There’s plenty of advice floating around these days when it comes to investing in the financial markets. The problem is to find the ones who really is worth something, like the famous “Bob Farrell’s 10 Rules of Investing.” But once in a while I stumble over something that sounds quite wise to me, and I happy to pass it on. Here is the top 20 investing rules for 2011 from the independent advisers at Cabot.net, (And, of course, a copy of Farrell’s classic ” Top 10″.
“Markets are never wrong; opinions are.”
Jesse L Livermore
There is of course different advise for different types of investors. So,the first thing you should determine is what kind of investor you are; a speculator investing to make as much money as possible in the shortest amount of time? Are you investing to save money and preserve the wealth you already have? or maybe you’re an ethical investor trying to make some kind of statement by the way you invest?
There is – however – some advice that are valid regardless of what kind of investor you are.
The following 20 tips from Cabot.net is the kind of sound, good common sence advise. and can be applied to almost every type of strategy.
Enough jaba-jaba from me – here they are:
Cabot’s 20 Best Investment Advise For 2011
1. Cut losses short (definitely rule #1 for growth stock investing).
2. Search for strong sales and earnings growth (especially triple-digit sales growth).
3. Search for revolutionary products with major benefits. First Solar and Crocs filled the bill in 2007 and were our two biggest winners. This year we’ve benefited from Green Mountain Coffee Roasters’ revolutionary Keurig single-cup brewer.
4. Heed the message of the overall market–never fight the main trend!
5. Never average down in growth stocks.
6. Be prepared for all contingencies (always have an exit plan ahead of time).
7. Never try to buy at the bottom or sell at the top (if you try, you’ll just lose more money).
8. To avoid gut-wrenching volatility, stick with stocks that are liquid (at least 500,000 shares traded per day or more).
9. Only put more money to work after your past purchases are showing you a profit.
10. Be humble—making money in stocks is tough, so don’t kill yourself over one or two bad trades. Be thankful when you hit a big winner.
11. Find an investing system that works for you, then follow it. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it’s too late—by then, your emotions are out of control and you’re likely to do the exact opposite of what’s constructive.
12. “Markets are never wrong; opinions are,” is a quote from Jesse L. Livermore, one of the most colorful, flamboyant, and respected market speculators of all time. At Cabot, we agree wholeheartedly with his comment and truly embrace this thinking. And you should, too, if you want to become a successful growth investor.
13. When looking for potential purchase candidates, examine both the company’s fundamentals and its stock’s technical performance. When analyzing the technicals, focus on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.
14. Find a company that has a big idea … one that leaves few if any limits on its future growth potential. It’s these big ideas that create an atmosphere that can push a growth stock to dizzying heights!
15. Warren Buffett once said there were only two rules to follow with your investments: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.
16. Our goal is to get you heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money! But, of course, no market moves in one direction forever. So, when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases, while building up cash by selling your weakest stocks, is a good idea.
17. Be an optimist. In our more than three decades of publishing investment advisories, we’ve seen many ups and downs for both the market and our country. But after every tough event our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because our country and stock market will give you some dazzling opportunities!
18. Diversify your portfolio. For our Model Portfolio in Cabot Market Letter, 12 stocks provide plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
19. Once you’ve invested in a stock, be patient. Recognize that time is your friend. Frequently stocks don’t go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you’ll have a great advantage.
20. Buy growth stocks with strong Relative Performance (RP) lines. RP studies are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!
Bob Farrell’s Classic Rules
When it comes too investment advise, it’s impossible to get around Bob Farrell’s 10 classic rules of investing.
Every trader, saver or investor should have a copy pasted on their wall, or somewhere where they’re sure to be remembered when turbulence are rocking the boat and the so-called experts are more confused than ever.
(You can download a copy at the link below.)
Here’s a quick summary of Farrell’s “10 Rules of Investing”:
1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction.
3. There are no new eras — excesses are never permanent.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5. The public buys the most at the top and the least at the bottom.
6. Fear and greed are stronger than long-term resolve.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-outfundamental downtrend.
9. When all the experts and forecasts agree — something else is going to happen.
10. Bull markets are more fun than bear markets.
Download: Bob Farrell’s 10 Rules of Investing
See also: David Rosenberg: How To Play 2011
On a personal account, I’d like to remind you of John Maynard Keyes well-known quote: “The markets can stay irrational longer than you can stay solvent.”
Worth keeping in mind in this age of quantitative easing.