by Dr Invest
Scott O'Neil wrote: The trait most common among successful investors is not intelligence, experience or intuition. It’s discipline.
This is the ONE FUNDAMENTAL TRUTH that you must master to become a successful investor. Without naming names, discipline is the universal failure of 99% of Finanical Advisors. It is easy for a financial advisor to sell you financial instrument, but seldom is there an effort to keep you from losing money.
If you are fortunate enough to have some money to invest, IT IS UP TO YOU TO KEEP IT! The idea of INVEST and HOLD can't remain viable when you lose 40% of your investment one year and 30% two years later. You need to develop new DISCIPLINES that help you LIMIT YOUR LOSSES and CAPTIALIZE ON YOUR GAINS.
Pride leads us to rationalize losses, and hope makes us hold on to stocks that can demolish a portfolio. Not only do rules prevent disaster, they represent a consistent approach to making profits and taking better control of your portfolio. - Scott O'Neil
Selecting Stocks
Portfolio Management
Develop a SOUND PORTFOLIO STRATEGY before buying a bunch of stocks. You need to know why you are buying a stock, otherwise you will have 50% of your portfolio invested in one fast rising market trend and if there is a sudden downturn, you will lose much more than you want to lose. By spreading your investmest over a variety of corporations that do different things, you will find greater safety. Diversification rules also help balance portfolios against the risk of excessive industry group concentration. For example, an investor might have a rule of never being more than 25% invested in any one industry group.
Buy Rules
Just as important as codifying “what to buy” is “when to buy.” Some investors question whether you can time a stock or time the market. For us, there’s no question. You use charts to time the market and stocks, which can enable you to make gains well above average and avoid the losses of major downturns. Timing buys and sells is one of the few advantages the individual investor has over the institutional investor.
Rules trump emotions by telling you objectively the best time to buy. Basic timing rules stem from observing a stock’s behavior on a chart. If a stock has been running up for several weeks, the odds are it will pull back at some point. So have a rule that prevents you from chasing an extended stock and getting caught in that pullback. Also, have a rule that prevents you from buying a stock that is trending down. A downward-trending stock has a high probability of going lower before it comes back. Remember, weakness begets weakness in the stock market. Buy rules identify areas in a stock’s price movement where you can enter with the lowest risk of price decline and the highest probability of price gain.
Don't plan to buy without already determinging how much you plan to lose. Listen! If you buy $10,000 of XYZ STOCK, you are buying it because all of the signs are showing that the stock is in an UPTREND. You are not buying the stock because you want to loose money or expect to do so. There are some regular up and down cycles on a daily basis. Consider those cycles and then determine how much your stock might go down, before it goes up. For instance, $800 is 8% of your $10,000 investment. Set your STOP-SELL at 8% below your purchase price. If the stock falls below 8% it will automatically sell. You will have lost 8%, but an 8% loss is better than a 20, 30, or 40% loss because you were overly confident in your judgement to select stocks. Take your 8% loss and comeback another day to purchase a stock that will continue to grow.
In January, I saw a great entry point for OIL STOCK. I purchased APA (apache). I held the stock only four or five days and the turmoil in Egypt caused the stock to drop. When it sold, I lost 4% of my investment. Two months later, I bought into APA once again even doubling my previous investment, when it began to falter once again, my STOP-SELL sold it at a 26% gain. The moral of this story is that you can be confident within the BUY RULES you have set and keep that confidence because you know that the RULES provide a safety net. When you are WRONG, you will lose a little; but when you are RIGHT, you will gain alot.
Sell Rules
Scott O'Neil writes: Ideally, investors should use two sets of sell rules: one that helps them lock in a profit and one that protects them against excessive losses. As a position begins to show a large profit, or a large loss, emotions can influence your decisions more strongly. That’s why sell rules are so important. They help you subdue those costly emotions and focus on the best course of action based on facts.
Our number one rule for preserving capital and preventing runaway losses is to limit losses to 8%. If we’ve done our homework correctly and entered the stock at the right point, our position should never be down 8%. If it is, it means we’ve either done something wrong or invested in a poor market environment. Either way, mistakes are always corrected immediately. Cutting losses short also keeps you out of the pride trap: “I know I picked a good company … it will come back.” Or the hope trap: “I hope it will come back so I can sell it and break even.”
This is what I know, Scott is RIGHT! If a stock is losing, SELL IT! Don't wait around for it lose more. Even more important, if the stock is going down and you are losing money don't invest more into the stock thinking that you are DOLLAR COST AVERAGING. This I promise, most of the time you will lose money. If DOLLAR COST AVERAGING on stock seems to be a good idea to you, THINK GE (general electric). Before the crash in 2008, it sold for $41.77. Today you can buy it for $16.31. In 2008, I owned GE and the best day of my life was when my STOP-SELL sold GE.
Don't buy a stock unless you have a STOP-SELL attached to it. Understand that a stock will not always continue to grow. Apple will not continue to grow, Amazon will not continue to grow, at some point they will turn downward and you want to move your STOP-SELL behind your growing stock. This aways depends on the average market flucuations. But should the stock become volatile, I begin to move my STOP-SELL closer to the market price to maximize the gains on the stock.
Market Trends
I am sure you have heard, "The Trend Is Your Friend". Remember that the majority of stocks always follow the overall trend of the market. Therefore, the first market rule is “the trend is your friend.” No matter how great a stock’s fundamentals, if the market is in a downtrend, we don’t want to own it.
There are also those rare times when it is better to be fully in cash—such as 2008. When the market dropped that year, it didn’t matter how strong a stock’s fundamentals were or how compelling the underlying story was, all stocks got hit. The signs of abnormal market action were clear in the charts of the major indexes and leading stocks. If those investors who took a major hit had been following a set of investment rules and tracking the movement of their holdings on stock charts, they would have gotten out of the market in time.
Although some traders see no benefit in looking at historical trends, I have found historical trends to be invaluable to the individual investor. A market in up-trend will see most of its gains between the end of October to the first part of January. The seasonal effects of Halloween, Thanksgiving, and Christmas act upon the market in powerful ways. Don't under estimate how these seasonal trends can increase your portfolio by 15 to 20%. Also, be reminded that no seasonal effect can overcome a market caught in a strong down-trend.
Stick to the Rules
Rules are only as valuable as your discipline in following them. Adopt a set of rules that aligns well with your approach to investing, whether it’s growth or value—and stick to them! Following the rules will save you alot of grief and give you confidence as you invest.
(Note: The above article is for entertainment puroses only and not to be used to make any financial decisions.)
credits to Scott O'Neil at AAII
Questions can be directed to DrInvest at drinvest@mail.com
by Dr Invest
Getting A Good Brokerage
I have already suggested OPTIONSHOUSE as a great discount brokerage firm. Trades are only $3.95 per trade. http://optionshouse.com/ OptionsHouse provides a great trading platform, great record keeping with end of the year tax schedule for stocks traded. When you open an account, you can also utilize a VIRTUAL TRADING ACCOUNT. Adding the amount to the virtual account you want to trade, you can experiment with trading just like you had the money in the account. When you feel confident that you have found a METHOD of TRADING that consistently works, you can begin trading with real money in your real account.
Keeping An Eye On Things
Another simple tool that I have found very helpful at following investments at a glance is Investor Dashboard. Sign-up is simple, you provide a name and password and you have access to the Dashboard. http://investordashboards.com/ By going to EDIT PROFILE, you can enter the STOCK SYMBOLS and even the 50 day and 200 day moving average under chart options. (or whatever moving averages you might choose) REMEMBER that Dashboard is a DELAYED CHART and NOT IN REAL TIME. It is delayed by 20 minutes and shouldn't be used except to see general trends.
I like charts that are a little larger so I choose 4 charts across. The page will fill up with the selected charts for 3 months of data or however many months you choose; and when you put your cursor over the charts, you can see the INTRADAY CHART.
I am typically looking at a 6 month chart with a 50 day and 200 day moving average. In INVESTOR DASHBOARD, I can enter various stock titles and then follow those titles. For instance, OIL STOCKS, FINANCIAL STOCKS, TECHNOLOGY STOCKS, or HEALTH STOCKS, and then follow the stocks in that group.
This year, I have selected at title called, DOLLAR STORES, represented by: DLTR, DG, FDO, and NDN. I created another title called, FAVORITE STOCKS, represented by: CATM, PETM, APA, and COST.
I am looking for consistent increases in the price of the stock. A twenty day move showing a trend is good, a fifty day move in a trend is better. The upward trend in the market since the first part of October is positive. A continued trend would indicate that some of these stocks should be purchased before the end of October and sold before the end of December.
The Dollar Stores will likely be busy over Halloween, Thanksgiving, and Christmas. Because of the economic climate, more purchases will likely be made at Dollar Stores. CATM is an ATM company and people will likely be getting cash. PETM is Pet Smart, people are likely to purchase things for their pets over the Holidays.
The goal is a 4 to 8% gain before the end of the year. It is looking like we could have a year-end rally, but patiently waiting another 7 days would be a safer choice before making a purchase and could provide an opportunity for the market to decline so as to provide a good entry point to make a stock purchase.
Closing Ideas
If you don't have a brokerage, or your brokerage is charging too much to broker stocks, consider OptionsHouse. Also, try Investor Dashboard, it costs nothing and is a great tool to be viewed over your computer or mobile phone.
(note: For entertainment purposes only, not to be used for any kind of financial advice.)
