I am humbled to have my previous post, How to Pick Stocks in Five Steps, chosen as a editor’s choice in this week’s Carnival of Personal Finance, hosted over at The Suns Financial Diary. Check out the rest of the excellent entries here.

As you may well know, I am an advocate of investing in individual stocks. Index funds are absolutely useful for certain investing situations - it’s what I currently have my IRA invested in. But the growth potential of individual stocks is huge. Not only that, but there’s something about investing in individual companies that really adds a lot of excitement to investing. What that excitement means is that you’ll be paying more attention to your investments, which in turn increases the likelihood that you’ll make better returns from them.

So how do you pick an individual stock? Here is the system that I use. Now for full disclosure, I am not a season investor of 30 years - instead, I’m just going on about two. But I follow the advice of the investment advisory company I work for, which has a combined century of knowledge on the subject. Picking stocks using this method I was up about 40% for 2007, and am down about 10% this year.

This stock picking method focuses on looking for growth stocks that you will hold, on average, for about four to six months.

1) Check your market timing. Before you even begin to spend time looking for a stock to purchase, it’s important to know whether or not now is the time to buy any stock. For example, in June 2008 the market timing system I follow basically said to get out of the market. So I did, and missed a 30% decline in the market.

Even though market timing indicators are based on the broad market, it can be extremely difficult to find strong growth stocks that are able to shrug off a weak market - let alone a crash like the one we’ve experienced this year.

You don’t have to be quite as concerned about the opposite, when the market is “overvalued.” It’s true that as a buy-and-hold investor, this would be a bad time to purchase. But the time frame of a growth stock investor is short enough that you don’t have to be constantly looking for tops in the market (you do, however, have to be wary of tops in the stocks you own).

Lastly, there are times when you may want to be only partially invested. For example, from October 2007 to June 2008, I gradually moved from fully invested to cash, as it became more and more difficult to find individual stocks that beat the market.

2) Narrow the field - use a stock screener. Stock screeners are exactly what they sound like - screens which filter out stocks you don’t want and leave you with a smaller number of stocks which warrant a closer look. There are thousands and thousands and thousands of stocks out there, so a stock screener is essential for narrowing that field so that you can spent your time only looking at stocks which show potential.

I use the Motley Fool Caps stock screener, for reasons I will explain in the next step. Here are what my settings look like, and the reasoning behind them. I’ve only mentioned the settings that I change.

• Custom Market Cap: $250M to $100B. Basically, this eliminates micro-cap stocks, which we don’t dare touch. It includes large-cap stocks because even those can be big growth stock winners (look at Google and Apple).
• CAPS Rating between 4 and 5 stars.
• Active picks: 50. Otherwise the star rating system doesn’t have enough samples to make it reliable.
• Current price minimum: 5. Anything priced below that would be too volatile for our tastes.
• 4 Week Price Change % Min: 10. This gives us stocks that are in an upward trend over the past month
• 13 Week Price Change % Min: 20. This helps to avoid stocks just on a temporary upswing.
• 3 Month Avg Daily Volume Min: 250,000. Anything below this volume also helps avoid volatile stocks.
• EPS Growth Rate and Revenue Growth Rate: 20. Helps us weed out stocks which are not actually growing in revenue.

Now, I do sometimes make adjustments to these numbers. For instance, running this screener in the current market conditions returns me only one stock. So often times I’ll adjust the 4 and 13 week price change lower in order to include more stocks to look at. Often times these are more of a “watch list” type stock, as I don’t really want to purchase a stock that is downtrending, but in bear markets it’s always good to have a few names so that you’re ready to purchase when the market turns.

3) Crowdsource your research. This step is a favorite of mine, and one that I added personally along with the other steps I learned from the company I work for. I have a full time job that does not involve researching stocks all day. However, that research is important to finding solid stocks. So how do I get around that? By having other people do it for me!

It’s risky, of course, to rely on the advice of a single person for investing recommendations, whether it’s your barber of Warren Buffet. But the collective knowledge of hundreds or thousands of investors can be incredibly useful.

I use Motley Fool’s Caps, mentioned above, for most of my crowdsourcing. It’s a popular site, which means lots of opinions, and has an intuitive interface for navigating through stocks. So when I use their screener, I’m not only able to screen against common fundamental and technical filters, but also against the collective opinion of the crowd at the same time. This helps to eliminate stocks which may look good on paper but have a flaw you can’t necessarily glean from the initial numbers.

I have found very few high rated stocks using this method that turned out to be real duds. I do sometimes find stocks I consider to be good picks rated 3 (out of 5), but they’re usually extremely well known names which therefore attract a lot of different opinions (such as Apple).

Don’t stop with just looking at the star rating. Be sure to read through the opinions and find if there is a common theme among the opinions. This also helps with determining if there is a “prejudice” against the stock. Take for example Crocs (CROX). This was a very poorly rated stocks all throughout 2007, even though it posted 300% gains at one point. But people rated it poorly because “the shoes looked stupid.”

Lastly, I also like to check investing blogs to see if they have any opinion on the stock. I usually start with Seeking Alpha and go from there.

4) Check the numbers. Our screener helped us get rid of any really unattractive numbers. Crowdsourcing helped us narrow down the field even further and hopefully gave us at least a handful of potential stocks. Now we need to look at those stocks closer to make sure they meet our criteria.

I use software we have access to at our company to get these numbers, but any major investment site (such as Yahoo! Finance) should have them as well. Here is what I’m looking for:

• Increasing EPS (earnings per share) quarter after quarter
• Increasing sales
• Increasing fund investors
• Increased earnings estimate for the current and following year

Pretty simple, eh? Normally it would be dangerous to look at just these numbers, but by this point, thanks to the previous steps we took, we are (hopefully) looking at only quality stocks now, and are just confirming our findings.

You may notice that one figure I have not mentioned is the P/E, or price to earnings ratio, which is the holy grail of many investor strategies. The reason is that it just doesn’t work for this growth investing strategy. In fact, a high P/E ratio is often the sign of a skyrocketing growth stock! Take First Solar (FSLR) as an example. You could have made 400% from this stock last year, but only if you weren’t scared away by the P/E ratio of 150.

5) Check the chart. By this point, we know we’re looking at a pretty good stock, and our market timing signals tell us it’s a good time to invest. So do we just go ahead and buy our shares? Nope! We have to make sure that this is a good time to invest in this particular stock. This requires a bit of technical analysis, but I promise it’s not too difficult.

Go to your favorite charting site. I prefer StockCharts.com. Put in the stock and look at it for the past six months (you’ll also want to check a full year back as well). The only technical indicators you have to concern yourself with are moving averages, so put in a 25 and 50 day moving average.

Now, there are entire libraries filled with books on technical analysis, but here are the basics you are looking for:

Red Flags

• The stock has had sharp gains (around 10%) over just the past few days without any news behind it. While this does show strength, it can also result in your buying at the top, which you never want to do. Wait until the stock pulls back at least a few points before considering investing.
• The stock has one or more tops (a top on a chart simply looks like a hill). Tops represent resistance, and means the stock is having trouble going higher than those tops. It can be dangerous to buy right before a top, as a stock that doesn’t break that top is often in for a downtrend. Two tops is worse, and three tops is a very bad sign.

Green Flags

• The stock is trending upward but it still within a reasonable distance from its 25 (and even better, 50) day moving averages.
• The stock has recently broken then previous resistance, and even better is at new highs. Assuming that the break through wasn’t too high of a spike, this is an excellent sign that the stock is on its way to higher prices.
• The stock has had sharp gains due to good news. A classic example of this is a stock that rockets higher due to surprisingly positive earnings results. Even though this places a stock higher above its moving averages, it also is a very strong sign that the stock is headed higher.

These tips should help serve as general guidelines as to when the best time is to purchase the stock you’re looking at.

And that’s it. You now have a basic tutorial on how to find, research, and buy individual stocks on your own.

I hope to follow this post up with a step-by-step example using a specific stock. I also would like to put together a guide on how to actually purchase a stock once you’ve found one you like, as it’s a very simple process that still manages to scare away a lot of new investors.

As I glance over at my box of drafts for this blog, I see about a half-dozen unfinished pieces on stocks, market timing, and personal finance. Why? Well, to be honest, it’s been hard to write about anything finance related for the past few months, with the way the market has been behaving. My introduction to the market began January 2007, which in retrospect was a pretty good time. The market took some dips in March and July, but it was still easy to make money until the end of the year.

The beginning of this year wasn’t bad either, and I was up 8% in my personal portfolio while the indexes were down 5%. My shared online portfolio was doing good as well, due to a well-timed (at that point, at least) purchase of Crocs (CROX).

And then everything started to unravel. My big energy winners in my personal portfolio, such as Cleveland-Cliffs (CLF), began to lose their steam. My online portfolio got slaughtered when Crocs dropped 45% in one day. Then the turmoil in the financial sector managed to snuff out any growth stocks which began to reach new highs.

I am now 85% cash in my personal portfolio and 100% in my online portfolio. Year to date, I’m still beating the indexes, but not by much. I have market timing to thank for that though, which showed clear indicators to begin moving into cash 6 months ago. I can’t help but feel bad for people who are looking at less money in their accounts now than they did in early 1999. I am thankful that we don’t have large amounts invested in the market at this point, and that we don’t need any of the money that we do have invested anytime soon.

At the investment company I work for, most of our subscribers are unfortunately not in the same situation. However, our flagship publication has been, on average, 70% cash since April or so, helping to alleviate losses. It is awfully quiet here though. Sometimes, when the market is in turmoil, our phones ring off the hook and emails pile up. Other times, like now, people seem to rather avoid having anything at all to do with the market - much like I am now.

I still read financial news, and follow along with a few dozen stocks, but I don’t spend nearly as much time researching individual stocks. I became frustrated over the past few months when I would find a storng looking stock that would be slaughtered only a week or two later due to this incredibly unstable market condition.

So for now, I’ll sit by patiently, watching and waiting for the right moment to jump back in.

If you scroll down, oh, one post, you’ll see a long entry I made last week about the stock Crocs (CROX). I purchased the stock for my Covestor portfolio , and was up just about 15% on Wednesday. Not bad.

Then yesterday, the market had a bad day, and the stock was down about 8%. That’s alright though - it had been on a tear, up for a week straight by nearly 25%.

Just after four, one of the analysts that works here casually mentioned he saw on the news that CROX reduced their EPS forecast to 3 to 7 cents per share.

But I thought, that couldn’t be right. Weren’t they forecasting 42 to 47 cents?

As I saw the stock start to take a nose dive, I realized I was right, and that they had reduced their forecast by about 90%. Ouch.

So, after stomaching the pain and spending a bit longer than normal at the gym that evening, I wrote down the lessons learned:

1. Never put more than 20% of your portfolio in one stock. Had I been more heavily invested in this stock, I could have lost a huge portion of my portfolio.
2. Technical analysis is only one tool in the toolbox. I didn’t make any mistakes using technical analysis, but even the best TA in the world couldn’t have told me that the stock was about to cut their earnings forecast that much.
3. Don’t buy a stock if it violates several of your rules. I knew CROX was a risky play, because it didn’t meet several of the rules I use when buying a stock - especially when it came to community sentiment. Several of the community resources I use to screen stocks all hated CROX, and I thought I saw something that they didn’t. This showed me that I was horribly wrong.
4. Be wary of stocks priced less than ten dollars. There’s a reason why most investors avoid them: They’re dangerously volatile.

My Covestor portfolio is really hurting at this point, but if anything this has just fueled the fire for me to do better with it, and hopefully catch up to the performance of my main portfolio.

The market had an excellent day yesterday, doing just well enough to convince me to move out of my 100% cash position and go ahead with a stock purchase. And that purchase was Crocs (CROX), maker of those funny, swiss-cheese looking shoes that you see all over the place.

Considering the fact that I have only been investing for a year and a half, I suppose I could go as far to call CROX my “heritage stock.” I’ve researched this stock more than any other, and have a certain fondness for it after buying it for $30 and selling it after it had doubled only a few months later.

Then October came, and the stock took a massive hit after reporting a dissapointing earning forecast for next quarter. And the stock kept falling, and falling, until it bottomed out around 7 a few weeks ago. I had written the stock off awhile ago, until, of all things, a trip to the ice cream parlor made me remember it. As I stood waiting in line, I noticed that every single one of the dozen ice cream servers wore Crocs. Literally half of the customers did as well. If Crocs was truly last year’s fad, why are so many people still wearing them?

Because they’re comfortable. I think that’s a big reason why they cannot simply be written off as a fad. A select group may very well wear Crocs because of the fashion statement they make. But I own three pairs, and wear them because they’re incredibly comfortable, cheap, and convenient. A co-worker of mine owns five pairs, including one pair decorated with New England Patriots logos.

One worry is knock-off competition, but every single review I could find of the knock-off’s say that they’re uncomfortable and they break quickly.

Foreign sales are increasing dramatically, which means entirely new markets that could catch on. Recent acquisitions of a few popular clothing lines also help expand their catalog to more cold weather options. Of course, I’ve yet to hear if these clothing lines have really sold well or not.

I will definitely admit that this is a risky trade. There’s no telling if this is a dead cat bounce or not, and the financials over the past few quarters have been steadily negative. This is much more of a play on the company itself, much like it was for Google a few months ago. This is also a very volatile market to be buying into.

I’ll also admit that I succumbed to an investing fault I still need to work on. When I have a stock on my watch list, and that stock suddenly skyrockets (like CROX did yesterday, up 10%), I’ll kick myself and buy the stock right away, instead of waiting for a pullback. The feeling of missing the boat is one I have to learn to get over, as the potential benefits of getting in a few days earlier are rarely worth the risk of buying at the top.

Lastly, I am very excited to have signed up for Covestor, an investing social network that automatically shares your portfolio holdings, and just recently added automatic support from Zecco. So I’ll work in incorporating that shortly.

BOUGHT: Crocs (CROX @ 8.48)

My coffee addiction began at a fairly normal age, in high school. School was starting two hours late one Monday, so in turn I stayed up an additional five hours. With just a few hours of sleep, my friends dragged me to the local coffee shop, where I had my first coffee: A small cup of black hazelnut coffee.

And I hated it. It was bitter and burned my tongue.

Yet a half-hour later I was more alert than ever, and thus began my lifelong fondness for coffee. During high school, it was easy enough: My mom would make a big pot in the morning, ready for me when I came downstairs. In college, things became a bit more complicated, though I was able to find a $20 individual coffee maker that served its function fairly well. For grounds, I mostly bought Eight O’Clock, which was just about the cheapest coffee I could find, at something like $4 a pound.

After my wife and I got married, I was the happy recipient of an espresso maker, thanks to our gift registry. While I loved the espresso, it was somewhat of a hassle to make, the machine took up a lot of our counter space (I still needed the regular coffee maker as well), and broke within a year.

You can probably spot the trend by now. As I’ve grown older, and my income has increased, I’ve moved up in both coffee makers and coffee beans. At the moment, I’m at a pretty good place: Both at work and at home, I have a Keurig K-Cup coffee maker. It’s pricey (about $150), but it makes a single cup of coffee in thirty seconds, allows for a different flavor each cup, and takes literally three seconds to clean up.

But still, I find myself drawn towards that twin-finned mermaid. Part of it is the experience - the clean store, the friendly baristas. Part of it is the good quality coffee. And part of it, at least recently, is the free iced coffee every Wednesday. So I often find myself standing in line for my $4 cup of coffee.

Except, of course, coffee doesn’t cost $4 a cup at Starbucks. It’s about $1.75. Sure, some of the more complicated drinks reach that range, but I think it’s unfair to say that you’re spending $4 every time you walk in the door at Starbucks.

So here’s example #493 of taking breaks from frugality to enjoy life. I figure I deserve a nice fresh cup of Starbucks coffee at least once a week.

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A few days ago, I opened my mailbox to find an official looking letter from a company called I.C. System, Inc. They said they were a debt collector hired by eBay to begin debt collecting activity.

I first scoffed at this and assumed it was some type of scam. Then I began to become worried as I did some Google research and found this was a legit collections agency.

There were two major problems with this. First of all, while I use eBay occasionally, there is no way I sell enough to account for the $60 some dollars they claimed I owed them. I actually logged into my eBay account which showed a balance due of $0, with my last payment of $2.12. Secondly, my name was spelled with an “h”, as in “John” instead of “Jon”, which I haven’t used since fourth grade.

As the collections agency was closed over the weekend, I emailed eBay, after spending ten minutes searching for a way to contact them about this matter. I told them I had received a letter and was trying to find out why eBay claimed I owed them this money. Two days later I received a response, asking me to please send them the headers from the email.

That’s interesting, because last time I checked letters sent via the postal service don’t have headers. Customer support hadn’t even bothered to read my email enough to see that, in the very first sentence, I said I had received a letter in the mail.

I got in touch with the collection agency tonight, who were actually surprisingly helpful. They gave me more details on the account, including the email address and eBay user ID - neither of which belonged to me. They said now that the issue is under investigation my credit will not be effected, and that if I don’t hear back from them I can assume the issue has been resolved (though I can guarantee I will be calling back to confirm this).

I have been a loyal (albeit light) user of eBay since 2001. Now they have alienated a customer for life, and have motivated me to do everything I can to let everyone else know of what happened. Bravo!

This past weekend, my wife and I headed to the great state of Ohio to attend the wedding of my best man. It was one of those trips that I didn’t hesitate to make, even though I tend to be someone who spends much on travel or vacation. And yet already this year we have flown to California, will be flying back to Ohio in September (for a family reunion) and November (for Thanksgiving).

When I went to book flights several months ago, I found a bit of a problem with flying from the Boston area to Cincinnati: Direct flights were over $500. Flights with one layover weren’t much better either, and honestly, how do people have time to spend the whole day flying somewhere, especially when I could drive the same distance in the same amount of time?

So instead, we opted to fly to the Akron/Canton airport, which even now still has direct flights from Boston for $200. We borrowed my mom’s car (thanks mom!) and made the 4 hour drive down to Cincinnati. Sure, we had to pay $50 in gas, but it was still nearly $800 cheaper than had we flown into Cincinnati. Even better, we got to spend father’s day with my dad.

We stayed at a hotel for $99 a night, not a bad rate, and saved about $50 total thanks to AAA. Food was of course mostly provided by the wedding events, although we did make a lunch trip to the Cheesecake Factory.

As for a gift, I was surprised to hear by my co-workers that $100 was the going rate for presents nowadays. So instead of putting together a few pans and dishes from their registry to total that amount, my wife went out and found some beautiful hand-made kitchen pottery for a much more reasonable price.

Overall it was a great weekend. I still believe in the philosophy my dad has tried to teach me, which is that there a certain things in life you should be able to just enjoy instead of fretting about the cost.

This is a response to this question:

I’ve been interested in stocks for the past few years and I’m finally looking to invest in some stocks. One thing that alot of investors recommend is to invest in companies you actually like. I was just wondering if this is a bad idea? I’ve also read about the importance of diversification - pick 5 stocks, all from different sectors, and gather information about said companies.

The companies I’m looking at are Costco and Chipotle. Both have expanded to my area within the past year and I really enjoy the service and environment. I’m a huge Apple fan and I’d love to get some Apple stock but I don’t think it’s within my budget. I feel like there stock can only rise if they meet their sales for the year with the iPhone. Nissan’s stocks look within my price range at roughly $18 a share. I feel like this may be a good pick with their shift to electric cars in 2010.

There’s some truth in the advantages to investing in companies you know. I think Apple is actually a good example. When I invested in it at the beginning of last year, everyone told me it was overvalued, “everyone loves Apple!”, etc. But I saw the huge growth in their PC market, and knew the iPhone would explode no matter what. And what happened? The stock doubled last year.

But the exact same thinking can kill you. I owned Jones Soda (JSDA) mostly for technical reasons (who wouldn’t want to own another HANS), but I also loved their soda, and thought there was a hole in the market they could take advantage of. The stock hit a high of $28 and now stands at $2.90 (though luckily I sold at $24).

So in the end, you have to have other solid reasons for investing in a stock besides the fact that you like it.

Regarding Chipotle: It was a great stock in the last bull market, but one common tidbit thrown around is that the leaders of the last bull market rarely have the same run-up in the next one. It’s in a clear downtrend since peaking at the beginning of the year.

Lastly, the price of the stock should have absolutely nothing whatsoever to do with your budget. What’s the difference between 10 shares of a $10 stock and one share of a $100 stock? Nothing! A stock is only “expensive” in terms of its price to earnings ratio. This is a common misconception I hear all the time.

This weekend, my wife and I both sat down in front of the computer. We both placed one finger on the mouse button, and clicked. Yes, in retrospect it was kind of lame, but I wanted to celebrate the moment: I had just paid off my first car.

The car is a 2003 Honda Civic which I named Stella, after A Streetcar Named Desire. I bought it in the summer of 2003, a few months before I moved into an off-campus apartment and needed transportation. I took out a five year loan at a rate of 0.9% interest.

(Yes, 0.9% interest. Having a father as a lawyer, who spends his whole day negotiating, can be quite handy).

So next month, I will take that payment of $278 and funnel it right into savings. It will also make paying the loan on my Honda Accord a bit easier, as for the past six months we have had make payments for both cars.

Now to the other good piece of news. Until recently, Massachusetts did not allow competition for auto insurance rates: They were dictated by the state government. That alone isn’t great, but what made it worse is that the payments were setup in a “socialist” way, in that you didn’t get breaks for being a safe driver, and you didn’t get penalized for being a bad driver. My wife and I have never been in an accident, never gotten a ticket - heck we’ve never even been pulled over. And yet we were still paying a premium of $200 a month.

Then a few months ago, Massachusetts changed their rules and allowed agencies to set their own prices. What does that mean? I found a quote for progressive for $76 a month, or about 1/3rd what I currently pay! And this is for better coverage!

This, combined with making my last car payment, means more than $400 a month extra we will be saving, which is just fantastic.