Picking the best stocks for your shares portfolio is key to improving the returns that you get from your share investments.

As explained in a previous article, shares are small pieces of a company and so picking the best shares (stocks) means picking the best companies to invest in.

It all sounds very simple doesn’t it?

So why do so many people get it wrong?

The short answer is that they don’t do their homework!

The best investors, people like Warren Buffett for example, base their investment decisions on solid analysis of the companies they are considering investing in.

So if you want to become a better investor, like Buffett, you need to do your homework properly before you buy and sell your shares.

In this article, I’m going to explain 5 different aspects that you need to do your homework on when you are picking stocks for your shares portfolio.

I can’t promise you that you will become the next Warren Buffett, but I can promise you that doing the following 5 things will improve your stock picking results and at the end of the article, I’ll tell you where you can get more help!

1. Analyze The Company’s Fundamentals

If you don’t know what fundamentals are, then these refer to the basic information that share investors examine when trying to decide whether a company’s shares are overvalued or undervalued.

It includes things like the P/E ratio and Dividend Yield for example.

Often fundamentals such as these are used as an initial stock screen to select a short list of potential shares for further analysis.

There are many fundamental data items and financial ratios that you could use and so doing this analysis fully is a key part of improving your stock picking success.

2. Analyze The Company’s Latest Results

Examining company results in the form of an annual report is something that many share investors try to avoid because they think it is complicated and a job best reserved for accountants.

As a non-accountant myself, I can assure you that you don’t have to be an accountant to be able to analyze a company’s latest results.

I have lots of friends who are accountants and if my friends are anything to go by, they don’t make the best investors.

Maybe it is a bit like a cobbler never mending his own shoes?

Or maybe there is some truth to accountants knowing the cost of everything and the value of nothing?

Whatever, the point here is that there is no getting away from analyzing a company’s latest results.

The good news is that it is much easier to do if you know what to look for in those results and what to ignore.

For example, I can now get the gist of a company by looking at its results for only 5-10 minutes.

Indeed, if it is taking me longer than that, then I consider the company to be too complicated for me to be able to predict it’s future prospects and I don’t invest in it.

3. Analyze The Latest Company News

The next area to examine is the latest news about the company.

This can be very useful for getting a feel for what is affecting the company at the moment and what other people’s opinions are about its prospects.

You need to remember though that most people writing the news are doing it for a reason and so it my not be as objective and factual as you might like.

Certainly, if the article you are reading is written by a journalist, then consider the views very carefully and challenge any assumptions or rationale given and form your own opinion.

Alternatively, if the news article is written on behalf of the company by its public relations company or in-house broker, bear that in mind too when you read the article.

4. Analyze The Economic And Market Trends

Arguably, this is the most difficult area to analyze and it is why Warren Buffett advises “sticking to what you know” when investing.

If you stick to industries that you work in or companies that provide products and services that you know and love, then the chances are that you have some knowledge about the market trends already.

As for economic trends, you probably know more about these than you realize too, especially if you read a newspaper or watch the news on the television.

The trick is to apply that knowledge to the particular company that you are investing in and analyze how the company is likely to be affected in the next few years.

5. Analyze The Share Price Graph

By this point, you should have a very good view of the prospects of the company that you are considering investing in.

The last piece of the jigsaw then is timing.

You could have found a great company, but now may not be the right time to buy or sell and you may decide to wait for a while.

Analyzing the historical share price of a company is a great way to assess your timing and there is a whole subject in itself known as technical chart analysis that goes into this aspect in minute detail.

Now, I have to say at this point that I am somewhat skeptical of some of the claims made by technical chart analysts.

In my case, this is probably because I am a pure mathematician and I like to understand the cause and effect relationship before I can buy into a theory.

That said, while I consider technical chart analysis to be an imperfect science, there is still considerable merit in examining historical chart patterns.

Even better is matching the rapid price movements, turning points and trends in the share price graph to the historical news flow.

This helps you to better understand what kinds of things are affecting the share price and provides further information or questions that you may want to ask yourself before finding the answers in your analysis elsewhere.

Putting It All Together

There is no doubt that doing your homework, as I have described here, is key to improving your investment success.

When you get into the habit of doing it properly and consistently, you will not only improve your stock picking, but you will time your buys and sells better and make fewer mistakes.

Ultimately, you will achieve bigger returns with your investments than you have hitherto, so why not give it a go?

If you’d like to follow a tried and tested process with more detailed checklists of what to analyze then you can find out about our Company Analysis Workbook by clicking here.

Otherwise, leave me a comment below about the kinds of things that you like to analyze when you pick your stocks or ask me a question you have with regard to improving stock picking.