Good Stocks To Invest In

What are some good stocks to invest in right now? The question comes up frequently. But what makes a "good" stock, and what exactly constitutes an "investment" as opposed to a "stock trade"? 

First, some definitions. The "best" stock to invest in, hypothetically,  would have a very smooth-looking price chart, approximating a straight line, without wiggles, and the line is pointing upward toward the right edge of the chart. The steeper the better. Best-case the price would increase each day, and never go down. If it did this, or rather you knew it was going to, you could crank up the leverage by using margin, or options, or futures, or even options on futures, and make a fortune overnight.

Obviously that's not going to happen! So realistically what is a good stock to invest in? The best you can do is to find a long-term chart with minimal intermediate-term swings superimposed on an underlying uptrend. Stocks like this will produce the best-looking equity curve, with the highest sharpe ratio.

Consider that the term "investment" as applied to stocks has generally come to mean a diversified, longer-term approach, without a lot of short-term turnover. Usually it's one form or another of the so-called "buy and hold" method. Consequently, the equity curve in a stock investment account, as opposed to a stock trading account, will typically move in tandem with the overall stock market indexes, with the same wiggles up and down, except hopefully with an underlying slant upward that's just a bit steeper than the broad market (noting that most investment advisors can't manage to beat the averages consistently).

Investing in this context may be better considered a form of "accumulation", in the interest of building up an ever-larger position. But who says it's going to work out that way? The question of the best stocks to "buy and hold" comes up frequently, but kind of begs the question. The buy and hold method can work over time, but it can also wreck your account. Sometimes stocks go down, and if you buy the wrong ones they could go to zero, or loose about 95% of their value like many tech stocks did in the Y2K bubble. Things like loss-cutting are not considered. That's the essential fallacy of the buy-and-hold method.

So how best to maximize equity, and minimize account drawdowns? Buy and hold is not the answer. It can work well during a long-term period of sustained growth in the economy, but can also produce very inconsistent results in a bad bear market as we've experienced of late. Many people's 401k plans were hammered, and not all have recovered, and many may never recover. Years of progress can be wiped out in a single season.

Another technique is called "dollar cost averaging', where the number of shares bought varies inversely with the price. You invest a constant amount on a regular basis, so that the number of shares varies inversely with the price. You wind up buying more shares when prices are low, fewer shares when they're high. But this can lead to problems too. If you get the wrong stock, you will loose money even faster by averaging down, which is in effect what you'd be doing. The math is stacked against you, for example if you lose 50%, you have to make 100% just to get back to even.

Of these two methods, we'd tend to prefer dollar cost averaging although neither method will have a very smooth equity curve. The stock selection is crucial in either case. It's absolutely essential that they be the very large and heavily-traded stocks, for example IBM, or Exxon or General Electric, or even Exchange Traded Funds (ETFs). These types of things are the ones to focus on for "investing", as opposed to small-cap momentum stocks, or any thinly-traded stock, or most penny stocks. Stocks like this can easily drop 20% at a whack, or go straight to zero.

One place to look is our list of the biggest stocks, the ones with the largest market capitalization. These stocks will have the least volatility, and our proprietary buy and sell signals work particularly well on the large-volume traders. The big ones are the best stocks to invest in, either with a dollar-cost averaging technique, or with a buy-and hold approach. They can be bought on dips with razor-sharp timing courtesy of the Gigascanner stock-screening tool, and held for quite a while.

Ideally you can get some dividend compounding going too. Stocks with high dividends can really help smooth out the equity curve and increase the overall return. Here's a preset stock screen for high dividend stocks.

Note: This article is about "investing", but our preference is to use a shorter-term style involving precision technical analysis. We use the Gigascanner trading signals and market indicators to do trades ranging from a week to months, buying at just the right price, and selling when appropriate, and staying out of the market when appropriate. Sometimes "out" is the best place to be.