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How often we’ve dreamt of a magic formula which only George Soros and Warren Buffet seem to possess, with regard to their wealth accumulation on the bourses. We as investors have read many a book on their investment styles, psychology of investing and what not so as to replicate even a small measure of their success. But alas-there doesn’t seem to be a magic formula for success in the markets. Well there may not be a magic formula, but if as an investor you choose to follow some basic common sense principles mentioned below-you really will not go wrong.

Rule 1- Make the right choice baby 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. 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. 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. Do your research carefully 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%. Also 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. But also don’t 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. 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 2-Sell the right stocks Sell your losers and let your winners run. How many times have you sold a stock that was up a few points while keeping one that was down? Guess what? Wrong move. The stock going up is doing what you expected; the one going down is not doing what you expected. Sell the loser! Not the winner. Also remember 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 3-Buy and sell smartly 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. 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. Also believe in the axiom - 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. Look for opportunities like stock splits etc. or a dividend announcement along with the split which increase scrip prices. 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. If you 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 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. But please balance this out with the principle of marrying your wife (or husband), and not 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. While placing a buy order remember to place a 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. The same rule applies while selling-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 4-Watch the trends 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. In case the company you have invested in does not meet up with the analyst’s estimates remember they 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. The secret of making money at the bourses doesn’t lie in buying low and selling high , but a more an identification of what to buy and what to sell (where many investors go wrong) and then buying or selling the same smartly-i.e.-at the right time and price!

 

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