The Best Stock Analysts rely on a diverse range of investment criteria in their decision making—including diversification and with an emphasis on dividend-paying stocks

After making a decision, people tend to look around for facts and arguments that support their decision. They tend to disregard opposing facts and arguments. This is as true in investing as in anything else.

Keep this in mind when thinking about your own beliefs. It also helps to keep it in mind when weighing the beliefs of other investors–even those considered the best stock analysts.

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The best stock analysts and how they use P/Es (the ratio of stock prices to per-share earnings) 

Investors generally look at two versions of the “e,” or earnings, in the ratio. They divide the current price per share by the total earnings per share for the most recent 12 months (often referred to as the “trailing P/E”). Or they divide the price by an estimate of per-share earnings for the current or next fiscal year (often referred to as the “forward P/E”).

Later on, some analysts began to think that the proper “e” is the average of per-share earnings for the past five or 10 years. After all, they argued, earnings are highly volatile. Why settle for a single year when you can look at 10? However, the superficial logic of this idea fades under scrutiny.

Stock prices, earnings and the economy generally grow over most five-year periods, and even more so over 10-year periods. So why divide the current stock price, or “p,” with the historical earnings average, or “e”, rather than the one-year trailing or forward “e”? The five or ten-year timeframes simply ignore the growth that typically takes place over periods of five to 10 years.

3 more ratios Successful Investors should take a look at when analyzing stocks

Price-to-book-value ratios: The book value per share of a company is the value that the company’s books place on its assets, less all liabilities, divided by the number of shares outstanding. Book value per share gives you a rough idea of the stock’s asset value.

Price-cash flow ratios: Simply put, this is earnings without taking into account non-cash charges such as depreciation, depletion and the write-off of intangible assets over time. It’s actually a better measure of a company’s performance than earnings.

Debt-to-equity: When a company loses money, it still has to pay the interest and eventually repay the debt. Generally it does so by dipping into shareholders’ equity. A high ratio of debt to equity increases the risk that the company (that is, the shareholders’ equity in the company) won’t survive a business slump.

The best stock analysts include the key elements of our Successful Investor criteria

With our Successful Investor approach, it’s essential to diversify your holdings across well-established companies, spread your investments across most if not all of the five economic sectors, and avoid stocks in the broker/media limelight.

In addition, successful investors need to limit their involvement in trouble-prone areas like new issues, start-up companies and illiquid investments.

They also need to stay out of companies in which they have doubts of any sort about the integrity of insiders.

The basics of Successful Investing also include these three points:

• Don’t depend on luck to make money for you or to prevent losses.
• Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
• Win by not losing.

The best stock analysts consider these guidelines before they sell

• Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.
• Before you sell, ask yourself this: does the stock have a poor outlook? Or do you want to sell because it just doesn’t fit your portfolio? If neither condition applies (and you just think it has gone up too far or too fast), then you should ask yourself if selling will improve your portfolio.
• Avoid excessive portfolio tinkering, especially when it comes to selling stocks that you feel have gone up too far and too fast. To succeed as an investor, you need big winners in your portfolio from time to time. One key fact about big winners is that they tend to go up further and faster than most investors expect, and they keep doing it for years if not decades. If you sell them when they’re just getting started, you may never experience the joy or profit of having a big winner in your portfolio.

Have you ever worked with stock analysts that steered you wrong? What did you do?

How have you developed your own stock analysis skills?