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20 Rules for Investment Success
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Nostradamus
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25-Sep-2006 17:52
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Two more buying tips. Compare a stock's price to its expected earnings-growth rate. The price-to-earnings-growth ratio, or "PEG," should be at or close to 1.0. For example, a stock at 25x PE may seem overpriced if the average company in the industry commands a PE of 15. But if analysts expect 25% earnings growth for the company over the next year, a PEG ratio of 1.0 is attractive. Also, study the corporate balance sheet, a financial summary that - along with the cash-flow and income statements - reflects the quality of earnings. These documents tell you whether management makes, spends and invests shareholders' money wisely. |
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billywows
Elite |
08-Sep-2006 07:37
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Haahaa! Yup, Ten4one ..... we keep learning every day. That's what this forum is all about ya. Shiok! |
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ten4one
Master |
08-Sep-2006 07:33
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Thks for the 'compliments' billywows. I'll try to be a sharp critic the next time. It is easier to cut corners without much pains (efforts). I know the truth sometimes could be hurtful and I'm not here to hurt. I just want to share what I knew and what I've experienced in this real world of Tradings and Investings. I'm still learning to 'perfect' my technic. Trust me, if you think it is so easy to beat the Market just by reading a few books (of rules of 'hows' and 'how nots'), think harder again...oops, there I go again! Cheers!!!!! |
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Nostradamus
Supreme |
07-Sep-2006 22:48
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Knowledge or info not only tells you what to buy ? and when ? but also what not to buy. |
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billywows
Elite |
07-Sep-2006 20:18
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After reading your various comments in every post: you protray yourself as a blunt critic, but with strong self-confidence, Ten4one ...... A good PLUS cos you trust only your own gut instinct and nothing else. This is a positive characteristic of a good investor! After all, its our own money we are trading and we must only trust ourselves. |
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ten4one
Master |
07-Sep-2006 17:59
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Yes, Knowledge is a must b4 you even start trading! Keep learning and acquiring new skills as you move on. Only trade with the cash you can well afford to lose and don't be afraid of getting it wrong. Remember, even the best Traders make mistakes - the only difference is they don't repeat their mistakes. I'd say that the best Teacher is the Market itself - no one can teach you better than experiencing and learning from your own participations in the Market. One thing I've learnt is not to be distracted by the 'noises' of the Market- it could be very costly. Learn to believe in yourself and trust your own judgements always. Just to add to Nostradamus's views. Cheers! |
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Nostradamus
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07-Sep-2006 11:59
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How to be a successful trader? Some people do full time trading for a living. Trading is the only avenue of earning a living that I know of where you alone determine your own income level. You have no boss other than yourself. You alone control your destiny. Any other profession, such as owning your own business, has inherent limitations based on market share, economic cycles, customer base, etc. Not trading. I know of traders who set a goal like several thousands per month and then go after it. It is amazing how even though the unexpected comes up and they miss their goal from time to time, other times they exceed their goal, and at the end of the year they usually have exceeded their own expectations. One trader everyone is familiar with is the second richest man in the world, having started with around US$10,000 and is worth tens of billions. Of course, these are the elite traders, but they are not in that position as a result of some magical powers or pact with the Devil. These success stories all got their by starting in the same place many of you reading this article are at right now ? ground zero. What Stands in the Way? (YOU) First they made a decision that many of you already have made-that trading is what they want to do. The only difference between them and you is that they chose a road that was a little more difficult to trek than you are willing to undertake. You rationalize to yourself, ?I can do this another time.? The problem is that ?another time? never is convenient. There is always that favourite television show that will take precedence over the long term. We live in a sound-byte society where most don''t have the discipline to put aside the immediate for the long term. Knowledge can be equated with food, if you stretch your imagination. Trading requires a commitment from you. What They Did to Become a Winner There are 3 primary ingredients for success
1. Conform to your personality and be honest with yourself. You have to be honest with yourself-not about the profits you want, but rather on how much pain you can absorb if/when things do not go your way. The plain and simple truth is that most people can not think rationally or enjoy life if the trades they have are beyond what their tolerance levels set by their personality dictate. Instead, you may want to start out slow with some of the better low-risk stocks. When you are ready, then proceed to high-returns, high-risk ones. 2. Exercise Discipline If you are disciplined and religiously get out at a predetermined stop-loss and let your winner ride, you can make money. Have a trading plan in place. Almost everyone is afraid to take a loss because it means they don''t have a chance of making a comeback, at least that is what they tell themselves. They then take their profits too fast as they are afraid they will give back what they made. This is 180 degree backwards from how success works. You have to learn and get comfortable with taking small losses and letting winners run. Trailing stops can be placed on orders that are profitable, if it makes you feel comfortable to feel that you won't give back what you made. 3. Get Knowledge Do your research first before buying a stock. Don't buy blindly. Find out what plans the companies have. Go out and make a small investment in a few books - TA or FA. Buy books on Warren Buffet and other successful traders. |
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ten4one
Master |
05-Sep-2006 13:46
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Very well informed indeed, Nostradamus. I'd like to keep thing as simple as possible and make sure I know and understand what I'm doing. If I'm more than 100% sure, I go in big and if I'm not sure, do nothing(even if the share px moves up). Sometimes it is good to take a break and relax and do the battles again on fresh ground. Shares buy back may not be a good thing if it is a growth company 'cos the Mgmt maybe running out of ideas how to expand future growth of the company. Why not return the cash to shareholders instead and let them decide what they want to do with the extra cash! |
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red1721
Senior |
05-Sep-2006 13:42
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As usual, your posts have been very educational Nostradamus. Thank you very much. |
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red1721
Senior |
05-Sep-2006 13:38
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As usual, your posts have been very educational Nostradamus. Thank you very much. |
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Nostradamus
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05-Sep-2006 12:40
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Thanks, singaporegal and allantanhc. And here's the concluding part. 16. Entrepreneurial firms The companies that come up with groundbreaking products or services have a youthful drive and moxie that sets them apart. Research found most winning stocks started surging within eight years of going public. Big-cap firms tend to offer better liquidity, less volatility and lower risk. But many also remain content to stick with the same game plan year after year. After all, why fix something that's not broken? That kind of thinking can make them less willing to take risks, innovate and stay current, leaving the field wide open for younger, smaller rivals to develop new products or services and take market share from their older stalwarts. But driving growth can be even tougher for a big firm. A hot new product might account for only a small portion of overall sales. That may not make much of an impact on sales growth or the stock price. That's why it's better to focus on smaller, younger growth companies. Even these young, entrepreneurial firms must keep churning out new products and services. Sales can slip in just a couple of years if they don't keep innovating. 17. Stock buybacks A buyback is when a company uses its cash reserves to purchase its own shares in the market. Sometimes, those shares are used for stock-incentive plans. Investors benefit too because a smaller supply of shares tends to push the price higher, provided demand stays the same or increases. Stock buybacks may reveal positive clues about the firm. Folks prefer to take a stake in a business venture they strongly believe can succeed. Companies with faith in their future often do the same - in the form of share buybacks. In order to buy back stock, a firm must have the cash on hand, which indicates strong cash flow. It also shows the firm is willing to reinvest in its own business. All positive signs, but don't use buybacks as your No. 1 factor for picking stocks. First make sure a stock boasts strong fundamentals, belongs to a leading industry group and meets all your other buy criteria. Study daily and weekly charts to track positive price-and-volume action and find stocks building bases. Then, if one of the firms you're tracking announces a buyback of, say, 5% to 10% of its outstanding shares, you can add another reason you like the stock. It's like a bonus - not the overriding factor whether you should buy a stock. This reduces the number of shares in the marketplace and usually implies the company expects improved sales and earnings in the future. A company often plans to buy back shares to help boost its bottom line. To calculate earnings per share, you divide net income by the number of shares out. Buying back shares reduces the denominator, which in turn raises the EPS. Why don't all firms do buybacks? Some tech stocks may prefer to spend the cash on research and development instead. A hot new product or service can also help drive profit, revenue and share price. If a company that hasn't regularly bought back shares starts to do so, take a deeper look. There could be new management in place, which may help spawn new ideas or new products. 18. Don't bottom-guess Many investors embrace stocks on the way down, viewing them as opportunities to buy shares on the cheap. In reality, it's difficult to stop a stock's downward momentum. The market will take a stock down no matter what individual investors may think about it. Don't bottom guess or buy on the way down. Leave your pride and ego at the door and never argue with the market. Follow the market's forces. Follow the trend, don't fight it. For investors, that means pay attention and be ready to pull the trigger when a stock starts falling on big volume. A small loss can turn into a big one in no time. Buy a stock and add shares on ohe way up, not down. Smart investors know it's OK to gradually build a position in a stock. Just make sure its shares are moving in the right direction. Say you spot a stock breaking out of a base, but aren't yet convinced it's a leader. Try taking a partial position. Invest only a third or half of your usual dollar amount. If the stock closes the day strong, or continues rising the next day, you'll have more confidence in its prospects. You might add a smaller batch of shares at that point. When you're right, be right in a big way. After a decent run-up, the stock may pull back to its 50-day moving average. If it bounces off the support line as trading volume picks up, that's another chance to build your position. If the stock's a leader, you can usually get away with adding shares on the first two pullbacks to the 50-day line. The trick is taking smaller positions with each purchase. That's called pyramiding. Your first buy forms the base of the pyramid, your last buy the peak. That way you reduce your risk by investing less money at higher prices. What about averaging down? Avoid it. Some brokers will advise clients to add to positions if a stock loses ground. It's a highly risky strategy. Stocks tend to maintain their current trend until something alters their course. Trying to guess when a downtrend will end can leave your portfolio in tatters. 19. Blue chips vs. penny stocks The stock market goes through periods in which it favors big-capitalization stocks or small-caps stocks. Investors can help themselves by going for stocks in the capitalization trending higher. The S'pore market it sports its own trends when it comes to market-cap size. Fund managers and other big players dictate whether big-cap or small-cap stocks lead the market. Sometimes you see the STI rising, but Sesdaq falling. This shows that institutional players are buying, especially if the volume is large. However, buying small caps likely proffered the biggest gains. Before buying any stocks, though, first check the broad market's condition. Since three of four stocks follow the market's trend, it won't matter much which group of stocks leads during a bear. Better to stay in cash at such times. The best time to invest: when the market heads north. By buying leading stocks in the outperforming group, you raise the odds of bigger gains. Remember, regardless of market-cap size, winning stocks show strong technical and fundamental action. Always consider those factors before buying a stock. 20. Analyze mistakes Learning from mistakes is helpful in every endeavour. A good way to do it with stock investing is to write comments on a chart of the stock. Note the positives and negative aspects and the reasons you saw for buying it, whether it was the financial performance, industry strength or other factors. The stock market has a way of exposing your weaknesses. When your money gets swallowed up, your eyes glaze over and your mind begins to swirl with questions that begin with, If only I. . . . If only I had bought a better stock at the right time. If only I stuck with a 7% to 8% loss rule. If only I sold last week, last month or last year. Getting burned happens to the best of us. But it's those who learn from their investing mistakes who ultimately profit the most. Before jumping back into the market with your wounds still exposed, improve on your investing habits. While it's easy to blame the deteriorating market for huge losses, evaluate what part you played. Did you buy at the right time? Timing is everything when it comes to investing your hard-earned cash. What was the state of the market when you made your buys? Three out of four stocks decline during a bear market. So follow the general market averages every day to judge whether you should even be thinking about buying. Assume the market was healthy (which it hasn't been for most of the past year). Did you buy your stocks just as they were breaking out from sound bases on heavy volume? Buying too early or too late exposes you to unnecessary risks. Don't kick yourself if you miss getting into a stock on time. There will always be other opportunities. When did you get out? Knowing when to sell can be difficult. But the most important rule of investing is easy. If a stock drops 7% to 8% below your purchase price, sell it. No questions asked. All losses start small; avoid the big ones. Did you let good profit get away? Go back and study your trades. Look for warning signs of a top such as climax runs, sell-offs in heavy volume and breaking long-term trend lines. Develop a set of sell rules to lock in profits during the next bull market. Instead of putting your hopes on a lousy stock that is losing ground and has potential for a strong rebound, look for other possibilities. There are many out there. Make sure you're buying quality stocks. Use FA for confirmation. |
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singaporegal
Supreme |
05-Sep-2006 11:26
Yells: "Female TA nut" |
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Hi Nostradamnus, I don't have their rating. I just rely on the standard Acc/Dist charts here. |
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allantanhc
Veteran |
05-Sep-2006 10:46
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Thanks, Nostradamus, for the very informative and educational article. Wish I have such information when I started playing shares years ago. |
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Nostradamus
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05-Sep-2006 10:02
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Thanks billywows. "Its the mother of all summaries". I like that. Singaporegal, do you have Accumulation/Distribution Rating as in Point 12 below? 11. Top sectors The list of new highs each day acts like a scorecard, showing which areas of the market are winning. The best stocks tend to be in the top five or six sectors. In a healthy market, how do you quickly spot high-quality stocks breaking out? The strongest industry sectors give clues. Check new highs list each day. Stocks breaking out of bases soon hit new highs as they run up. Many may be too extended in price from their ideal buy point. But in a strong market, others in those sectors tend to follow suit into new high ground. Research found that industry group and sector strength account for up to half of a great stock's power. Stocks on the new highs list get put in broader sectors than the industry groups. You'd usually focus on the top four or five sectors on the list. But best to keep an eye out for leaders in other sectors too. 12. Increasing sponsorship In the stock market, sponsorship means ownership. Specifically, it talks about institutional investors such as unit trusts and pension funds taking a stake in a company. The tremendous buying power fuels extraordinary gains in stocks.
13. Improving margins Profit margins quantify how much profit a company gets from each dollar in sales. Obviously the higher the margin, the better.
Healthy revenue growth is great. But what if a company spends the same amount to make and sell a product as it earns once the sale is complete? That doesn't do shareholders much good. That's where profit margins come in. Robust margins mean a company is earning money efficiently. It may have better pricing power than rivals, or manufacture its wares on a tighter budget. The more the firm gets to keep on each dollar of sales, the more investors benefit. Profit margin is simply a firm's income as a percentage of revenue. Say Company A has margins of 20%. That means it earned 20 cents for each dollar of product it sold. That raw profit is the fuel that lets the company keep growing. Margins vary widely by industry. Pricing pressure leaves retailers' margins notoriously thin. Drug makers and software firms, meanwhile, may easily rake in profit margins in the double digits. In general, look for stocks with the best profit margins in their industry. Prefer those with margins that grow quarter to quarter and year to year. That means the company is succeeding in ways to conduct its business more productively. Waning margins may mean the firm is propping up its bottom line by slashing prices or cutting costs. That kind of shell game can't be sustained for long before it shows up on the income statement and balance sheets. To calculate after-tax profit margins, divide net income after taxes by net sales. To find pretax margins, divide pretax profit by sales. Use income from continuing operations, which excludes one-time items and accounting adjustments. 14. Industry leadership The leader in an industry has an edge not just over its competitors. Industry leaders also tend to be stock market leaders.
Obviously, dividends add to shareholders' wealth. But if your aim is to make serious money in the market - and not have to wait 50 years to do so - ignore them. Investors can make much bigger progress in their portfolios by picking the very best growth stocks at the correct time. They also must use good sell rules to lock in gains. Why? The leaders tend to produce triple- or even quadruple-digit percentage gains during the course of their runs. Dozens of stocks last year rallied 100% or more from their pivot point. No stock has an annual dividend yield like that. If you invest millions of dollars or more in dividend stocks, that's important. But if you're a small investor, that's not much of a gap. Dividends may seem like defensive armor in a bad market. But sharp capital losses can pierce that armor. That's why cutting losses and raising cash in a weak market is a safer approach. Paying attention to only dividend-yielding stocks is like looking only at stocks with low PERs. You're more likely to miss out on the companies that have superb growth in earnings, sales and return on equity. These companies tend to reinvest their earnings to create new products, expand their sales force, or make solid acquisitions. These efforts, in turn, further grow earnings. 15. New products The personal computer, genetic research and innovative store concepts have all given rise to hugely successful stocks. Indeed, winning stocks almost always emerge thanks to a groundbreaking new product or service. The best stocks tend to feature something brand-new, innovative. It takes something new to produce a startling advance in the price of a stock. So just what sort of developments qualify as something "new"? Fortunately for investors, a number of factors can set the stage for a big move. Those factors include a new product or service, a change of management and new industry conditions. It could also be that the company itself is relatively new to the public market. Sometimes an upstart company can shake up an old industry that's set in its ways. And the company doesn't always have to be newly public - just one that's growing fast and tends to do things differently from its rivals. |
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m2d4pc
Member |
04-Sep-2006 23:03
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After a company release on news media that it will issue bonu share, the share price will usually go up a bit. Between the period of media annoucement and approval in the AGM, usually how will the share price behave ? After approve in the AGM how will share price behave ? When is the best time to sell the share ? |
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billywows
Elite |
04-Sep-2006 22:42
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Wow! Great stuff this article, Nostradumas ..... Its the mother of all summaries! |
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Nostradamus
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04-Sep-2006 19:36
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6. Have selling rules Finding and buying stocks with strong qualities is one part of investing. But the selling part poses a problem for many investors. When a stock starts drifting lower, who knows how far down it'll go? Small losses can turn into big ones fast, especially during a bear market. It never feels right to sell a stock that starts going down right after you buy it. But in many cases, it's the right thing to do. Learning to protect your investment capital is the first sell rule.
Always sell a stock when it falls 7%-8% below your purchase price. Master this rule, and your portfolio will be shielded from devastating losses. Think of it as an insurance policy that minimizes your risk. IBD studies have shown repeatedly that when a stock is bought at the correct buy point, it will rarely fall this much. If it does, there's something wrong with the general market or with the stock itself. A series of losses, if contained to 7% or 8%, can leave you with plenty of cash. But a small loss that turns into a huge one isn't so easy to overcome. Say you bought a stock at $50 and it declines 50% to $25. To get back to $50 again, it would have to double. The stock could take weeks, months or years to get back to your initial purchase price, if it ever does. The lesson also details the importance of watching how your stock performs relative to the general market and its industry peers. What if other stocks in the industry group head higher, but yours is treading water? That may be reason enough to sell, even if the stock hasn't fallen 8% below the purchase price. Use stock charts to recognize the 4 sell signals. Signal 1 It's never a good sign when a stock starts dropping repeatedly in price on above-average volume. That's a clear sign that mutual funds and other big institutions are unloading shares. Owning a stock when big investors are selling is risky. A single day of heavy selling can be a prelude to future price weakness. Stocks acting weak for extended periods tend to get weaker. Signal 2 Another key sell signal is when a stock begins to churn. Churning occurs when a stock trades heavily but can't muster further gains. Churning is most often seen after a stock has made a substantial price advance. Signal 3 Plot the stock's price performance vs. the STI or Sesdaq. Be wary if a stock hits a new price high but its Relative Strength (RS) Line does not. Some stocks whose RS lines are lagging the stock into new high ground (not a good sign) and others that are leading the stock into new high ground (a sign of strength). Signal 4 When a stock breaks below its 50-day MA on heavy volume and can't rally back above it, it's another sell signal. When it trades below the line for weeks, that's a pretty good indication that institutional support is waning. 7. Market is rallying It may seem obvious, but your stock buys should occur when the market is going up, not down. Some investors erroneously think a declining market is a time to buy low. Not so. Most winning stocks have their genesis at or close to the start of a new market rally. Conversely, avoid buying when "distribution" hits the market. That's when the major indexes decline on higher volume than the prior session five or more times over the span of a few weeks. This tells you institutions are abandoning the market. Avoid getting mesmerized by the media glitz. Keep in mind that news headlines can affect your investing frame of mind in more bad ways than good. Big news alone won't help in timing your entry into a solid bull market. Why? Stories cover the past. The market looks into the future. It can do so because prices are the sum of millions of investor decisions every minute, every day, every week. Collectively, the market is smarter than anyone out there. The best time to buy growth stocks is in the early stages of a market uptrend. To identify this stage of the market's cycle, watch for at least one of the major indexes to rise at least 2% on higher volume than the previous day. This follow-through usually comes on Day 4 through 7 of a brand-new rally attempt. Follow-throughs that come on Day 8 to 10 tend to work less effectively. 8. Learn and understand investing strategies. Educational articles and market analysis help investors stay on top of the market. 9. Relative Strength of 85+ True or false? Stocks are more likely to go up after they've been among the highest-moving stocks the past year. The answer, surprisingly, is true. IBD studies found that, on average, the most successful stocks were already among the top 13% of all stocks in terms of 12-month price gains before their major advances got underway. This involves IBD rating, so will not elaborate further. 10. Management ownership Many top executives own stock in the companies they manage. That serves as a good incentive. Also, when a significant percentage of stock is held by executives, it shows management has confidence in the company. You've heard the expression: "Put your money where your mouth is." That test holds true in the market. Prefer companies in which leaders also own shares. There's no magic rule regarding how much of a company's outstanding shares should be owned by management. Executives who own a solid chunk of the company's outstanding shares are showing confidence in the viability of the stock. Large-cap stocks can have a huge number of shares outstanding, thus making even a small percentage of shares owned by management acceptable. Ideally you want to see smaller-cap stocks with higher percentages. Small caps often fly below the radar of fund managers and retail investors. As the company grows, it can benefit more heavily from its stock appreciation, invest the gains back into the company, and expand its products and services on the go. Recent buying activity by management can sometimes be used to gauge a stock's strength, but treat it as a secondary indicator. Look instead for strong sales and earnings growth and a bullish price chart as more reliable indicators. An example of buying activity is a stock buyback. A company can find multiple uses for its capital. By buying back its shares, it's issuing a vote of confidence that it believes those shares will appreciate in value. Though management buying can portend good tidings, don't get too concerned about insider selling. A CEO or CFO may sell shares for a variety of reasons. Sell a stock if it triggers key price- and volume-related signals. |
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Nostradamus
Supreme |
04-Sep-2006 18:29
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1. Annual earnings up 25% Annual profit growth gives a longer-term view of a company's success.
2. Quarterly earnings up 25% Earnings in the most recent quarter should be at least 25% better yoy. The more often a company reaches this goal, the better. Earnings are the primary driver of stock growth. 3. Stock price over $0.20 Low-priced stocks don't necessarily translate to bargains. A depressed share price usually means there is something wrong with the company and why it can't attract investors at higher prices. Also institutional investors avoid cheap stocks because they usually have inadequate liquidity. That deprives the stock of a huge source of demand. Bargain hunters figure they can make a big profit if a cheap stock they own goes up just a few cents. Why not load up on a variety of penny shares, they say, instead of focusing on one or two pricier stocks? Sure, that may sound like a good theory. But overall, such stocks carry higher risk. stocks selling for less than $0.20 a share often trade at a low price for a reason. The company may have logged a recent string of sales or earnings disappointments or is being targeted in a probe. Its sector could be hitting a rough patch as well. Trading-related risks also apply. Penny stocks' thin liquidity makes them unappealing to most institutional investors and makes them more susceptible to wild price swings. And even a few cents' decline can result in a big loss. While a few good businesses may see their stocks recover over time, they tend to be the exception. If you don't luck out with one of these, you could end up with a company that gets delisted or goes out of business. Just look back at the tech bubble of the late 1990s. Droves of Internet and other high-tech stocks came crashing down with the market in March 2000. Many firms, which had nearly become household names, fell to penny-stock status. Bottom fishers who thought they were getting a great deal and scooped up shares got burned. Those three companies, and many others, weren't strong enough to survive. Instead, they went bankrupt, got delisted and left investors with worthless shares. Above all, by spending time trolling for penny stocks, you risk missing out on the top growth stocks with the potential to yield sizable gains. These stocks may cost more to buy, but their sound fundamentals and institutional support often help boost price performance. Stick with issues trading at least $0.20 a share. Look for rising earnings, sales, profit margins and return on equity. Seek stocks with a track record of price growth. 4. Spot proper buy points Stock charts can be tricky to use, but they also give an unbiased picture of the supply and demand forces working in a stock. The key parts of a chart are its bases, periods of price consolidation that often presage new price bursts. The buy point is at or near new highs from these bases. Always study both daily and weekly charts for a high-quality stock. You might spot a winning pattern in one chart that's not as clear in the other, helping you spot the pivot point. 5. Cut losses short The most important sell rule is to dump any stock that drops 7% to 8% from the purchase price. Cutting losses short helps preserve capital and keep you from suffering large losses. Investors are tempted to hang onto a stock that's begun to tank. It's easy to think, "Well, this stock can't go any lower," or "It's a good company; the stock will come back." But you don't get ahead in the market by hoping and wishing and guessing. A better plan is to apply a strong set of rules that have worked. While your stock-buying rules are your offense, your sell rules are your defense. It's inevitable that you'll make mistakes or you'll buy a stock at exactly the right point, but the breakout fizzles. You want a Plan B ready for those situations. Keep an eye on it. If it falls 7% to 8% below your buy point, sell it. Why 7%? Research showed that the best market winners that during their uptrends rarely fall 7% or more below the correct breakout point. So it's vital to use charts, study bullish patterns such as the cup with handle, and spot the exact price level to buy. This strategy has another benefit besides the immediate value of protecting your cash. It means your money won't have to work so hard to make up for lost ground when you find a winner. For example, you cut your losses at 7%. You'll have to earn only about 7.5% on another stock to break even. But say you finally sell a stock that falls 50%. You'd need to double your investment in another stock to make up for the loss. Also, a big loss can destroy your confidence and make you gun-shy during a roaring bull. |
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Nostradamus
Supreme |
04-Sep-2006 18:07
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By Vincent Mao Investor?s Business Daily Modified for S'pore context There's no way to predict which stocks will go up, but it is possible to know what conditions lead to their advance. That's the aim of the 20 Rules For Investment Success developed by Investor's Business Daily and its chairman and founder, William O'Neil. Using computer analysis going back several decades, it was possible to single out the characteristics of the most successful stocks before their major price runs. IBD's 20 rules are a synthesis of those findings. The characteristics, in fact, have changed remarkably little over the years despite one of the longest bull markets in history, the worst bear market since the Great Depression and lots of changes on Wall Street. In many ways, these rules confirm some tenets of stock investing, such as the power of earnings growth and blockbuster products. But in other ways, the rules defy long-held beliefs. For example, price/earnings ratios and dividends are written off as predictors of future performance. To be sure, most winning stocks stop short of possessing every trait outlined. But the better a stock matches up to the criteria, the stronger is its potential. There's no certain way to predict which stocks will go up, but it's possible to identify what conditions lead to their advance. These rules are based on the characteristics of the most successful stocks before they delivered major price runs. 1. Annual earnings should be up > 25% each of the past 3 years. Return on equity should be at least 17%. It's also good if recent earnings and sales growth are accelerating. 2. Recent quarterly earnings and sales should be up > 25%. Earnings are the primary driver of stock growth. 3. Avoid cheap stocks. Buy higher-quality stocks selling for >= $0.20 a share. 4. Learn how to use charts to spot sound buy points. Confine your buys to these points as stocks break out on big volume increases. 5. Cut every loss when it's 8% below your cost. Never average down in price. 6. Have rules on when to sell and take a profit. It doesn't do investors much good if their stocks go up but they don't know when to take a profit. 7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when market indexes show five or more days of selling on heavy volume. 8. Learn and understand investing strategies. Educational articles and market analysis help investors stay on top of the market. 9. Buy stocks with a strong Relative Price Strength Rating. Stocks are more likely to go up after they've been among the highest-moving stocks the past year. 10. Pick companies with management ownership of stock. You've heard the expression: "Put your money where your mouth is." It holds true in the market. 11. Buy mostly in the top six broad industry sectors. In a healthy market, stocks in strong sectors tend to follow leaders into new high ground. 12. Select stocks with increasing institutional sponsorship in recent quarters. Trading volume is a great way to measure how potent a stock's rise or fall is. 13. Current quarterly after-tax profit margins should be improving and near their peak. Robust margins mean a company is earning money efficiently. 14. Don?t buy because of dividends or PERs. Buy the industry leader in earnings and sales growth, return on equity, profit margins and product quality. 15. Pick companies with a new product or service. It takes something new to produce a startling advance in the price of a stock. 16. Invest mainly in entrepreneurial companies. Pay close attention to those that went public in the past eight years. 17. Check into companies buying back 5% to 10% of their stock and those with new management. It's a promising sign if a firm is willing to reinvest in its own business. 18. Don't try to bottom-guess or buy on the way down. Never argue with the market. Forget your pride and ego. 19. Find out if the market is currently favoring big cap or small cap stocks. The market sports its own trends when it comes to market-cap size. 20. Do a post-analysis of all your buys and sells. Evaluate and develop rules to correct your major mistakes. |
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