Whether you are looking to improve your retirement investing or better ways to invest in equities, our critical investing rules will maximize your returns.
Personal investing systems, while not for everyone, can often provide the personal investor the discipline to both beat the market and even vault investment returns north of 20%.
Here are our top 10 investing rules that should be incorporated into every personal investor’s system.
1. Have a plan – Most personal investors go in without a solid plan and are doomed to failure before they begin. Why is a plan important? It’s simple. Investors face two obstacles in making money in the markets – Fear and Greed. Fear creates a herd mentality and causes investors to panic and sell low when prices are going south. Greed causes investors to fail to take profits during good times and instead ride their winners back down the price curve.
A solid plan prevents both. A solid investment plan defines when you’ll sell your equity investment before you even buy the stock. (e.g. Buying a $25 stock with a firm target sell price of $30.)
A solid investment plan also defines when you’ll sell your equity stock should it suffer a price decline. (e.g. Buying a $25 stock with a downside stop loss at $22.50)
A solid plan commits to a specific upside sell rule to avoid the dreaded greed trap. It also commits to a downside stop loss which avoids being frozen with fear when things go south.
2. Concentrate on EPS – As a personal investor there are so many variables to study when analyzing stocks. Lots of things are important. It’s overwhelming. But one metric is always important and is usually the most important. That’s EPS – Earnings per share. Every investor large or small studies EPS. Forecast EPS drives target prices for the big mutual funds determining their buy and sell points. In our view it’s the most important metric and is always the place to start your stock analysis.
3. Understand what the funds are doing – As a general rule, always try to understand what the big mutual funds are doing before beginning your stock search. Why? Well the funds control the market. I mean REALLY control the market. In the US alone, there are over 9,000 mutual funds with $19 Trillion to invest. You must understand if the big money is buying or selling before you invest. Don’t be the salmon trying to swim up-steam. Always understand and then follow the funds.
4. Market and Industry are very important – We all find favorite stocks. But the metrics of an individual stock are only as good as the industry it’s in and the overall market direction. Let me explain. At a point in time, some industries are in favor and some are not. The big funds are investing in industries in favor driving their stock prices up. They are ignoring those industries that our not in favor. Picking a stock within an out of favor industry is like sitting in a car that is out of gas. As good as the car may look and feel it’s not going anywhere.
The overall market conditions also have a big impact on individual stock prices. In an up market about 70% of the stocks are advancing. In a down market about 80% are declining. No matter how good an individual stock is, if the market direction is downward it will be tough to make money buying that stock. The rule is – always incorporate market and industry assessment into your investing process.
5. Study the charts – Years ago when I started investing, I used to think that charts were just hocus pocus. Determining a stock’s underlying value in relation to its current price was my only focus. I soon learned that this approach ignored a very important part of stock analysis – the psychology of the market. Charts tell you a story about a stock or the market itself. For example, a good stock that is currently coming out of a trough and going sideways may just be shaking out old shareholders replacing them with new shareholders more likely to hold their stock. Such a pattern is often the precursor to a major price advance. Understanding the chart pattern and the underlying psychology involved is the key to identifying this potential major stock move.
Stock charts, EPS, Debt levels and even recent fund action can be found in many free on-line statistical sources including Yahoo Finance,
That’s the first half of our list. Be sure to read part 2 since some points on that list are extremely important.
Island Equity Systems designs and markets equity trading systems for the personal investor