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chance and the following year, 21 of them will underperform the market.

So maybe you want to pick your stocks yourself rather than depend on a professional manager or an index to pick them for you. First, remember that the professionals have a difficult time beating the market. What makes you think you can do better? If you insist, be very careful in evaluating the stocks you buy. There are a few important things you should remember.

Remember, what you get from that stock depends on how the company does *after* you buy the stock. Some companies, especially small or new companies, can provide very volatile returns, great one year, bad the next, mediocre the next. As the standard disclaimer warns, past performance is no guarantee of the future. That said, past performance is one indicator of several indicators you should look at. Try to understand why the company did well or poorly *and* if those factors are changing or likely to remain in place.

Next, look at the company management. A purchase of the stock is a bet that that management can and will run a profitable company. Does management control costs? Encourage innovation? Find and address profitable markets? Are employees satisfied and willing to work hard under that management? I would avoid stock in any company where the employees are unhappy, those employees have the power to ruin quality and production either on purpose or just by not caring.

What about the market for the company's products? Is it expanding or contracting? Are competitors going to grab market share? Is new technology likely to replace the company's products?

Sadly, you are pretty much on your own to find the above information. While there are a lot of market analysts willing to tell you all sorts of stuff, be careful with what they say. Remember, those analysts get paid to spout off and they have to say something.

Stock brokers are another source of often misleading information. I had a stock broker friend who was sometimes accused at church of helping people lose their money. He would reply, "Well, I look at it this way. The broker makes money, the brokerage firm makes money, and two out of three ain't bad." That joke aside, be careful about accepting advice from a broker uncritically. Remember, he gets a commission on what you buy or sell so he has an incentive to encourage you to trade frequently. However, frequent trading eats up your money in commissions and is unlikely to enhance your income.

Also, avoid "hot tips" that come through email and similar sources. Many of those are from people who bought the stock and now want to unload it at a big profit. They can be pretty much anonymous on the internet as they separate suckers from their money.

Finally, remember that short-term, the market reflects psychology. Investors tend to react emotionally so short term ups and downs often don't reflect the real fundamentals of the market or of individual stocks. That is one reason it is so hard to predict stock prices. Long term, prices do tend to follow the real fundamentals and profits which is one reason it's easier to make money in the stock market if you buy and hold for the long term. That means you must be prepared to watch the price decline at times. If you don't have the stomach for that, stay out of the market.

Learn more about this author, Hal Lillywhite.
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