A short time ago, I explained how to grow your holdings in a company for free. I more fully explain this method in my book, The Confident Investor. After you have practiced this method for a while, you will come upon the situation where you have to choose the best company to receive your investment dollars.
As I have explained before, you will have divided your portfolio into equal allotments. You should have at least 10 allotments but you could have 20-50, if your cash supports this amount. For the sake of argument, lets say that you have decided to have 10 allotments in your portfolio. Eventually, you will run into the situation where you have already invested some of your allotments, let’s stay 7 in this case, and only have 3 more allotments to invest. If the market is growing nicely, you may find 5 companies on the Watch List that are presently ready for investment. This creates a dilemma – you need to choose the best 3 of the 5 companies.
This situation is not rare and I personally experience it on a regular basis. Here is my logic to reduce the number of potentials:
- Recheck to make sure the indicators are all equally strong. In many cases, I can eliminate one choice because the stock barely passes all of the minimum tests. If I have to be picky, the weak ones need to get a bit stronger so they get trimmed off the list.
- Am I already exposed to the market in my other allocations? For instance, I would want to avoid having 2 oil companies or 2 specialty retailers. I would also want to avoid a supplier and its main customer. Once again, this probably doesn’t matter, except if I am trying to eliminate a stock.
- If the first 2 filters don’t cut down my choices, I look for where I have existing free shares already in my portfolio. The company that has the least accumulated free shares is the company that I will eliminate. For instance, if I am choosing between two companies and I have 35 free shares in one and 85 free shares in the other, I will choose the 85. My goal in this situation is to develop a portfolio that has a full allotment of each company that I am tracking. I have explained this earlier, once I have achieved a full allotment in a company, I will suspend building up more shares in that company.
Hopefully, by applying these three simple tests you are able to decide which stock is prime for your portfolio. If some of this is not clear, you can ask me questions on Twitter or Facebook or leave a comment below. You can also achieve a greater understanding by reading my book, The Confident Investor. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.