25 Investing Rules, Tips and Books
In Case You Missed It
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By now you may have heard of the "25 Random Things" phenomenon that has swept Facebook and been written about in The News York Times, CNN and the Wall Street Journal. The idea is not new; it takes a page from the old chain letters that circulated on the Internet in its early days, but it has really taken off. The concept is that your friends write 25 things about themselves that they then send to you in hope of learning 25 things about you. Some have used this as a forum to spill their guts, while others have sternly refused to participate.
I'm not into confessionals, so I'll use the concept to write 25 top investing rules, tips and books that I've compiled from the advice our editors have given over the years. (Most of these are for growth investors, but there are a few things for value investors, too.) What are your top investing rules? Maybe you don't have 25, but if you have a few helpful ones to share with us and your fellow investors, please do so on our blog, http://www.iconoclast-investor.com.
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).
4. Heed the message of the overall market.
5. Never average down in growth stocks.
6. Be prepared for all contingencies (always have an exit plan ahead of time, just in case).
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 600,000 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. 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 will be 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 investor.
13. When looking for potential purchase candidates, examine both the company's fundamentals and its stock's relative 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. Finding 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. We call this STAYING POWER!
20. Buy growth stocks with strong RP lines. Relative performance (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!
The last five are investing books we highly recommend:
21. "How to Trade in Stocks," by Jesse L. Livermore. It's a great account from Livermore himself on some of his key principles of trading. One of the big lessons editor Michael Cintolo learned: Be patient not just with winning stocks, but also practice patience when waiting for the next big move.
22. "How I Made $2,000,000 in the Stock Market," by Nicholas Darvas. This book will take you through a progression from total novice to super-successful investor. It's a great read to reinforce some of the market's basic principles.
23. "Technical Analysis and Stock Market Profits," by Richard Schabacker. If you're just beginning in the world of chart reading, this is a good guide. We don't subscribe to all of the patterns he talks about, but it's still a great place to start.
24. "The Intelligent Investor," by Benjamin Graham. Penned in 1949, the book has since been called "by far the best book on investing ever written," by Warren Buffet, one of Graham's students and followers. Editor and analyst J. Royden Ward uses the criteria outlined in the book to select the stocks for the Classic Benjamin Graham Model found in the Cabot Benjamin Graham Value Letter. Most value-oriented investors believe this is one of the best books ever written.
25. "Market Wizards," "The New Market Wizards" and "Stock Market Wizards," all by Jack Schwager. They contain great interviews with a few dozen of the best investors in the world. You are guaranteed to learn some valuable things, about both the market and yourself.
I hope you enjoyed our list of 25 investing rules, tips and books. What are your top investing rules? Maybe you don't have 25, but if you have a few helpful ones to share with us and your fellow investors, please do so on our blog, http://www.iconoclast-investor.com.
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Discover the Next Stock Market Leaders
Cabot's proprietary screening software ferrets out the 10 strongest stocks each week, no matter what's happening in the market. The Report routinely beats the market by finding strong leaders like these past picks:
In 2005, Hansen Natural gained a whopping 570%. In 2006, NutriSystem was up an amazing 480% in 11 months. In 2007, stocks like JA Solar were up 200% in seven months, DryShips was up 510% in 10 months and Research in Motion was up 149% in seven months.
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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 2/9/09 - Building Blocks of a Solid Portfolio
On Monday, Paul Goodwin wrote about why lowering the short-term capital gains tax would help stimulate the economy. He also wrote about two investing rules that can help you build a solid growth stock portfolio. Paul finished up with a recommendation for an exchange-traded fund with broad exposure to the Chinese market. Featured Stock: iShares FTSI/Xinhua China 25 Index (FXI).
Cabot Wealth Advisory 2/10/09 - Shipping Stocks are Starting to Rebound
On Tuesday, we had a guest writer, StreetAuthority Editor Amy Calistri, who explained why shipping stocks have a bright future ahead of them while paying monstrous yields. Amy explained why shipping stocks have fallen in recent months and what signs she sees that they are rebounding. Featured Stock: Navios Maritime (NYSE: NM)
Cabot Wealth Advisory 2/12/09 - How You can Prepare for Economic Crisis
On Thursday, Timothy Lutts wrote about a book he recently finished called "The Fourth Turning," written by sociologists William Strauss and Neil Howe. The book deals with the authors' conception that progress in America is not linear but comes in predictable cycles, all because succeeding generations grow up influenced by--and reacting to--the behaviors and values of their parents' and grandparents' generations. The authors also suggest some steps that you can take to prepare for economic crisis. Tim also wrote about a stock that recently popped up in Cabot Top Ten Report. Featured Stock: Brinks Home Security (CFL).
Cabot Wealth Advisory 2/13/09 - Markets are Never Wrong; Opinions Are
On Friday, Michael Cintolo wrote about the soon-to-be-passed stimulus package, and whether its purpose is to actually stimulate a boom ... or merely cushion the downside. Mike also wrote about some key levels in the market to watch, along with a small out of the way leading stock that gapped up on earnings and has a terrific turnaround story. Featured Stock: American Italian Pasta (AIPC).
Until next time,
Editor of Cabot Wealth Advisory
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