TEN COMMANDMENTS FOR THE INDIVIDUAL INVESTOR by Tom Heysek thepennystockpicker.com
Dateline: Timeless
1. There is no inside story. Inside information is extremely rare today. It is also illegal. Know this: While it may be possible inside information does get exchanged, and enormous though illegal any profits earned on that information may be, the likelihood of such information landing on your door step is remote. There are no short cuts to basic research.
2. Neither a single firm nor any one individual has a lock on being right all of the time. Prudence dictates that an individual investor never makes a money-decision based on one source. We can promise you that the sensational investments you've missed by taking the time for a second-sourcing will be fewer than the numerous losses incurred by rushing to investment judgment.
3. Let the other guy prove the point. General Patton once said to his troops that the objective of war was not to die for your country but make the other guy die for his. This is relevant since there is ample evidence to confirm the generalization that most individual investors lose money in the stock market By thinking contrarian, by supplementing your existing research protocol with visiting these electronic pages, you'll have a good chance to let other individual investors confirm that generalization.
4. Determine if you are a client or a meal ticket to your financial advisor(s)…and the sooner the better. Three questions to your investment advisor/securities broker or financial planner will assist you in this search. (i) Does this person ever call you without having something to sell?; (ii) Are transaction costs with your broker (virtual or analog) the same for Limit Orders (i.e. you know what you are doing) and for Market Orders (i.e. take my money, please); and (iii) Does this person know your spouse's occupation and first name. If the answer to any of these is NO…you're a meal ticket to this person, and wasting your time.
5. Expect the stock you buy today will decline in value tomorrow. There is no scientific data to confirm the validity of this Commandment…except the real experiences of just about every individual investor on the planet. There are many reasons this happens---a big seller shows up, or the last quarter fell short of expectations and someone knew before you (re-read Commandment #1). The best defense is to have a 15% stop loss attached to those first purchases in establishing a position in order to cut your losses short---and still have some chips to remain in the game at a lesser price.
6. Take your losses and move on. Admit that your long-term holdings at a loss are, in reality, yesterday's promised "Ten Baggers" that struck out. This is especially relevant in today's stock market environment where many companies in the Internet space have diminished by more than 90% in shareholder value. These $2 stocks you may now own are NOT returning to $100 / share, either soon or ever. No one will tell you this. We just did. These companies have depreciated so markedly in value because they are deemed to have no commercial future, and certainly no relevance. Look for new names to add to your portfolio .
7. If you are riding a winning position in a stock, don't be too quick to sell it. Market technicians have completed studies that confirm a rapidly rising stock price is likely to continue to rise with the same probability that a rapidly declining stock price will continue to decline. That, basically, is the theory of Momentum Investing. It's relevance here, for the Individual Investor, is to give a heads-up that selling too early means you'll buy back-in later and probably at a higher price. This Commandment eliminates at least two unnecessary transaction-costs in accumulating your position.
8. Average Up…not Down. Averaging down has arguably altered the lifestyles of more people than former Soviet Premier Josef Stalin. Especially in this current stock market environment reflecting Creative Destruction, do not be awaiting a dead cat bounce in the stock price of a company that you own which is down 90% from where you bought it. Those cats are indeed dead and the only bounce will be the check you've written on the equity in that account.
9. Expect Certain Minimum Levels of Competency. All individuals investors receive "Tips" and "Did you hear?" from brokers, friends and relatives. Here are three simple questions to help you gauge whether this person is wasting your time: Ask (i) What is the market cap of the company (the caller is recommending); (ii) What is the ratio of market cap to trailing 12 months sales; and (iii) What is the trailing 12 months net income (not EPS…real dollars). If the caller cannot give you these facts, you're wasting your time.
10. Know your Competition. As an individual investor, you are ultimately competing with professional money managers. In a one-on one confrontation in the market, you will lose. The objective is to make your little bit of profit before the bigger guys who do this all day long get interested. There are ten movies The Heysek Report has adapted as Movies for Case Studies in Investment Management (or, What Harvard should be teaching).[1] In the Wild Bunch, William Holden tells one of his co-bank robbers to hold the customers at gunpoint, and "If one of them moves, kill 'em". Professional…a minimum of wasted moves. Versus, say an amateur, a word derived from the Latin verb amare...to love…or, to do something for the love of it.
If you are an investor in the stock market, you are competing with the type of person who always had to have all the marbles when a child. Sharing was a problem too. Ironically, the small cap and micro cap sectors of the stock market are probably one of the richer veins for Individual Investors to mine since
larger institutional investors are not yet interested either due to a stock price under $5 /share or due to limited market recognition of that company; and
market inefficiencies can be found among these smaller-sized companies (i.e. current market valuation inconsistent with its commercial outlook);
it is a statistical fact that 83% of all publicly-listed companies have zero coverage by the "Street".
You may not get rich reading The Heysek Report---Commentary about Companies, People and Events. You might even profit from a contrarian POV (point-of-view)…and you'll always know where we stand on any issue or company about which you write into us (see Contact Us button on home page). We are occasionally wrong, but never in doubt.
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[1] Those ten movies are (alphabetically): Day of the Jackal; Godfather; Gone with the Wind; Parallax View; Seven Samurai; The Sting; Sliding Doors; The Thomas Crown Affair; Wall Street; The Wild Bunch. While all of these movies are entirely different, in the context of a Business school Case Study, they all embrace three principals fundamental to any well-run business: Planning; Capital; and Information
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