<<at least I covered my loss on my ATML calls>>
"THE 12 INVESTMENT STRATEGIES OF EVERY SUCCESSFUL INVESTOR"
By: Donald H. Rowe, publisher of The Wall Street Digest and
creator of "The Wall Street Profit System 2000"
Each one of us, whether we realize it or not, is a money manager. We
are
either managing the monthly household budget or investing funds into
the
stock and bond markets, precious metals, real estate, money market
funds, treasury bills, etc. While no one can guarantee you an
investment
profit, there are several basic rules that will give you a much better
chance.
RULE ONE: Know The Primary Trend of The Market! The most important
thing
to know before you invest is the primary trend of the market. If you,
for whatever reason, would like to buy IBM, you would be wise to first
check the primary direction of the stock market. If the stock market is
in a downtrend, it will be difficult or next to impossible for the
shares of IBM or any other company to go up in price.
Or perhaps you would like to purchase a gold mining stock because of an
article you read or a tip from a friend. You should check first to see
if the price of gold is in an uptrend. If the price of gold is falling
or in a downtrend, it will be difficult or next to impossible for the
gold mining shares to go up in price. So the first rule of successful
investing is: Never Invest Against The General Trend of The Market.
RULE TWO: Diversify! Never invest all of your funds in one area such as
real estate or gold or the stock market. Pick several areas, then
further diversify into that area. For example, never invest more than
5%
of your funds into any one stock such as IBM or GM. If you are
purchasing 10 stocks, further diversify by industry. For example, don't
purchase 10 semiconductor stocks or 10 automotive industry stocks.
Barrons may feature an article on the computer or automotive industry
that has a negative bias. When that happens, and it frequently does,
all
of the stocks in that industry decline in price, sometimes for weeks.
Merrill Lynch or some major brokerage house will frequently remove an
industry from its buy list. When that happens, the stocks in that
industry usually decline immediately and continue to decline for weeks.
As a rule of thumb, your investments should be diversified into at
least
three or four different areas. Never invest more than 30% of your funds
into one area such as the stock market, the precious metals market,
real
estate, agriculture, energy, etc.
RULE THREE: Low Priced Stocks Usually Rise Faster In Price Than High
Priced Stocks! Research has shown that during a bull market, a $20
stock
will double in price much faster than a blue chip stock. Eastman Kodak
is a fine company, but at today's prices, the bull market could be over
by the time the price doubles. Two things are involved here: One, the
price and two, the company. Eastman Kodak or IBM already have a
substantial share of their market. Annual growth in excess of 12% to
15%
will be difficult.
A stable, rapidly growing, young company with a $20 share price will,
all things being equal, produce a better opportunity for investment
profit.
RULE FOUR: Cut Your Losses Early! No one can pick ten stocks that will
go up. Chances are seven will go up and three will fall in price.
Establish a 15% trailing mental stop loss on each investment.
For example, if you purchase a stock for $20 and it falls 15% to $17,
sell it. If it goes up in price to $100 and falls 15% to $85, sell it.
All stops should be mental stops. In other words, don't purchase a
stock
for $20 and then tell your broker to sell it if it falls to $17. That
sell order at $17 will sometimes act like a magnet and pull the market
down to $17 just long enough to execute that sell order at $17.
RULE FIVE: Let Your Profits Run! Avoid the urge to be a trader or
speculator. Most traders lose money. The professional traders devote
every minute of every day and still lose money on many occasions.
Successful money managers purchase undervalued stocks and hold them for
the long term.
RULE SIX: Don't Be Emotional About Your Investments! Most of us are
fighting two emotions. When we should be selling, we're fighting greed
because we want a little more profit. When your investment hits your
stop loss point, sell even though the market in general is still
rising. At the bottom of the market, most of us are fighting fear when
we should be purchasing. After the market bottoms and establishes an
uptrend, take a position and then determine your mental stops.
RULE SEVEN: Never Average Down! Many stockbrokers or gold and silver
salesman will tell you to establish a monthly buying program. For
example; some people recommend purchasing a Krugerrand a month at the
market price or 50 shares a month of IBM or Ford at whatever price the
shares can be purchased. That advice might have worked in the 50s and
60s when we had a stable economy, 1% money supply growth and virtually
no inflation.
Today, all investment markets are far too volatile and nervous.
Following that advice today is a sure way to lose money. Always average
up. When you find a good stock that is going up and you have additional
funds, there is nothing wrong with an additional position, but don't
violate the 5% rule. (see Rule 2)
RULE EIGHT: Never Borrow Money To Invest! Using margin to purchase
additional shares of stock is a good way to double your profits. It's
also a good way to double your losses. Always take fully paid positions
when you invest.
RULE NINE: Leave Commodity Investing To The Professionals! I have never
talked with an investor who made money in the commodity markets. Most
investors will invest once or twice and then lose a substantial sum for
a sizeable net loss. The commodity futures market is volatile and it
takes a seasoned pro with nerves of steel to consistently make a
profit.
RULE TEN: Never Invest In Options! 85% of the people purchasing options
don't make money; 85% of options expire unexecuted. You can be right
about the uptrend of a particular stock or a specific market, but a 90
day correction or a sideways market can create a net loss for you.
RULE ELEVEN: Never Get Married To Any Investment! The investment
environment today is far too volatile and uncertain to purchase
something, and then put it in a safety deposit box. Don't hold 1,000
shares of AT&T simply because Uncle Steve gave them to you when he
died. You may believe that gold is the only real money, but why hold
it, even for insurance, if it is going down in price.
If you are holding any investment that you would not purchase today,
sell it today. If you are living in a neighborhood where you sense that
property values have peaked, take a deep breath and sell. Do it before
our home begins to fall from current values. Take a look at everything
you own. Ask yourself: Would I purchase this today as opposed to
something else? If the answer is no, the time to sell has arrived.
RULE TWELVE: Use Patience, Discipline, And Wisdom When Managing Your
money! You need the patience to wait for the right investment. Then you
need the discipline to leave the money alone long enough to grow. Then
you need the wisdom to know when to sell. We'll help you with all three
steps with our monthly commentary in The Wall Street Digest. Timing is
everything in any investment market. |
