How To Choose Safer Stocks

Investing doesn’t always have to be an aggressing strategy at wealth creation or income multiplication. Sometimes, it is a slow and steady tug at your goals with the aim of value creation.

For the defensive investor, this is a safer way to go and the first step towards that lies in choosing the right stocks.

Since this investor is relatively passive and interested principally in building a strong portfolio geared towards long-term growth, this process involves limiting or eliminating the speculative stocks and retaining only those that will help you attain a conservative investment portfolio.

This is what one of the greatest investment books of all time as Warren Buffett calls it, seeks to explain in its chapter on defensive investing. "Intelligent Investor is a book by Benjamin Graham that provides timeless and accurate principles that are based on years of vast experience in the investment space.

The following are some of the tips to consider when building a portfolio of safer stocks.

Go For The Big Companies

One of the easiest ways to choose safe stocks is to avoid the highly volatile stocks. Small companies are generally subject to wider fluctuations in earnings while large companies are generally more stable when compared.

In determining size, look at the company’s revenue, share of the market, number of years of experience, and to a certain degree, its stability in terms of profitability over the past few years.

Strong Financial Ratios

Of course, the best tools for comparison are ratios. Ratios help you compare companies or stocks with industry bests as well as across a broader spectrum. When conducting ratio analysis, it is expected that you will eventually compare one against another or a group of others.

There is no easier way to determine the safer stocks than by assessing the right ratios. Bear in mind that these companies might not have had great rates of growth over the years but they have strong fundamentals.

One ratio is the current ratio which is a ratio of assets over liabilities of which a ratio of over 2 to 1 will be the best. Also, long-term debt should not exceed working capital. These fundamentals

Stable Profits

According to the book by Benjamin Graham, the company’s stocks should also be profitable and should ideally not have reported a loss over the past decade. The idea is that the companies that will have been able to maintain a level of profit, no matter how little, are relatively stable compared to other companies.

In fact, another one of his strategies for determining the safer stocks is to choose companies that have grown in profits steadily. This is important because it means the company has found a way to keep the pace with inflation with net income increasing steadily as well.

Paying Dividends

There are many articles here where we have spoken about the difference between growth stocks and dividend stocks. The idea here is that growth stocks spend more time reinvesting their profits for growth while dividend companies because of how slow their growth is will compensate investors by consistently paying dividends.

According to the same book by the prolific investor, the company you are interested in as a defensive investor is the one that has paid dividends for at least two decades sustainably. They are safer, more stable, and will not have your heart thumping from incessant volatility.

These few strategies will enable you choose stable stocks and keep a relatively safe portfolio as a defensive or risk-averse investor.

Written by Lawretta Egba.