Starting List

Highly liquid stocks or ETFs to reduce transaction costs:

Stick with Leaders
Prefer companies which are among the best in their industries. These are usually companies that innovate and provide unique product or service that customers want or need.
Out of Favor Stocks
Stocks that are temporarily out of favor offer best value.
Excessive Debt
Avoid stocks that have high debt -- prefer debt less than cash or equivalents. Examples: NCT, ACAS, GNK, bank & financial stocks
Diversity among countries, sectors, industries, and asset classes.
Fraudulent Management/Owners
Make sure stocks, industries, or countries are not fraudulent. Ex: Chinese RTO stocks. Test: Ask if the perpetrators will face consequences or go unpunished because of loop holes. Examples: APWR, NIVS, CSKI, CNIT
Is the product or service obsolete? Ex: Blockbuster, Borders, RIMM/NOK, etc.

Rejection Step

(Avoid Value Traps)

Selection Step

Easy to Understand Business
If you cannot understand how the company makes money, stay away. Ex: ACAS, NCT
Story Stocks
Avoid stocks that are built on just stories without proven earnings. Ex: SKINS, CMGI & other Internet bubble stocks
Commodity Products or Services
Unless it is for short term trading, avoid companies that sell commodity products and services that anyone else can make. Eventually, there will be oversupply and margin erosion. e.g., GNK, EXM, DRYS, and other shipping stocks in 2010-11

Find good quality, high dividend paying, & optionable stocks.

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My method with the latest refinements is -- start off with good value companies (broken stocks not broken companies or business models) and look for a good entry point using the technical analysis.  Even then, enter by selling Put options.  If I end up buying the stock, sell covered call options in sideways movement or take profit when the uptrend is broken.  Leave profits in an index fund or ETF.



Good Technicals

Ensure that the stock is showing good price action.

  • MACD is positive
  • Coming out of base
  • Long term trend should be good but may have weak short term trend
  • Positve call option buying - huge increase from norm.
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