Do Your Detective Work When You’re Buying Stocks

Investors can find plenty of clues -- if they know where to look

I get asked all of the time how I find the stocks I recommend and invest in. There are a couple of ways to answer that question. Yes, finding the right companies to invest in takes hours of research, investigation and analysis. Some people find that drudgery, but I love it.

Do Your Detective Work When You're Buying StocksWhy? Because when buying stocks, one gets to be a detective, a CEO, an investment analyst, a trader and more all at the same time.

Admittedly, I’m a stock junkie, so I realize not everybody shares this same passion. If being knee-deep in spreadsheets about a company isn’t your thing, that’s OK. You can still find great investment ideas when you are buying stocks.

Every Friday, I post an “Investor Tip of the Week” to my Facebook page to help people realize their full potential when it comes to the stock market. I remind people that you don’t have to be an “expert” to uncover the next great opportunity in buying stocks.

Last week’s tip was all about absorbing the information you receive from the people in your life — including family, friends and just people you run into on the street. Here’s what I posted:

Investor Tip of the Week: You can learn a surprising amount of information about what’s trending from the people around you. Talk to everyone you can — not just your neighbors but your plumber, your electrician, your mom. Ask questions. Find out what they think is hot, exciting, novel, useful. In short, find out how they’re spending their money and it just might lead you to a solid investment opportunity. Happy investing!

When I gave birth to my daughter, I began to focus more on healthy and natural food. Now, since you can’t take the investor out of me, there I was walking the aisles of Whole Foods Market, Inc. (NASDAQ:WFM) and looking for any opportunities in the “organic” sector that were being created.

You’d be surprised how much you can learn when you simply keep your head up and take in the world around you. For all you know, you could be stumbling across the next big thing just by checking out the long line that’s snaking around the outside of a new business or people watching while sitting at the food court in the mall.

In fact, this awareness actually helped me come up with a great new stock idea for my GameChangers service recently. My family and I became big fans of a restaurant we began to frequent. I was consistently impressed every time I visited, and not only with the food I was eating but also with the atmosphere, the management and the crowd.

After doing my research and really digging into the business and its financials, I recommended Texas Roadhouse Inc (NASDAQ:TXRH) to my subscribers. While the stock has struggled to hang onto its post-earnings gains on investor concerns regarding the economy, it has gained 40% over the last 12 months, and I like the potential for continued strong growth.

Even if analyzing a company isn’t your favorite thing to do, I recommend that when buying stocks you at least examine the fundamentals of one you are considering investing in to make sure what you saw with your own eyes is being reflected in the company’s performance and that the potential is what it appeared to be.

The good news is that it’s easy and fast to find this information — like sales growth, earnings growth, stock performance and more — on the Internet.

Peter Lynch is a big proponent of this “invest in what you know” approach, and it certainly worked for him. During his time as manager, the Fidelity Magellan Fund (MUTF:FMAGX) was the best-performing mutual fund in the world, averaging nearly 30% returns a year over a 13-year period.

That’s why I never leave home without my detective magnifying glass — figuratively speaking, of course. My family wouldn’t appreciate me walking around the mall with that up to my face the whole time. But you know what I mean.

You just never know when the next big idea will strike when you’re buying stocks! It really does pay to observe the world around you.

Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.

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