My nine tips for picking shares – for growth, dividends or fun

A good guide is the price-to-earnings (p/e) ratio. A high p/e ratio indicates that the shares are expensive, although there is usually a reason. If the p/e ratio is higher than it has tended to be in the past, there could be a better opportunity to buy in the future. This simple valuation yardstick is not infallible, however, and considerably more information will be needed, which is likely to require you to delve deeply into the company’s accounts. 

In truth it is rare for private investors to have either the knowledge or the information needed to assess properly if the share price of a particular company is too high or represents value; there are so many variables. 

A good philosophy is to aim to hold for the long term. All companies’ share prices fluctuate and you will profit only if you hold for the long term – trying to second-guess short-term price movements is a hopeless ploy. 

One rewarding strategy is to use your own eyes and ears to judge a company. If you see many people buying a company’s products or visiting its outlets, that could be a good buy signal. 

I remember when 30 years ago a David Lloyd tennis centre opened near where I lived. I considered the membership very expensive but thought that would make it easy to get a court. We joined and much to our amazement the place was buzzing; the high membership charge was clearly not a deterrent. I bought the shares and my profits paid for 20 years’ membership.

Another example is Fever-Tree. I noticed that from nowhere its mixers were everywhere, and not just in this country. The share price soared. In both cases you could have been ahead of the market had you observed the success before the companies’ accounts were published. 

More recently I saw many people wearing a particular brand of trainers with a novel construction that made them light but still well cushioned. They are made in attractive colours too. The shoes are branded OC but are made by a Swiss company, ON. Although the company has been around for some time its shoes have only just got traction in the market. I believe it is a share to watch. 

There are also good reasons to continue to observe the businesses in which you invest to get some feel of how they are doing. Over the past few months I have walked past Superdry stores not just in Britain but overseas too. They have always been empty or nearly empty and not because it was a quiet day; adjacent shops were booming. I was not surprised when there was a profits warning and a collapse in the share price in December. 

I remember similar situations a couple of years ago, again with catastrophic share price declines. Shares should not be just bought and forgotten – shrewd investors regularly reappraise their holdings. 

On a lighter note, let’s acknowledge that there is a fun side to picking and owning shares. I always remember a client from the early 1980s, when she must have been 80. When I suggested a fund she wanted none of it. “I want something exciting which I can watch go up and down in the paper,” she said. She loved the stock market.

My nine-point summary for picking shares

1. Buy at a price where you can see a profit in future (it sounds obvious but many people don’t make that assessment).
2. Always know exactly why you are buying the share. If you don’t know why you bought it, you can’t gauge if and when you might sell. (This is a good reason for not following golf club tips unless you are also told the rationale.)
3. Buy long term – with any share purchase you should be intending to hold over the long term.
4. Be your own analyst. If you observe via your own direct experience that a company is doing well, that is a good buy signal. Scour the press for comments on companies. Good comment is obviously welcome but be alert to adverse comment; it could be the first sign that you should be questioning the holding.
5. If you have bought a share for the dividends, keep checking that the profits are growing. Income growth is the main reason for buying a share with dividends.
6. Never rush to buy an investment; equally, once you have decided to buy, get on with it. Any change in the price from then will sour your decision. If the price goes up you may think you have missed the opportunity; any fall in price and you will think you might get it more cheaply if you delay even more. You could end up sitting on the fence forever.
7. You will see in the media advice to buy certain stocks. In this instance it can be good policy to wait a little, since the media comment is likely to inflate the price in the short term. (I know this contradicts the point above but in this case there is a sound reason to wait.)
8. A very prevalent habit among investors is to sell the winners and keep the losers in the hope the companies will recover. I would suggest that keeping the winners and selling the losers is a better policy. Don’t be afraid to swallow a loss.
9. Finally, always make your decisions first and foremost about investment; don’t let tax considerations determine what you do. If you feel, for example, that a share should be sold but are aware that it would lead to a capital gains tax bill, don’t let that stop you selling.

Peter Hargreaves co-founded the stockbroker Hargreaves Lansdown.