---
title: "Is There a Secret Formula to Pick Good Stocks?"
description: "Good stocks are hiding in the market, waiting for you. Is there a secret stock picking formula? Everything you want to know about how to pick stocks."
canonical_url: https://trendshare.org/how-to-invest/is-there-a-secret-formula-to-pick-good-stocks
markdown_url: https://trendshare.org/ai/is-there-a-secret-formula-to-pick-good-stocks.md
published: 2014-08-31
last_updated: 2022-03-11
content_license: https://trendshare.org/about/disclaimer
---
# Is There a Secret Formula to Pick Good Stocks?

Source: https://trendshare.org/how-to-invest/is-there-a-secret-formula-to-pick-good-stocks
Updated: 2022-03-11
The only reliable way to make money sustainably in the stock market is to
buy low and sell high. That's a truism, and it's not helpful. The hard work is
answering the relevant questions.

Everything you need to know about how to pick stocks (but were embarrassed
to ask!) can be summarized in three questions:

- *When is a stock price low?*

- *What stocks will go up in value?*

- [When should you sell a stock?](https://trendshare.org/how-to-invest/when-to-sell-a-good-stock)

With tens of thousands of stocks, [ETFs](https://trendshare.org/how-to-invest/should-you-invest-in-etfs), mutual funds, REITs, and investments
to choose from, you need to be picky. You need to weed out everything that's
not currently on sale and everything that won't be worth more in the
future.

If you had infinite time, you could analyze each stock and its underlying
business one by one, but who has that time? If only there were a way to analyze
everything for sale in the market stock every day to find bargain stocks!

## Is There a Formula to Choose Good Stocks?

Thanks to the Internet, copious financial information is available online.
That's much of the value of [online stock trading](https://trendshare.org/how-to-invest/what-is-online-stock-trading); you don't have to pay [broker fees](https://trendshare.org/how-to-invest/broker-fees) to do
basic research for you. All of the data you could want is available for you to
search, if you have the time and inclination to find it and think about it.

Beyond *having* information available via your computer, you can
often find spreadsheets and other programs to analyze stocks for you. That
implies something very important: that, given sufficient sources of information
about stocks, it's possible for computers and formulas and spreadsheets to find
good stocks automatically—even secret stocks with great value!

Yet there's a risk.

Joe Ponzio's [F Wall Street](http://www.amazon.com/gp/product/1605500003/ref=as_li_tf_tl?tag=trendshare0c-20) tells the story of the Enron corporation. On
paper Enron looked great. It reported bigger and better revenues each year. Yet
if you looked at the amount of money pumped into the company every year, it was
actually *losing* increasing billions of dollars every year.

It wasn't a money-printing machine. It was a money pit crumbling in on
itself into bankruptcy.

It's easy to see that in retrospect, but if you invested based on a simple
formula which only looked at revenue, you'd have been in danger of losing your
investment on a bankrupt stock.

## What Can't a Stock-Picking Formula Do?

A computer can't apply human judgment to factors beyond its understanding.
All a computer can do is measure and analyze the data it's given. These are
often financial information ([cash yield](https://trendshare.org/how-to-invest/what-is-cash-yield), [free cash flow](https://trendshare.org/how-to-invest/what-is-free-cash-flow)) and derived ratios ([P/E ratio](https://trendshare.org/how-to-invest/what-is-the-pe-ratio), [current ratio](https://trendshare.org/how-to-invest/what-is-the-current-ratio)). These only work if the
company reports them correctly and if you can use this information
correctly—for example, comparing similar companies to each other.

Comparing the international conglomerate of [Coca-Cola](/stocks/KO/view) to a small organic soda company from
Canada makes little sense. Even though they're both nominally in the same
business (selling soft drinks), they're at different stages in the lifecycle of
a business and they have different concerns (rapid growth versus sustainable
revenue). Similarly, a young biotechnology company does not necessarily compare
to the Canadian soda company even though they have the same number of employees
and the same amount of revenue. The amount of competition in the market as well
as the nature of customers make the two businesses difficult to compare.

A company may have a good [intrinsic value](https://trendshare.org/how-to-invest/what-is-intrinsic-value) when compared to other companies with similar characteristics, but
are those other companies similar enough in the ways that matter most to mean
that you absolutely *should* buy one stock over another?

Even if you could answer that question unequivocally "yes", do you trust
that the formula doesn't have a bug in it? That the source of data is
completely internally consistent? That the interpretation you're putting on the
result of the formula is supported by the formula itself?

Don't discount the nature of hype, both when it's favorable and when it's
not. Compare the behavior of [Peloton](/stocks/PTON/view)'s stock at
the beginning of the Covid-19 pandemic to its behavior in late 2021 and early
2022. PTON saw a huge stock price jump fueled by favorable consumer purchasing
trends as people started exercising from home instead of from gyms. The company
invested huge amounts of money to expand, perhaps believing that this trend
could only continue.

Those sales trends didn't. Peloton had to shrink its business and its stock
price declined.

Compare that to a similar company like [Nautilus](/stocks/NLS/view), which saw a similar, if smaller, rise
based on good sales numbers, but didn't expand as quickly. It's also seen a dip
in its stock price but not based on the company shrinking.

This behavior is easy to analyze in retrospect and not easy to see as it's
happening, but people with a knowledge of the exercise equipment sector have an
advantage over investors who don't have that information or expertise. Numbers
themselves can't tell you everything that's going on.

## Finding Good, Value Stocks without Spending Years Doing Research

This disclaimer may seem strange for a project such as Trendshare, which has
a goal to encourage individual investors to take control of their own
portfolios by educating them about how the market works and giving them free
tools to help identify good stocks to explore further.

Yet rather than promising that every number on the site is the last word in
investment, the [value investing](https://trendshare.org/how-to-invest/what-is-value-investing) formulas
used to analyze stocks exist to give you information. Most of the stocks
evaluated here every day *aren't* on sale.  Many of them are worth
owning—many of them are great businesses—but they're not bargain
stocks right now.

The biggest benefit of automated stock analysis is to help you rule out 99%
of the available stocks out there. Based on your knowledge and interests, you
can identify a handful of stocks to analyze further, on your own, with all of
your human intellect and intuition. When and if those stocks make
sense—when you can tell a story about the underlying companies, where
they've been and where they're going—then you know enough to decide
whether to invest now or ever.

No formula can tell you that.

No one can or should tell you how to spot a good stock without also telling
you that a good stock to buy is one where you *understand* what makes it
good.

The best investing strategy is one you already know: buy low, sell high.
Buy things you understand, when they make sense. Avoid things you don't
understand. By all means, use the tools at your disposal (investment websites,
financial information, [stock screeners](https://trendshare.org/how-to-invest/how-to-buy-dividend-paying-stocks), [Trendshare's stock guides](/stocks)) to winnow the
field down to a few good candidates for further research. Yet never let
adherence to any specific formula override your own judgment. It's your money.
It's your investment. Take charge, do your research, and trust yourself.