Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you a specific advice on successful investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Tip of the week: “To get the widest possible view of a stock’s chances of success, you should look at these 4 important keys that many investors overlook.”

When we pick the stocks we recommend in our newsletters and investment services, we consider many factors, of course. But these 4 key factors are particularly important in helping you maximize your chances of success before you make your stock picks. We believe they can help you succeed in all kinds of markets.

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1. Always ask yourself, “What can go wrong with this investment?” What upcoming event, technology or political trend could derail its profitability? In other words, don’t fall in love with a stock just because it has a great track record.
   
   When a company’s profits have been rising for years, its stock price will always be expensive in relation to its per-share profit. If something goes wrong and profit starts to erode or, worse, turns into a loss, the stock can go through a devastating drop. Too much enthusiasm for a favourite can lead investors to ignore its risks and price it as if those risks don’t exist.
2. Remember that high profits attract competition. This is related to rule #1. When a company is making a lot of money, you can be sure that other companies are making plans to enter its market with a competitive product that is slightly cheaper, or better, or more effectively marketed or whatever. Unless demand is exploding, this is bound to limit sales growth and depress profit margins.
   
   That’s why you need to diversify your portfolio between stocks that are already making big profits and those that seem headed for profit gains.

3. Always try to apply your judgement, but don’t overrate it. If you spot a stock that seems to have great prospects, go ahead and buy it. Don’t wait for your broker or the Internet or business television commentators to begin talking about it. If you have been successfully investing for a number of years, your judgement has value and you should trust it. But don’t go overboard. After all, no matter how sure you are that a stock is a winner, you can still be wrong.
   
   There are no sure things in stock picking, even when the market is up, and certainly not when it’s down. That’s why we always advise you to keep any one stock you buy within reasonable bounds (5% or less of your overall portfolio is a good benchmark.)
4. Resist the temptation to copy prominent investors: Sometimes you’ll hear that a stock is a good buy because some prominent investor (a company, family or individual) has a stake in it.
   
   However, it’s important to remember that prominent investors don’t expect to profit in every investment they make. They do make mistakes. For that matter, sometimes they invest for strategic or political reasons, rather than for profit.
   
   To profit yourself by copying the decisions of prominent investors, you have to copy what they do with the bulk of their money, not with token amounts of it. That’s more difficult to do than it might seem at first glance, since prominent investors often keep their best investments hidden until they want to sell.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Have you ever decided against buying a stock and then changed your mind because it got a good recommendation from someone you believed was trustworthy? Or, alternately, have you ever been ready to buy a stock and then backed off due to a negative opinion from someone else? In either case, was the outside opinion correct?

Note: This article was previously published on November 8, 2012.