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12 Basic Stock Investing Rules Every Successful Investor Should
Follow
There are
many important things you need to know to trade and invest
successfully in the stock
market or any other
market. 12 of the most important things that I can share with you based on many
years of trading experience are enumerated below.
1. Buy
low-sell high. As
simple as this concept appears to be, the vast majority of investors do the
exact opposite. Your ability to consistently buy low and sell high, will
determine the success, or failure, of your investments. Your rate of return is
determined 100% by when you enter the stock market.
2. The stock
market is always right and
price is the only reality in trading. If you want to make money in any market,
you need to mirror what the market is doing. If the market is going down and you
are long, the market is right and you are wrong. If the stock market is going up
and you are short, the market is right and you are wrong.
Other
things being equal, the longer you stay right with the stock market, the more
money you will make. The longer you stay wrong with the stock market, the more
money you will lose.
3. Every
market or stock that goes up will go down and most markets or stocks that have
gone down, will go up. The more extreme the move up or down, the
more extreme the movement in the opposite direction once the trend changes. This
is also known as "the trend always changes rule."
4. If you
are looking for "reasons" that stocks
or markets make large
directional moves, you will probably never know for certain. Since we are
dealing with perception of markets-not necessarily reality, you are wasting your
time looking for the many reasons markets move.
A huge
mistake most investors make is assuming that stock markets are rational or that
they are capable of ascertaining why markets do anything. To make a profit
trading, it is only necessary to know that markets are moving - not why they are
moving. Stock market winners only care about direction and duration, while
market losers are obsessed with the whys.
5. Stock
markets generally move in advance of news or supportive fundamentals -
sometimes months in advance. If you wait to invest until it is totally clear to
you why a stock or a market is moving, you have to assume that others have done
the same thing and you may be too late.
You need
to get positioned before the largest directional trend move takes place. The
market reaction to good or bad news in a bull market will be positive more often
than not. The market reaction to good or bad news in a bear market will be
negative more often than not.
6. The
trend is your friend. Since the trend is the basis of all profit, we need long
term trends to make sizeable money. The key is to know when to get aboard a
trend and stick with it for a long period of time to maximize profits. Contrary
to the short term perspective of most investors today, all the big money is made
by catching large market moves - not by day trading or short term stock
investing.
7. You must
let your profits run and
cut your losses quickly if you are to have any chance of being successful.
Trading discipline is not a sufficient condition to make money in the markets,
but it is a necessary condition. If you do not practice highly disciplined
trading, you will not make money over the long term. This is a stock trading
“system” in itself.
8. The
Efficient Market Hypothesis is fallacious and is actually a derivative of the
perfect competition model of capitalism. The Efficient Market Hypothesis at root
shares many of the same false premises as the perfect competition paradigm as
described by a well known economist.
The
perfect competition model is not based on anything that exists on this earth.
Consistently profitable professional traders simply have better information -
and they act on it. Most non-professionals trade strictly on emotion, and lose
much more money than they earn.
The
combination of superior information for some investors and the usual panic as
losses mount caused by buying high and selling low for others, creates
inefficient markets.
9.
Traditional technical and fundamental analysis alone may not enable you to
consistently make money in the markets. Successful
market timing is
possible but not with the tools of analysis that most people employ.
If you
eliminate optimization, data mining, subjectivism, and other such statistical
tricks and data manipulation, most trading ideas are losers.
10. Never
trust the advice and/or ideas of trading software vendors, stock
trading system sellers, market commentators, financial analysts, brokers,
newsletter publishers, trading authors, etc., unless they trade their own money
and have traded successfully for years.
Note
those that have traded successfully over very long periods of time are very few
in number. Keep in mind that Wall Street and other financial firms make money by
selling you something - not instilling wisdom in you. You should make your own
trading decisions based on a rational analysis of all the facts.
11. The worst
thing an investor can do is take a large loss on
their position or portfolio. Market timing can help avert this much too common
experience.
You can
avoid making that huge mistake by avoiding buying things when they are high. It
should be obvious that you should only buy when stocks are low and only sell
when stocks are high.
Since
your starting point is critical in determining your total return, if you buy
low, your long term investment results are irrefutably better than someone that
bought high.
12. The
most successful investing methods should
take most individuals no more than four
or five hours per week and,
for the majority of us, only one or two hours per week with little to no stress
involved. |
