You often hear market commentators state that, “It is a stock pickers’ market.” Well, unless you are buying tens of thousands of publicly listed securities throughout the world, by definition you are always a stock picker. But are there times when stock picking becomes even more essential to determine returns? I would argue the answer is yes, and now we are in one of those periods.

Let us split the market into 3 buckets: wildly overvalued (think 1999), hugely undervalued (how would you like to be back in March 2009 with some cash on hand?) and fairly valued. It is this latter market condition when stock selection becomes increasingly important to achieving superior returns.

The opportunities arise when an otherwise great company temporarily falters and provides you the chance to buy this security at 10-20 percent less than the day before. It is like a micro-crash; rather than the whole market dropping, a given stock drops due to a non-fundamental reason and gives you the opportunity to pick up shares for relatively cheap amounts.

But you need to have the ammunition (the cash) to take advantage of such opportunities. Also, you need to have a watch list of high quality companies you are tracking. If your portfolio consists, for example, of 30 – 50 positions, you should have another 50 – 150 companies you monitor regularly from a fundamental and technical standpoint. That way, if opportunity (not disaster…at least not for you) strikes and one of these companies makes the “percent losers” list for the day, you will not be starting from scratch on your research. It is vitally important to note that there is bad news and there is bad news. Sometimes stocks crack because the company is broken. In this case, you need to resist the temptation to purchase what may appear to be a bargain but may instead be a falling knife. This is usually the case when the news relates to things like restating financials or executive departures. As the saying goes, “it is rare that there is only one cockroach in the kitchen.” So when news like this hits, monitor the situation but don’t pull the trigger yet. There are often additional down legs to be had, especially as all the investment banks pile on their after-the-fact downgrades, putting further near-term downward pressure on the stock.

The scenarios I am referring to are when good companies falter on a short term basis. Some great examples are QCOM’s earnings call a few quarters ago. In April 2010, the company announced earnings and basically blew the conference call and said all the wrong things. The stock proceeded to drop over 20 percent in days during an otherwise strong market. Soon thereafter the company boosted its dividend (a sign of future confidence) and generally re-instilled investor confidence. Since that time the stock has rallied about 70 percent, far outpacing the broad market’s gains. Here was a great opportunity to own a high quality company at a lower price, and the lowest price always wins the returns game. But you had to have done your homework ahead of time; you had to be aware of the drop – and why – and you had to have the cash available to take advantage of the opportunity.

The reality is, it is always a stock pickers’ market. That is just a cute term financial commentators use when they want to look smart and have nothing meaningful to say about the overall market. However, after big run ups, when stocks in general are neither screaming buys nor screaming shorts (betting against them – another animal entirely), knowing how and when to pick up some shares on the cheap can be a good way to reduce risk in your portfolio and enhance returns.