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TheStreet Open House

Five Rules for Buying Stocks

Stocks in this article: AMZN BRK WFC

3 - Buy Stocks for the Future, Not the Past

Sifting through quarterly reports and past performance for a company can provide insight into the health of a prospective investment. But whenever you look at these numbers, it's important to realize that they are lagging indicators. When you look for the best stocks to buy, you should put a premium on future growth trends over previous successes.

Consider changing demographics, such as the fact that China is now the No. 1 automobile sales market in the world, thanks to an emerging middle class in the People's Republic and flagging consumer confidence in the United States during the recession.

The result has been wild profits for China auto parts stocks such as China Automotive Systems (CAAS - Get Report) and Sorl Auto Parts (SORL - Get Report), both of which are up over 225% in the last year.

This goes for product life cycles and market relevancy as well. Major pharmaceutical companies may still be seeing decent earnings and sales, but investors in Merck (MRK - Get Report) had darn well better be aware that as much as 30% of Merck's sales could dry up due to patent expirations and generic competition in the next few years.

Obviously, if investors could tell the future than it would be easy to play the stock market. There is no crystal ball that will provide easy answers as to which companies will see success and which ones won't. But if you want to invest wisely, your rules for buying stocks should include focusing on future trends more than past successes.

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