Rule 1– Make the right choice
Buy a Winner, Own a Winner. That’s right. You don’t have to reinvent the wheel to be an investor who makes money. By that I mean, you don’t have to find an undiscovered stock to do well. Buying companies that consistently do well is a good concept. Don’t take tips from your neighbor. Unless, of course, he is qualified. But most of your neighbors aren’t qualified. Most likely your neighbor is just repeating something he heard from someone else. Kind of like the game whispering down the lane. We all know how that works. Yes, stories change. Do your own research, or use a professional. Remember, the masses are usually wrong. When all the pundits on CNBC say the market can only go lower look for a turn up. By the same token, when everyone says the market is surely headed much higher brace yourself for a correction. Pay attention to extreme investor psychological levels in both directions as they usually mark both bottoms and tops.
Rule 2–Sell the right stocks
Sell your losers and let your winners run. How many times have you sold a stock that was up a few points while keeping one that was down? Guess what? Wrong move. The stock going up is doing what you expected; the one going down is not doing what you expected. Sell the loser! Not the winner. Also remember it is better to average up than to average down. Stocks go down for a reason. If you buy a stock and it goes down, why buy more? If you have a stock that is going up, well, wouldn’t you want to own more of your winners?
Rule 3– Buy and sell smartly
Consider buying when there is blood in the streets. Of course we don’t mean this literally. But the historical fact is that the stock market goes up, the stock market goes down and then the stock market goes back up. When the market has been slaughtered there are always opportunities. Never buy a stock just because it has a low price. Price can be one of your parameters, but it should not be the only one. Buy stocks that you think will go up. People are use to hearing buy low and sell high. You don’t have to buy low. You just have to buy stocks that you think will be going up. That’s how you make money.
Rule 4–Watch the trends
Stocks tend to move in groups. That’s why many stocks in the same sector like technology, health care, or banking, as examples, move in the same direction at the same time. You don’t have to look for a star in a sector devoid of other bright lights. When possible, find your stars in clusters of other stars. In case the company you have invested in does not meet up with the analyst’s estimates remember they are just that estimates. Companies may earn significantly more or less than analysts believe they will.