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Investing 101: Don't Pick Stocks, Pick Companies

Investors should also become extremely critical of the companies in which they're interested. Don't take anything for granted. Profitability, I believe, is the single most important indicator of a company's financial health. The more money a company continues to make (rising earnings), the higher the stock price typically goes. If the company is making money, it makes it easy to ignore the noise that are being spewed, even from people like me.

Logic suggests that if the company is growing profits, it's hard to argue that the business is on the right path of producing the returns investors expect. But getting there and finding these sort of companies is a process - one that is more sophisticated than simply looking at a chart and a daily moving average, which is typically the method of picking stocks.

New investors must also realize that there are no signals for spotting good companies. Just because you hear a company's name get mentioned 24/7 in the media it doesn't mean the company is worthy of investment. It requires you to be thorough and conduct sound due diligence, while paying strict attention to detail.

Along those lines, it goes a long way to find companies where management values shareholders -- something that you can witness by the manner in which they communicate information. It seems trite to say, but there are a host of companies that go out of their way to bury bad information. If not deliberately, they certainly make it hard to find. Accordingly, you'll know that you have become a true student of investing when you figure out the right questions to ask. Again, don't take anything for granted.

I've said this before and it's worth a reminder: It also helps to have a standard of performance for your companies, a set of guidelines from which you never waver -- preferably one that is hinged on logic and based on realistic expectations. If you remember these simple yet complex tips, you will then agree that your stock is doing well for no other reason than because the business is leading the charge.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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