Whether you are looking to improve your retirement investing or better ways to invest in equities, our critical investing rules will maximize your returns.
Here’s the second half of our list.
6.Say NO to Bottom Fishing – This rule follows from those above. Bottom fishing involves finding seemingly undervalued stocks and buying them at a bargain. The problem with this approach is that it ignores the industry and market components of stock analysis. The reason some stocks appear to be undervalued is often because their industry is out of favor. This means that the big funds don’t like the near term prospects for their industry and are therefore ignoring the stock. Your stock price won’t advance unless the funds buy into the stock.
So what’s wrong with buying the stock anyway and waiting for the funds to come around? Well the problem with that is timing. You have no idea if the industry will move into favor in a month or a matter of years. Further, while you wait other variables start to change. The metrics for the stock, its industry and the overall market may shift. So, say no to bottom fishing –too many moving parts in an uncertain future.
7. Add Market Rules – As part of your investment plan, don’t forget to include Market Rules. Above I stated that you must have both upside targets and downside stop loss rules in place before buying a stock. The same holds true for market rules. Your stock analysis was made with underlying assumptions about overall market conditions. If those conditions change this alters your views on holding the stock. So you must incorporate market rules into your investment plan.
You might have a rule that you sell all your holdings once the market goings “into Correction”. You might have a rule that you don’t re-enter such a market without seeing a week long recovery process with evidence of significant fund buying. Whatever rules you decide upon, your plan won’t be complete without them.
8. Undecided? Sell half – Indecision is usually the enemy of the personal investor. Often you find yourself in situations where you’re not sure whether to sell or not. Your stock has advanced strongly but you feel it will continue to advance. Your stock has declined but you feel a rebound is insight. What to do?
I’ve found that in such situations the correct answer is to sell half. Take some of your profits. Cut some of your losses. Don’t be frozen by indecision – Sell half.
9. Beware the Earnings Report – As a rule I don’t buy a stock when it has a quarterly earnings report due out within the horizon of my likely sell decision. What do I mean? Well, if I believe that a stock will advance at least 10% within the next three months I won’t buy the stock if an earnings report is due out within say a month.
SEC quarterly required earnings reports are a minefield. Each of the funds that owns the stock have expectations as to what those reported earnings will be. That’s why they bought in the first place. If those earnings don’t meet expectations they often dump the stock causing its price to dive. The problem is that you don’t know what the expectations are. A company could issue an earnings report showing great earnings when the funds thought they’d be even better. The stock dives and you’re left scratching your head. I’ve had this happen many times. So, don’t gamble – pick stocks without earnings reports on the horizon.
Updated earnings report information is available free through many on-line sources such as Yahoo.com. Some paid services such as Bloomberg.com offer these resources for as little as $2 per month.
10. Program in those Targets and Stops – It’s one thing to have rules for executing sells when target prices are reached or stop loss points are reached but it another the actually pull the trigger on those trades. The enemies of fear and greed take over. You question the decision.
Don’t fall into this trap. Use your computer to program in automatic trades once decision points are reached. Set an automatic upside sell at +10% when you buy the stock. Also when you buy, program in your downside stop loss of -6%. Program your sell rules in at the time of purchase and leave fear and greed in the dust.
That’s it. Practice our 10 rules for the personal investor and you’ll build a strong foundation for successful and profitable equity investments.
Island Equity Systems designs and markets equity trading systems for the personal investor