Success in the markets means picking the best stocks

Poor stock selection is one of the biggest mistakes a trader can make. But how do you spot the good ones?

Melanie Stetson Freeman/The Christian Science Monitor/File
The 7,000 pound statue called 'Charging Bull,' a reference to the 'bulls' or optimists on nearby Wall Street, in New York's financial district. It may seem obvious, but according to Brown, many traders lose sight of the importance of picking good stocks.

My friend Joe Fahmy is one of the best traders I've ever met.

Schooled at the side of the legendary Mark Minervini, Fahmy's style is both momentum-driven and risk averse at the same time.  He trades when the market is healthy and bides his time doing research when the market is sick.  And he is a Big Game Hunter - he's looking to bag elephants and find stocks to trade that have the ability to go up exponentially ($AAPL, $HANS, $NFLX, $ISRG etc), not 5 or 10%.

Joe is doing his first ever full-day seminar in NYC on March 3rd.  Barry Ritholtz is speaking there and I am drinking free ginger ale in the audience.  He is also doing one in LA.  Go here to learn more about it.

Joe and I had a great conversation over sushi the other day and I asked him to expand on his philosophy for a series of three blog posts.  In this post, we talk about why good trading begins with good stock selection more than anything else:

Josh: Your concept that most investors fail because they start off not knowing where to look for winners is very powerful, could you expand on that?

Joe Fahmy:  When the head coach of an NFL team has the 14th pick in the draft, the media always asks him: "Who are you going to pick?" The coach usually says: "The best player available." In the stock market, we have roughly 6,000 stocks to choose from (3,000 in the NYSE and 3,000 in the NASDAQ). The problem is that most investors do not choose "the best stocks available."

The biggest mistake investors make right off the bat is poor stock selection. To continue with the sports analogy, if you randomly draft 5 football players from LSU or 5 players from The Yeshiva University, don't you have a higher probability of finding a better player from the LSU pool of athletes? The same goes for the stock market. At least give yourself a shot by starting with a quality group of stocks. The problem is that most people don't know what to look for because they haven't studied the big winners throughout history. Therefore, they settle for poor quality stocks that have low probabilities of outperforming the market.

My goal is not to produce results that are simply "in line" with the market. My goal is to achieve superior returns. Screening for stocks that match the characteristics of the greatest winning stocks in history is a great way to narrow the field of 6,000 down to a solid group of names. This is a major topic that I cover in my seminar because it can greatly improve your chances of selecting a potential big winner.

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