Test your knowledge on how to select stocks to buy and you may discover some little-known tips for picking some of the market’s best investments

Whether buying stocks without a broker or with, we recommend investors build a portfolio mostly comprised of well-established companies. As well, some of the biggest profits you ever make will come from buying stocks before they find their way into the limelight.

Are you wondering how to select stocks to buy? Test your knowledge below.

True Blue Chips pay off Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor. Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

A. Some of the safest and most secure stocks on the market are:

1. Dividend-paying stocks
2. Mining Stocks
3. Energy Stocks
4. Penny Stocks

You are correct if you answered A.

When you pick the best income stocks, you are, for the most part, investing in the safest and most secure companies. That’s in large part because of the dividends that the best income stocks pay. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake; either the company has the cash to pay dividends or it doesn’t.

B. Which category of stock can provide protection against economic downturns?

1. Growth Stocks
2. Consumer Stocks
3. Penny Stocks
4. Resource Stocks

You are correct if you answered B.

Consumer sector companies offer products and services that benefit from continuous, habitual use and have a steady core of sales, regardless of economic and business cycles.

More generally, Consumer stocks can provide some protection against economic downturns. Generally, that’s a key difference between these stocks and firms in the Manufacturing or Resource sectors. Unlike Consumer stocks, those areas are far more sensitive to the ups and downs of the economic cycle.

C. True or false: You can pick the best stocks by zeroing in on a single, attractive investment measure.

You are correct if you answered “false”.

When considering how to select stocks to buy, investors sometimes fall into a habit of focusing on those with a particularly attractive reading on a single investment measure. These readings include a low per-share ratio of price-to-earnings, a low price-to-book-value ratio, or a high dividend yield. This seems like a quick, easy way of spotting an investment bargain.

However, most investment measures fall on a spectrum that ranges from suspiciously cheap to extraordinarily expensive.

For example, many disasters-in-waiting go through a low-p/e period prior to their eventual collapse. During this low-p/e period, people close to or involved with the company recognize that it has serious problems. They sell their own holdings and they tell their friends and relations to do the same.

Another common problem is that the company is cyclical and is at the top of its business cycle. (It’s easy to overlook the fact that tech stocks tend to be cyclical. Their growth can mask the typical peaks-and-valleys of a business cycle.)

D. Stocks that make the most stable long-term investments are often considered:

1. Value Stocks
2. Growth Stocks
3. Blue Chip Stocks
4. ETFs

You are correct if you answered C.

When considering how to select stocks to buy, we like to look for a history of dividends. A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in the traditional sense.

High-quality blue chip companies are good companies to invest in. Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. They are often some of the most stable stock investments.

E. A big difference in returns over the long-term can come from:

1. Hidden assets
2. Aggressive holdings
3. Popular cannabis stocks
4. None of the above

You are correct if you answered A.

Hidden assets can make a huge difference in growth stocks over the long term. The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot because they are the last stocks that experienced, successful investors sell.

Bonus tip: Follow our Successful Investor philosophy on how to select stocks to buy and you can find the best long-term stocks to invest in—and to build a top portfolio

• Invest mainly in well-established, high-quality companies;
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.
• Downplay or avoid stocks in the broker/media limelight. Stocks in the limelight instill bloated expectations in investors. When they fail to live up to these expectations, as is bound to happen eventually, downturns can be swift and brutal.

In the long run, our three-part system will provide much better results than basing investment decisions on market opinions or predictions.

Meanwhile, Pat McKeough’s book, The Successful Investor’s Toolkit is now available as a Kindle version on Amazon. Here’s a link: https://www.amazon.ca/dp/B08157WZHH

Have you ever had a broker that instructed you against any of the information above?

How often do you buy stocks without the aid of a broker?