In 2009 and 2010 I posted double-digit gains. That’s great, so how do you do it? Simple, spot trends and use common sense. Below are some criteria to consider when putting together your double-digit gainer portfolio.
1. Spot the trends
What will be big in in the coming year? Do you believe oil will play a big role? How will financials do? Are there any strong emerging markets? Are there any infrastructure programs in place?
By spotting the trends we believe will be big in the coming year we can simply answer the question of what company will that trend benefit.
For example, maybe Brazil’s growth will play a major role in 2011. So look for companies that will play a part to move along that growth. Perhaps Caterpillar (CAT) has contracts to major projects in the area.
Simply spot the trends and find what companies should benefit off that.
Lets say you thought oil will play a big part in the coming year, so you decide to invest half your portfolio into oil-based companies. Fast-forward a year later and oil is at record-low prices and your portfolio is taking a beating right now.
Out of all your stocks, all it really takes is one good pick to make a good year. By spreading your money around to different sectors, you give yourself a better chance of catching the bullish area.
3. Use “best of breed” stocks
If a sector moves higher, most of the stocks in that sector will move higher. If a sector moves lower, most stocks in that sector will move lower; however, the top companies within a sector generally don’t get beaten as much. Stay with stocks in the top tier.
4. Avoid stocks that made huge gains in the previous year
Just like the housing market, how do you know when you actually bought at the top? The same goes with stocks. The higher gains your stock posted last year, the less of a chance it has to do it again.
If a quarterback has a record number of touchdown passes one year, how likely do you think he will be able to match or do better than that the next?
That’s not to say that your stock can’t have a great year, but the odds are highly against you and, at the end of the day, we are just trying to keep the odds in our favor.
5. Use technology
Technology is big. There is no denying that. If you manage to find a technology company right before it gets popular it can often times lead to triple-digit gainer. Try to spot companies on the verge of some form of technology that will be in high-demand.
For example, in 2009 I felt many people would ditch their cable company and opt for the cheaper solution in Netflix – after all you could watch most TV shows online, so Netflix could take care of your movie needs.
Netflix ended up 84% and I became a rich man.
6. Invest in what you know
What I believe to be the most important criteria on this list – know about what your company does. The worst thing you can do is pick a stock because you read about their numbers and how good their outlook is.
If you don’t know anything about medicine, then stay away from pharmaceuticals. If you aren’t sure how your company is really impacted by the price of oil, then don’t use it has an oil play.
Sound simple enough?
While putting up double-digit gains two straight years is a great accomplishment, the truth is that it wasn’t all that hard. In the end, all you need to do is to:
- Spot trends
- Find out which companies gain the most from them
- Use common sense