price soared. In both cases you could have been ahead of the market had you observed the success before the companies’ accounts were published.

More recently I saw many people wearing a particular brand of trainers with a novel construction that made them light but still well cushioned. They are made in attractive colours too. The shoes are branded OC but are made by a Swiss company, ON. Although the company has been around for some time its shoes have only just got traction in the market. I believe it is a share to watch.

There are also good reasons to continue to observe the businesses in which you invest to get some feel of how they are doing. Over the past few months I have walked past Superdry stores not just in Britain but overseas too. They have always been empty or nearly empty and not because it was a quiet day; adjacent shops were booming. I was not surprised when there was a profits warning and a collapse in the share price in December.

I remember similar situations a couple of years ago, again with catastrophic share price declines. Shares should not be just bought and forgotten – shrewd investors regularly reappraise their holdings.

On a lighter note, let’s acknowledge that there is a fun side to picking and owning shares. I always remember a client from the early 1980s, when she must have been 80. When I suggested a fund she wanted none of it. “I want something exciting which I can watch go up and down in the paper,” she said. She loved the stock market.

My nine-point summary for picking shares

  1. Buy at a price where you can see a profit in future (it sounds obvious but many people don’t make that assessment).
  2. Always know exactly why you are buying the share. If you don’t know why you bought it, you can’t gauge if and when you might sell. (This is a good reason for not following golf club tips unless you are also told the rationale.)
  3. Buy long term – with any share purchase you should be intending to hold over the long term.
  4. Be your own analyst. If you observe via your own direct experience that a company is doing well, that is a good buy signal. Scour the press for comments on companies. Good comment is obviously welcome but be alert to adverse comment; it could be the first sign that you should be questioning the holding.
  5. If you have bought a share for the dividends, keep checking that the profits are growing. Income growth is the main reason for buying a share with dividends.
  6. Never rush to buy an investment; equally, once you have decided to buy, get on with it. Any change in the price from then will sour your decision. If the price goes up you may think you have missed the opportunity; any fall in price and you will think you might get it more cheaply if you delay even more. You could end up sitting on the fence forever.
  7. You will see in the media advice to buy certain stocks. In this instance it can be good policy to wait a little, since the media comment is likely to inflate the price in the short term. (I know this contradicts the point above but in this case there is a sound reason to wait.)
  8. A very prevalent habit among investors is to sell the winners and keep the losers in the hope the companies will recover. I would suggest that keeping the winners and selling the losers is a better policy. Don’t be afraid to swallow a loss.
  9. Finally, always make your decisions first and foremost about investment; don’t let tax considerations determine what you do. If you feel, for example, that a share should be sold but are aware that it would lead to a capital gains tax bill, don’t let that stop you selling.

Peter Hargreaves co-founded the stockbroker Hargreaves Lansdown.

As an investment enthusiast with a deep understanding of the stock market, let me share insights into the concepts mentioned in the article about buying shares in individual companies. My extensive experience in the financial domain allows me to provide a comprehensive analysis:

  1. Reasons for Buying Shares:

    • Capital Growth: Investing in shares with the expectation of the company's value and share price increasing over time.
    • Dividends: Receiving a portion of the company's profits in the form of dividends, which can contribute significantly to the investment return.
  2. Types of Stocks:

    • Growth Stocks: Companies that reinvest profits for further business enhancement, focusing on expansion rather than paying dividends. These stocks can be riskier but may offer substantial returns if successful.
  3. Investment Philosophy:

    • Long-Term Approach: Advises holding shares for the long term to ride out market fluctuations and maximize returns over time.
  4. Valuation Metrics:

    • Price-to-Earnings (P/E) Ratio: A measure to assess whether a stock is expensive or reasonably priced. A high P/E ratio may indicate expensive shares, but it's essential to consider other factors and delve into the company's accounts for a more informed decision.
  5. Stock Market Timing:

    • Market Sentiment: Acknowledges that share prices fluctuate based on sentiment as well as fundamentals. Suggests monitoring the P/E ratio and buying when the share price is reasonable.
  6. Observational Investment Strategy:

    • Using Personal Experience: Recommends observing companies in real life – for example, noticing popularity or success of a product or service – as a potential signal for a good investment opportunity.
  7. Continuous Monitoring:

    • Regular Reevaluation: Emphasizes the importance of regularly reassessing investment holdings, considering factors like company performance, market trends, and any warning signs, to avoid potential losses.
  8. Investment Decision-Making:

    • Making Informed Decisions: Advises against impulsive buying and encourages investors to have a clear reason for each investment, be it potential profit, dividends, or long-term growth.
  9. Tax Considerations:

    • Prioritizing Investment over Tax Implications: Recommends making investment decisions based on the potential for returns rather than letting tax considerations dictate actions.
  10. Selling Strategy:

    • Cutting Losses: Suggests a pragmatic approach of selling underperforming stocks and holding on to winners, contrary to the common habit of doing the opposite.

In conclusion, these concepts form a comprehensive guide for individuals interested in investing in shares, providing a mix of financial metrics, observational strategies, and practical advice for effective stock market participation.

My nine tips for picking shares – for growth, dividends or fun (2024)


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