📊 STEP 6caa — HOW TO SELECT INDIVIDUAL STOCkS

A Simple, Complete System Anyone Can Use to Choose Strong, Long-Term Stocks

You don’t need to be a Wall Street pro. You just need a process.

⭐ INTRODUCTION — You Don’t Need to Be a Genius, You Need a CHECKLIST

Most people think picking stocks is about:

Being super smart
Having secret information
Watching charts all day
Predicting the future

It isn’t.

Great stock selection is about:

Following a repeatable process
Knowing what makes a strong business
Avoiding obvious red flags
Paying a fair (or discounted) price
Not panic-selling
Letting time and compounding do the heavy lifting

This lesson will show you step-by-step how to:

Decide whether you should even pick individual stocks (vs just index funds)
Find good candidates
Analyze them without getting overwhelmed
Avoid bad businesses
Understand valuation in plain English
Decide how much to invest in each stock
Know when to buy, hold, or sell

By the end, you’ll have a simple, complete STOCK SELECTION CHECKLIST you can use for the rest of your life.

🎯 SECTION 1 — Do YOU Even Need Individual Stocks?

Before we talk “how,” we ask “if.”

Not everyone needs to pick individual stocks.

✅ Index Funds Alone Are Enough If:

You want simple and hands-off
You don’t enjoy research
You mainly care about long-term wealth
You don’t want to track companies

In that case, your core portfolio can be:

Total Market Index Fund
S&P 500 Index Fund
Maybe some international exposure

…and you NEVER have to pick another stock.

🧠 When Individual Stocks Make Sense:

You might want some individual stocks if:

You enjoy learning about businesses
You want a chance (not guarantee) for extra returns
You’re willing to do some homework
You are emotionally able to see prices go up AND down
You already have a solid base in index funds + retirement accounts

⚖️ The Life’s Wealth Quest rule:

Individual stocks should usually be the “satellite,” not the “core.” High-frequency trading that happens from companies like Blackrock or Vanguard can make stocks move anyway they want. We will discuss this later

Core = index funds
Satellite = carefully chosen individual stocks

This keeps your wealth stable but gives room for upside.

🧭 SECTION 2 — The 5 Pillars of a Great Stock

To keep this simple, a great stock should pass five pillars:

Great Business — sells something people want, over and over
Strong Financials — not drowning in debt, actually making money
Reasonable Price — not insanely overvalued
Capable Management — not burning cash or diluting shareholders
Fit in Your Plan — matches your risk level and time horizon

If a stock fails badly on any of these, skip it.

You don’t need to find every stock — you just need a few good ones.

🔍 SECTION 3 — Step 1: Start With the Business, Not the Ticker

Most beginners make this mistake:

They start with the stock price, not the business.

You are buying a slice of a real business.

Ask These Questions First (In Plain English):

What does this company actually DO?
Who are their customers?
Are those customers likely to still want this in 10–20 years?
Is this a “must-have” or a “nice-to-have” product?
Does the company have competitors? Are they winning or losing?
Is the business simple enough that you can explain it to a 10-year-old?

If the business is too confusing to explain, skip it.
If it sells something that could disappear in 5 years, skip or size it small.

Favors:

Simple, understandable businesses
Products with repeat customers
Companies with a clear “edge” (brand, patents, scale, network effect)

💰 SECTION 4 — Step 2: Check Basic Financial Health (Without Being an Accountant)

You don’t need to read every footnote in the annual report.

You just need a few simple checks:

1️⃣ Is Revenue Growing?

Look at sales over the past 5–10 years:

Up steadily → good
Flat → maybe
Down → caution

Growing revenue means the business is expanding.

2️⃣ Is the Company Profitable?

Look at earnings or net income:

Positive and growing → strong
Negative for many years → only okay if it’s a growth startup (and even then, risky)

3️⃣ Does the Company Have a Lot of Debt?

Debt isn’t always bad, but too much can kill a business during hard times.

Basic rule:

If debt is small compared to earnings and cashflow → okay
If debt is huge and profits are small → risky

4️⃣ Are Profit Margins Reasonable?

Profit margin = how much they keep as profit after paying all expenses
Higher margins → more room to survive downturns

You don’t need “perfect.” You just need “not obviously terrible.”

📉 SECTION 5 — Step 3: Understand the Risk Level

Different stocks have different “personalities.”

Some are calm.
Some are wild.

Ask yourself:

Is this a giant, stable company or a small, risky one?
Does the price move a lot every day?
Is this company in a very competitive, unstable industry?
Could this company realistically go to zero?

Rough Guide:

Big, profitable, well-known → lower risk
New, tiny, no profits yet → high risk

You can still invest in riskier stocks — just smaller amounts.

🧮 SECTION 6 — Step 4: Is the Price FAIR? (Valuation in Plain English)

“Good company” is not enough.
You also want a good price (or at least not a crazy one).

Here are simple tools anyone can use:

1️⃣ Compare P/E Ratio

P/E lower than similar companies and its own history → possibly undervalued
P/E much higher than everything else → possibly overhyped

Compare:

Company’s P/E vs its industry
Company’s P/E vs its own 5–10 year average

2️⃣ Use PEG (Price/Earnings to Growth)

PEG ≈ 1 or less → better value for growth
Very high PEG → possibly overpriced

3️⃣ Simple “What Would I Pay for $1 of Profit?” Thought

If a company makes $5 per share per year (EPS = $5), and you pay:

$50 per share → you’re paying 10× earnings
$100 per share → 20× earnings

Would you pay 100× earnings? 200×? The higher the number, the more future perfection is already “baked in.”

4️⃣ Margin of Safety

Because we can’t predict everything:

Try to buy great companies when they’re temporarily on sale.

Market crashes
Bad news that doesn’t hurt long-term logic
Short-term panic

These are opportunities if the business is still strong.

🧱 SECTION 7 — Step 5: Moats, Management, and Durability

Now you look deeper at quality.

1️⃣ Moat (Their Protective Wall)

A moat is what protects the business from competitors.

Examples:

Strong brand (Apple, Nike)
Network effect (social media platforms)
Patents or unique tech
Lowest cost producer (Walmart, Costco)
High switching costs (it’s hard for customers to leave)

The stronger the moat, the safer your investment over decades.

2️⃣ Management

You don’t need to worship CEOs, but you do want:

Not constantly diluting shares
Not drowning in dumb acquisitions
Not prioritizing “hype” over profitability

You can spot good management by:

Long-term revenue + profit growth
Reasonable compensation
Clear plans that match actual results

3️⃣ Durability

Ask:

Is this company likely to still exist and be relevant in 10–20 years?
Does it sell something that humans are very likely to still need?
Or is it riding a short-term trend or fad?

Durability is extremely important for long-term investors.

🔎 SECTION 8 — Step 6: A Simple Stock Selection Checklist (Use This Every Time)

Here’s your Life’s Wealth Quest Stock Selection Checklist:

✅ Do I understand what this company does?
✅ Would people still want this product/service 10–20 years from now?
✅ Is revenue generally growing over time?
✅ Is the company profitable (or clearly on track to be)?
✅ Is debt reasonable compared to its profits and size?
✅ Are profit margins decent for the industry?
✅ Is the P/E and PEG reasonable vs its history and peers?
✅ Does the company have a moat?
✅ Does management seem responsible (not drowning in debt, not constantly issuing new shares)?
✅ Does this stock fit my risk level and time horizon?
✅ Is this a core long-term hold, or a smaller speculative position?
✅ Do I have a reason to buy that is based on NUMBERS, not hype?

If you can’t confidently check most of these boxes → skip the stock.

There are thousands of companies. You don’t need this one.

📂 SECTION 9 — Position Size: How Much Should You Put Into One Stock?

Picking stocks isn’t just what you buy, but how much.

A Simple Guideline:

🧱 Core Index Funds: 50–90% of portfolio
🟦 High-Quality Individual Stocks: 10–40% total
🟥 Speculative Stocks: 0–10% (often less)

Within your individual stock bucket:

Safe, huge, stable companies: larger positions are okay (3–10% each)
Smaller, riskier companies: smaller positions (1–3% each)

Never put your entire net worth in one stock.
No matter how “safe” it seems.

Enron looked safe once. So did many others.

🕒 SECTION 10 — When to Buy, Hold, and Sell (In Simple Rules)

✅ When to Buy

When your checklist is mostly green
When the price is fair or better
When the business is strong and durable
When it fits your overall plan

✅ When to Hold

The business is still strong
Earnings and revenues are okay or growing
The story hasn’t fundamentally changed
Price drops are from fear, not destruction of the business

Great businesses can stay great for decades.
The big money is usually made by holding, not flipping.

❌ When to Sell

The business breaks — not just the stock price
Debt explodes, profits vanish, no clear plan to fix
The company makes a fundamental pivot you don’t believe in
You discover fraud or serious dishonesty
You drastically need to rebalance because one position is now too large

You do not sell just because price dipped.
You sell because the reason you bought changed or vanished.

📚 SECTION 11 — Simple Case Studies (Anyone Can Follow These)

🟢 Case Study 1 — Safe Long-Term Stock

Big brand
Steady revenue growth
Regular dividends
Reasonable P/E
Global market
Strong moat

This becomes a core stock holding in your satellite portion.

🔵 Case Study 2 — “Looks Cool, But Fails the Checklist”

Confusing business model
Revenue up, but massive losses for 10+ years
Constant share dilution
Wild hype online
P/E and PEG make no sense

Even if it’s popular, it fails your checklist. You skip it.

🟣 Case Study 3 — Undervalued Boring Company

Not in the news
Profitable for 20+ years
Low P/E vs history and peers
Strong cashflow
Modest growth

This might be a great candidate for value investors.

❌ SECTION 12 — Common Mistakes People Make Picking Stocks

🚫 Buying because “someone on TikTok said so”
🚫 Owning companies they don’t understand
🚫 Confusing stock price with business quality
🚫 Ignoring debt
🚫 Overpaying for hype
🚫 Selling at the first drop
🚫 Not diversifying
🚫 Putting too much in one stock
🚫 Treating stocks like lottery tickets

You’re building wealth, not gambling.

🟢 SECTION 13 — Your Step 6caa Action Plan

Decide your role → Mostly index funds? Or some individual stocks as satellites?
Pick 3–5 companies you already know (brands you use, companies you understand).
Run them through the checklist in Section 8.
Reject anything that fails badly. You lose nothing by skipping.
Start small with amounts you’re okay holding for 5–10+ years.
Keep a simple stock journal:
- Why you bought
- What you expect
- When you’ll reconsider (not just on price)
Combine this with:
- Step 6c (Stocks)
- Step 6ca (Types of Stocks)
- The big glossary you just created