The Ultimate Stock Selection Guide: The Advanced Path from Novice to Expert

What is the biggest frustration when first entering the stock market? It often comes down to finding worthwhile targets amid the vast ocean of stocks. Don’t worry, let’s solve this problem together. Whether you aim for short-term quick profits or plan to accumulate assets for the long term, this stock-picking secret will give you the answer.

Three Essential Questions to Ask First

Before starting to select stocks, ask yourself three questions, because your answers directly determine your stock-picking strategy.

1. How do you want to play? Short-term or long-term?

Time frames are divided into two categories: from a few minutes to a few months is short-term, and one year to over five years is long-term. This is not a multiple-choice question—you can pursue both simultaneously, but the ratio should depend on your personal situation.

2. How much volatility can you tolerate?

Short-term trading carries higher risks because you may know little about the companies you buy, simply following technical signals. Long-term investing requires a deep understanding of the company. Before deciding, think clearly about your psychological endurance and risk appetite.

3. How much time can you dedicate to monitoring the market?

If you can only spare five minutes daily to check stocks, then don’t do short-term trading. The amount of time invested determines the strategies you can adopt.

Long-term Stock Picking: Mining from Fundamentals

Find businesses with growth potential

Imagine each stock as a business. The goal of long-term investors is simple: find companies whose profits will continue to grow in the future. Why? Because the long-term performance of a stock ultimately depends on the company’s profitability.

So, what kind of companies are worth buying? The ideal ones are those with near-monopoly positions in their respective markets:

• Google(GOOG.US) dominates search
• Apple(AAPL.US) has a rock-solid iOS ecosystem
• Disney(DIS.US) leads in entertainment content
• Meta(META.US) is hard to beat in social media

Conversely, avoid companies that have lost market position and are unlikely to rebound: once-glamorous Nokia(NOK.US), BlackBerry(BB.US), which have faded in smartphones; IBM(IBM.US), whose tech leadership is no longer assured; Kodak(KODK.US), which has fallen behind in the digital wave.

Is stock selection more difficult in highly competitive industries? Not impossible, but it requires deeper research. At this point, the quality of management becomes critical. For example, JPMorgan(JPM.US) excels in banking; Tesla(TSLA.US) leads in electric vehicle innovation; Lilly(LLY.US) developed the revolutionary drug Mounjaro.

Professional advantage matters. If you work in a certain industry, your understanding of that industry may surpass that of Wall Street analysts. Fully leveraging your professional expertise can make stock picking much more effective.

Catch the Industry Trends

Besides individual stocks, pay attention to the overall direction of industries. Investors who can identify long-term trends often end up smiling last.

For example, global demand for clean energy and electrification continues to rise, directly boosting the demand for raw materials like copper. As a result, most copper mining companies benefit. This is also the core driver behind recent gains in copper-related stocks.

Valuation Determines Entry Price

No matter how excellent a company is, buying at the wrong price can lead to losses. A stock that is a treasure at $100 might be a trap at $200. Therefore, consider valuation after stock selection.

The simplest and most practical valuation method is Price-to-Earnings Ratio(PE Ratio), with a straightforward formula:

PE Ratio = Stock Price ÷ Earnings Per Share

But how to judge whether a PE ratio is high or low? There are two approaches:

Compare with historical levels

Compare the current PE ratio with the company’s performance over past years. For example, Wells Fargo(WFC.US) had a PE ratio fluctuating between 8 and 16 over the past decade. If now it’s 9, and the company’s fundamentals haven’t changed, this price is quite attractive.

Horizontal comparison within the industry

Compare within the same industry. ExxonMobil(XOM.US) and TotalEnergies SE(TTE.US) are both energy giants. If their growth prospects are similar, the one with the lower PE ratio—TotalEnergies—may be more worth buying.

What to watch out for when using PE ratios?

• A high PE ratio doesn’t necessarily mean you shouldn’t buy. If the company’s growth prospects are explosive, a high valuation might be justified. Conversely, Netflix(NFLX.US) in early 2022 was a cautionary tale—growth expectations suddenly changed, and its PE ratio plummeted.

• A low PE ratio might hide risks. Sometimes, cheap stocks are cheap for a reason, such as cyclical industries(energy stocks) or highly leveraged companies, which carry higher risks.

• The macro environment also influences valuations. When central banks raise interest rates, the overall market PE ratios tend to decline.

The core logic is: buy when the PE ratio is temporarily low due to short-term factors, but ensure the company’s long-term profitability remains fundamentally intact.

Short-term Stock Picking: Deciphering Technical Patterns

Short-term trading doesn’t wait for fundamentals to materialize but aims to catch ongoing or upcoming price trends. Here, technical analysis becomes the main tool.

Technical Indicators Lead the Way

Trend Indicators

Simple Moving Average(SMA) based on the average price over the last 50 or 200 trading days. If the line slopes upward, especially when the stock price is above it, it usually signals an uptrend. Exponential Moving Average(EMA) emphasizes recent data and is more sensitive; the 21-day EMA is a common quick indicator.

Momentum Indicators

MACD(Moving Average Convergence Divergence) reflects the speed and strength of price movements. The key is to watch the crossovers between the MACD line and the signal line:

• MACD crossing above the signal line = buy signal
• MACD crossing below the signal line = sell signal
• Crossing zero line is even more significant (negative to positive is bullish, positive to negative is bearish)

Use Chart Patterns to Find Entry and Exit Points

Besides indicators, chart patterns also tell stories. Master these four common formations:

Head and Shoulders Top/Bottom

Price forms a peak(head) in the middle, with two lower peaks(shoulders) on either side. A break of the neckline in a head and shoulders top signals a sell; an inverse head and shoulders pattern indicates a reversal upward. For example, AMD(AMD.US) in 2022 showed a clear head and shoulders top, followed by a decline.

Double Top/Double Bottom

Price hits two similar highs or lows in succession. When the price breaks above the neckline of a double bottom, it often signals a trend reversal and a buying opportunity. Goldman Sachs(GS.US) exhibited a classic double bottom in 2022.

Ascending Triangle

Support line slopes upward, indicating higher lows, and eventually the price breaks upward. TJX Companies(TJX.US) formed such an optimistic ascending triangle.

Descending Triangle

Resistance line slopes downward, with lower highs, and the price eventually breaks downward. Apache(APA.US) repeatedly showed descending triangles in 2022-2023, indicating a downtrend.

Three Major Watchlist Targets for 2024

( NVIDIA)NVDA###

The chip giant NVIDIA’s GPUs are seen as the gold standard of AI era. In 2023, its stock tripled, and this year it has gained nearly 40%. Among the so-called “Big Seven Tech Stocks,” NVIDIA performed outstandingly, surpassing $1 trillion market cap last year, and this month overtook Amazon and Alphabet to become the third-largest US stock by market value. Why is NVIDIA so hot? Because the commercial potential of AI excites investors, and NVIDIA’s chips are the infrastructure enabling all this.

( Tesla)TSLA###

Tesla was in the spotlight in 2023, but the trend reversed this year. Its stock has fallen nearly 23% since the start of the year, threatening its position among the Big Seven Tech Stocks, with market cap overtaken by Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Lilly. In the short term, Tesla faces multiple challenges: slowing global EV sales, Berlin factory suspension due to a fire, and Elon Musk’s high-profile compensation plan. Yet, analysts remain optimistic, viewing these as short-term setbacks.

( Microsoft)MSFT###

Microsoft’s precise bets on generative AI paid off with a stellar Q4 FY2023 report, the first after acquiring Activision Blizzard. Revenue, EPS, cloud growth, and other metrics exceeded expectations. In 2023, Microsoft’s stock rose 57%, far outperforming the S&P 500’s 24% increase, making it one of the biggest winners in AI alongside NVIDIA. Entering 2024, Microsoft has already gained 9%, surpassing the market’s 3% rise. What’s Wall Street’s view? 50 analysts are unanimously buy, only 4 are neutral, none recommend sell, with an average target price of $443, implying an 8% upside.

The Ultimate Logic of Stock-Picking Experts

At the core, stock prices follow profits. Whether you are a novice or a veteran, the most reliable method is to deeply analyze a company’s fundamentals and competitive position. Then, don’t forget to evaluate valuation, because the purchase price directly impacts your returns.

Short-term stock picking relies on technical indicators and chart patterns, which are very different from long-term thinking. But when both fundamental and technical signals align, you often get the best investment returns. Remember the principles of diversification and risk management, and you will be on the path to rational investing.