The Motley Fool: Seek out tomorrow's stars

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In last week's column, we finished by saying that by buying a cheap index-tracking fund, you can match the returns of the stock market. To actually beat the market you'll have to turn your hand to individual stock-picking.

A word of warning: this is not an easy feat to achieve. Most professional fund managers fail, and you could, too, if you choose the wrong companies. But where do you start looking for those great companies of tomorrow?

Peter Lynch, the best-selling author, advocates that investors should buy what they know. A trip down to the local high street or shopping centre can give you a few clues. Keep your eyes peeled for all sorts of things. For example, did you see many people with mobile phones? Have you noticed more and more people with them? This may lead you to investigate the merits of Vodafone, Orange, Cable & Wireless (part owner of One2One), BT and Securicor (part owners of Cellnet). An investment in any one of those companies would have been a big winner for your portfolio over the past 12 months.

Did you notice that Marks & Spencer's clothing range was lacking a little oomph this year? This may have led you to avoid buying shares in the company at their peak. Although in the long run there is a good chance that M&S will recover - based on their past record - you may have saved yourself a bit of money by waiting for the share price to fall.

Was Dixons busy? Did you see much in the way of competition to it on the high street? If you decided to delve a little deeper into Dixons, you would also find out that it owns Currys, PC World and part of The Link. You may also have seen a few Freeserve CD Roms floating about.

Knowing that the internet is a growth business, you may want to find out more about Freeserve.

Are people buying digital televisions, decoders, or dishes? Are you interested in signing up to this new service? Companies such as BSkyB, Carlton Communications and Granada (joint owners of ONdigital) could be beneficiaries. Beware, however: the price war that started last week between Sky and ONdigital could mean that profitability and market leadership for one of the services could be some way off.

Which supermarket has the best range of goods and cheapest prices? And was it busy? Of the local stores near Fool HQ, Safeway comes a poor last. Not surprisingly, this fact has been reflected in its share price over the past four years.

Tesco is now the market leader, having left Sainsbury's behind a long time ago. An observant Fool may have picked up this trend long before it was confirmed by the official numbers.

Are people eating out? Have you been particularly impressed by one restaurant outlet? A household name such as Pizza Express has been one of the better- performing shares over the last five years. If you liked the concept, or "experience" as the company itself likes to call it, and had seen more and more of the restaurants opening up across the country, you could easily have bought into Pizza Express.

Of course, not all stock ideas come from a visit to the local shops. Colt Telecom and Energis have been two of the very best- performing shares over the past 12 months. Yet these are companies with low consumer recognition. Both of them are "new wave" telecommunications companies, and their share price has benefited from their exposure to the fast-growing world of data transfer, courtesy of the internet.

Information technology companies have been excellent performers in recent times. You may not have heard of RM. It supplies integrated IT solutions to the educational market. In the last Budget, the Chancellor pledged to continue to support this initiative. The shares began 1998 at 158p, and now hover around 540p, a stunning rise of 240 per cent in just 15 months.

For every winner, however, there is also a loser. Examples such as Safeway and Marks & Spencer are littered throughout the stock market.

It will be virtually impossible for individual investors always to pick winners, and avoid the losers. The trick is to find out a little more about the company you're interested in before trusting its management with your hard-earned cash.

Annual reports are a good place to start, and these can be ordered directly from the companies themselves.

Next week, we'll see what information - and warning signs - can be gleaned from these documents.

n Motley Fool, www.fool.co.uk

NAME THAT COMPANY

The first five correct answers out of the hat win a super de luxe black Fool baseball cap.

Whitbread is currently in talks regarding a possible takeover of another pub chain. Name this company.

n Answers to: UKColumn@ fool.com or snail mail to Foolish Trivia Quiz, The Independent on Sunday, One Canada Square, London E14 5DL.

n Last week's answer: Egg.

ASK THE FOOL

I've heard about market gurus who specialise in timing the market. Are there any good ones out there?

EH, London

The Fool responds: We don't place much faith in market-timers. We have yet to find one that can time the market consistently.

Sure, if you keep making the same prediction over and over, one day you'll be correct. For how many years have we been hearing predictions of a market crash, particularly for Wall Street?

If and when the crash does come, you can be sure that the gurus will be shouting from the rooftops. However, although the market may correct by 10 per cent or more, the past three years have seen it rise close to 100 per cent. Follow the advice of the gurus, and you would have missed out on a gain of 90 per cent.

n Send us your question and if we publish it, you'll win a Fool baseball cap. E-mail to UKColumn@fool.com or post to Motley Fool, The Independent On Sunday, 1 Canada Square, London E14 5DL.

MY SMARTEST INVESTMENT

My smartest investment was to buy ICI shares just before the company split into ICI and Zeneca. I kept both until I sold a few (but still kept most of the Zeneca) when I decided to invest in a commercial property for my business.

Others pay the mortgage and I get space to expand.

JM, Surrey

The Fool responds: That indeed was a smart investment. Although ICI has been a poor performer since the demerger, Zeneca has been a real winner. You recognised the value that the drug business held and had the courage and conviction to take the plunge.

That you were able to use the proceeds to prosper in the tough commercial property market makes your investment even more Foolish.

n Send us your smartest or dumbest investment story. If we publish it, you'll get a free copy of the 'Motley Fool UK Investment Guide'. E-mail to UKColumn @fool.com or snail mail to Motley Fool, The Independent on Sunday, 1 Canada Square, London E14 5DL.

The Motley Fool started as an irreverent investment newsletter and has grown to become one of the most popular personal finance and investment websites. Anyone who follows its philosophy is called a 'Foolish investor'

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