Rule Number 2. 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. I would much rather own 200 shares of a $20 stock that has earnings behind it, than 2000 shares of a $2 stock that has nothing but a story behind it. If you want to gamble, go to Las Vegas.
Rule Number 3. 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 Number 4. Buy when the people that “know,” buy. Who are the people that “know”? The people who run the company of course. If the officers and/or directors of a company are making purchases of the company stock in the open market, that is a good sign. Remember, we don't mean if they are exercising options they have been granted. We mean buying stock in the open market, just like you do.
Rule Number 5. Buy…Sell Higher. 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 Number 6. Watch the trend. 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. It could make for a longer, straighter ride.
Rule Number 7. Only use margin if you understand what it is and can afford to lose more than you invest. Margin is borrowing money to buy more securities. I have known some brokers who actually told their clients, and I quote, “The amount of money you make in the market is predicated on how many shares you own.” Guess what! It's not! It is predicated on whether or not the stock you own goes up! If it doesn't go up it won't matter how many shares you own. You'll lose money. Make sure you know how much money you have at risk.
Rule Number 8. Stocks that split can offer great opportunities. And even better opportunities are sometimes found with stocks that announce a dividend increase along with the split. Sometimes after a split, a stock will come down a little because of a run up in price caused by the announcement. Look for the bottom, if that happens and enjoy the ride.
Rule Number 9. 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.
Rule Number 10. Buy on rumor. Sell on News. Many times the price of a stock will go up because there is a rumor about a company. A rumor is different than a “story.” A rumor is based on fact. A story might not have any facts attached to it. Where do these rumors come from? Who knows? But who hasn't heard of the company that has a drug with a scheduled FDA hearing and the thought is, they are going to get approved? Or the buyout that is going to happen? Or the big deal that makes sense for a company? If you are buying into one of these rumors, sell when you hear the news, good or bad, most times you will be better off. By the way, if the rumor never turns into an announcement, pick your time to sell. You bought the stock for a reason. If the reason is not there…SELL.
Rule Number 11. 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.
Rule Number 12. Look around you before you invest. A great way to invest is to look for companies you know or do business with. Is your bank a public company? Do you shop at the large homebuilding stores? What about your supermarket? Is there one that stands out? Which products do you like? Look around and you might come up with a great investing idea.
Rule Number 13. Don't take large positions in illiquid securities. You don't want to buy a lot of stock in a company that doesn't trade much or one that has a very small float. When you go to sell your stock you could easily drive the price down. If you get into a stock, make sure you will be able to get out of it.
Rule Number 14. P/E/G not P/E. It is not enough to look at the Price Earning Ratio of a company. You need to look at the P/E Ratio versus the past, current and estimated future growth rate. If a company has a P/E of 15 and is growing at 12% annually, all things being equal, it probably will not do as well as a company with a P/E of 20 which has a growth rate of 25%.
Rule Number 15. Diversification can save your life…your investment life that is. This is the proverbial “don't put all your eggs in one basket,” rule. We are not trying to gamble here; we are trying to invest. Don't put so much money in one stock that if it doesn't work out it will change your lifestyle for the worse.
Rule Number 16. Over diversification can give you a false sense of security. Most people don't need to own more than 4 or 5 mutual funds to have maximum diversification. If you invest in multiple mutual funds of the same type, large cap growth for an example, you will find they will own many of the same issues. That is duplication, not diversification.
Rule Number 17. Act, and act quickly. Let's say you call your broker to buy a stock, or perhaps your broker has called you and you decide you want to enter an order. Once you have made the decision you should live by the “Nike” slogan. Make it your credo. “Just Do It.” Don't inquire about other stocks or ask how the family is doing. If you make a buying or selling decision, do your business so you don't miss your price. Sometimes stock prices change quickly. Ask your other questions after you have made your trade(s).
Rule Number 18. Limit your limit orders. If you are an investor, the difference of an eighth of a point shouldn't matter to you. Putting in a limit order to buy could cause you not to get an execution on a stock that you like and is moving up. If you want to invest in a company, invest in that company, don't leave it to chance.
Rule Number 19. If you are an investor, don't over trade. Investors do just that, they invest. For the relatively long haul, at that. If you buy a stock for a reason and the reason does not change and there are no mitigating factors. Hold the stock. Remember, let your winners ride and sell your losers.
Rule Number 20. 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.
Rule Number 21. Don't give stop orders that are too tight. If a stock has a normal trading swing of 1 ½ points in a day, don't put in an order to sell if your stock drops 1 point from where you bought it. You could get “stopped out,” not because of a drop in the stock price, which was caused by something extraordinary, but because of the normal price gyrations of the stock.
Rule Number 22. Marry your wife (or husband), don't marry a stock. Many people get caught up in one or two stocks or one or two industries and hold them forever, even if they are holding on for dear life. There are stocks that go down a lot and never come back. Divorce them.
Rule Number 23. Beware the wicked witch. The third Friday of the months of March, June, September and December are triple witching months. That means that options on stock, futures and index's all expire at the same time and often cause wild gyrations in the market. It can create opportunity, but could also be dangerous. Do not take these facts lightly if you are going into the market around triple witching day.
Rule Number 24. Don't be penny wise and dollar foolish. There are a lot of people out there offering advice on investments. If you are taking advice, concern yourself with more than the commission or the fee. After all, if you own stocks such as First Pacific Networks, Sci-clone Pharmaceuticals, Singing Machine, Magic Restaurants, or Continental Savings and Loan Preferred, it doesn't matter how much you paid for commissions or fees, you probably have lost a lot of money. Value is in the total profitability of your investments, not in the commission costs.
Rule Number 25. Beware the Hustler. There are three types of people in the investment business. There are those that hurt you because that is what they do for a living. There are those that can hurt you because they don't know any better, they just don't know what they are doing. Then there is the third group, the group that Michael Gold and Lee Siler belong to. That is the group of financial professionals who truly can help you. So the next time someone calls you on the telephone and tells you they have the next great stock and it is going to run to $50 and then split and run to $50 again and then split again and run to $50 again and then split again. Look into the telephone and tell them to call you back once the stock has run to 50 and then split the first time. You will still make a lot of money if the scenario comes true. When someone calls you and says they have found a company that can make aluminum out of sand (we actually heard this one), and that the stock will have a big run up in price, tell them to call you after the product is in production and is selling in the United States. Buy quality and earnings, not stories. Oh, one more thing, when someone tells you that you should buy low priced stocks because it is easier for a $2 stock to double than a $20 stock, do yourself a favor and hang up the telephone. In the long run, you will save yourself a lot of money and a lot of heartache.
Rule Number 26. 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 Number 27. Remember that analyst estimates are just that: estimates. Companies may earn significantly more or less than analysts believe they will. It is more important to watch the stock price performance heading into an earnings announcement than to focus on what analysts are saying. You will often see a stock's price run up significantly BEFORE the company announces better than expected earnings.
Rule Number 28. B uying options is a speculation, not an investment. When you buy an option you have to be right about both the move in the underlying security as well as the timing. This is why eighty percent of options expire worthless.
Rule Number 29. Tax consequences must come second to performance. Do not hold a stock solely to avoid paying a capital gain. If the stock is headed lower at some point you must protect yourself and pay the IRS. We have seen numerous instances where people have not sold a stock to avoid paying a capital gain only to have that gain disappear.
Rule Number 30. Find your comfort level. At night you need to be able to put your head on your pillow and go to sleep. If you can't do this owning a handful of Internet stocks, then don't own Internet stocks. It is your money, not your broker's. If you are not comfortable with the investments you own then it is time for a change.
