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The Best Stocks to Buy Now

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Everyone seems to have a hot stock tip. Maybe oil companies are about to triple their profits, or maybe that little restaurant down the street is about to go public and open a thousand franchises. Maybe a new biotech firm just submitted its cure for the common cold to the FDA. You'd be a fool not to buy now, right?

You can do better!

The Best Stock to Buy Right Now

The best stock to buy now, December 2016, is a great company with a solid history. It's a stock on sale. It's a business you understand. That last point is wildly subjective, but it's how you will make money in the stock market. Buy stocks in companies you understand when those stocks are on sale.

Good stocks to invest in right now may surprise you. Maybe it's a boring company. It's probably a very boring company. Maybe it has a boring story. Some of the best businesses in the world have incredibly boring stories, like Wal-Mart getting logistics right. Every good company to invest in makes money for its owners over and over and over again.

Repeat that word "owner". You're buying part of a company. You're paying for the company's ability to make money. The most important thing you can know is how your company makes its money.

The Best Companies to Invest In Do These Things

Buying good stocks takes work. A good stock isn't going to fall into your lap. Picking good stocks takes some research, but finding a good company you know about and understand something about gives you a huge advantage. When you understand a business and its products and its customers, you can understand its financial position.

A good stock always belongs to a good company. Good companies to invest in share many characteristics.

A good business has a history of making money for its owners—not only reporting profits but earning real money. A great business has an advantage over its competition, whether a strong brand or the highest quality products or the best manufacturing line or something that keeps customers coming back.

A great company reinvests in itself to find new customers and retain existing customers. A strong business manages its cash wisely so that its debt and assets and credit will not pose a problem in times of trouble. A company worth investing in has a predictable history of financial success.

The best businesses worth investing in have clear plans for where they're going going and why.

Suppose you find a company that meets these criteria. Is it a great stock? Is it a hot buy? That depends on its current price.

What is the Right Price for a Stock?

Remember that the price you pay for a stock determines the profit you can make when you sell that stock. If I buy a share of Coca-Cola at $10 and you buy it at $20, I will make more money than you do if we both sell at $30.

The value investing approach uses the financial information of a company to figure out how much real cash that make for its owners over its lifespan. Think like an owner. Would you buy lemonade stand that lost you money every year? The same goes for a stock. A lemonade stand that can make you $100 every year isn't as valuable as a lemonade stand that can make you $1000 every year. The price for the latter will obviously be higher than the price for the former.

If the stock market were always completely rational, and if it were only full of value investors, the price of a company would always be pretty close to the right price based on the amount of real cash the company can make for its owners. That's often true, but it's not always true.

Sometimes the market is irrational. Sometimes good stocks from great companies go on sale not because of anything the company has done wrong (it's still making money for its owners) but because the market is made up of countless people with countless ideas and agendas and reasons good and bad to buy and sell. Sometimes great stocks are available at bargain prices. These aren't always the most recommended stocks. Sometimes they're the most overlooked stocks.

The best investment is a great company sold at a good price.

Hot Stocks versus Good Stocks

Forget about buying hot stocks. Look for good stocks. The right stock to buy now is from a company you know and believe in and is on sale. The profit you make from a stock depends on the price you pay. If you buy high and sell low, you won't make money.

The problem with so-called hot stocks is that other people are calling them hot. How likely are you to buy good stocks on sale if everyone is lining up to buy them? What's more likely, the idea that a stock with huge demand and more buyers than sellers is a bargain or that today's hot investment is going to cost you more than it's worth?

If none of your favorite companies are on sale, it's okay to wait. Better to keep your money elsewhere—say a boringly reliable index fund—than to tie it up in something overvalued.

Yes, you have to exercise some patience, but it pays off, when you can sleep at night knowing that you've put your money in a solid business that knows how to grow. You've bought into a great company at a good price, and you're content to let it earn you more money.

This is all a long way of saying that stock tips aren't always (or often) worth investing in. Sometimes your work buddy or cousin or neighbor has a great idea on an undervalued stock, but it's only a good tip if, after you've done your research, the company is a good company and the price is right.

No one can predict what the stock market will do with any degree of accuracy, but good companies that make good products and sell them will always be in demand.

Good Stocks Can Seem Boring

This isn't as much work as it seems. It's easy to rule out a lot of stocks—even stocks on the "top X best investments" lists you see all over the place—just by looking at them. Most stocks in the market today are priced fairly. Many companies don't make enough money (or have a solid enough history) for you to consider.

You're looking for undervalued gems. Maybe they don't have a lot of buzz. Maybe they're rebuilding. Maybe they've just escaped the notice of the market so far, as they're not flashy technology or biology or high-finance stocks. Yet they quietly return great value to their investors and owners.

It's exciting to hear a great stock tip and dream of doubling, quadrupling, or ten-bagging your investment. Yet you're more likely to make money investing by doing a little bit of research, ruling out the top stock tips you've heard, and buying and holding something great.