Page 558 - How to Make Money in Stocks Trilogy

Important Time-Tested Proven Rules and Guidelines to Remember 425

8. Don’t buy a stock because of its dividend or its P/E ratio. Buy it because
it’s the number one company in its particular field in terms of earnings
and sales growth, ROE, profit margins, and product superiority.
9. In bull markets, buy stocks with a Relative Price Strength rating of 85
or higher in Investor’s Business Daily’s SmartSelect ratings.
10. Any size capitalization will do, but the majority of your stocks should trade
an average daily volume of several hundred thousand shares or more.
11. Learn to read charts and recognize proper bases and exact buy points.
Use daily and weekly charts to materially improve your stock selection
and timing. Long-term monthly charts can help, too. Buy stocks when
they initially break out of sound and proper bases with volume for the
day 50% or more above normal trading volume.
12. Carefully average up, not down, and cut every single loss when it is 7%
or 8% below your purchase price, with absolutely no exceptions.
13. Write out your sell rules that determine when you will sell and nail
down a worthwhile profit in your stock on the way up.
14. Make sure that one or two better-performing mutual funds have bought
your stock in the last reporting period. You also want your stocks to have
increasing institutional sponsorship over the last several quarters.
15. The company should have an excellent, new, superior product or ser-
vice that is selling well. It should also have a big market for its product
and the opportunity for repeat sales.
16. The general market should be in an uptrend and be favoring either small-
or big-cap companies. (If you don’t know how to interpret the general
market indexes, read IBD’s “The Big Picture” column every day.)
17. Don’t mess around with options, stocks trading only in foreign markets,
bonds, preferred stocks, or commodities. It doesn’t pay to be a “jack-of-
all-trades” or overdiversify or have too much asset allocation. Either
avoid options outright or restrict them to 5% or 10% of your portfolio.
18. The stock should have ownership by top management.
19. Look mainly for “new America” entrepreneurial companies (those with
a new issue within the last eight or even up to 15 years) rather than too
many laggard, “old America” companies.
20. Forget your pride and your ego; the market doesn’t care what you think
or want. No matter how smart you think you are, the market is always
smarter. A high IQ and a master’s degree are no guarantee of market
success. Your ego could cost you a lot of money. Don’t argue with the
market. Never try to prove you’re right and the market is wrong.