Rules to Live By

On my special holiday show, I’m going to go over rules – MONEY RULES…INVESTMENT RULES that most people don’t live by…that most people ignore.

HAVE SELL RULES

The first time I met William O’Neil and David Ryan in the early ’90s, I remember asking both of them, “What’s the most important thing people need to know?” They said:

1. Never lose big.
2. Know the difference between bear and bull markets.

And I remember the one line he said to me:

“If you are one of the .0000000000001% of the people out there who knew how to stay out of bear markets for the most part – YOU ARE WAY AHEAD OF THE REST OF THE WORLD.”

If you don’t have sell rules, you should not be in the market. Every great investor throughout history had one great common link. It’s not what they did when they were right. It’s what they did when they were wrong. It’s what they did when they made a mistake. Did they compound their mistakes by sitting there and adding to it? NO! THEY GOT OUT AND MOVED ON.

JUST SOME THOUGHTS ON WHAT TO BUY:

Bill O’Neil went back decades to find winning stocks and to find out the characteristics of those winning stocks and whether they had things in common. And very simply put: On a fundamental basis, there was one:

ALL THE COMPANIES THAT WERE LOOKED AT, ON AVERAGE, HAD VERY STRONG GROWTH RATES. Home Depots, Ciscos, Microsofts, Walmarts, Apples – I could go back decades. Throughout years, all these companies had in common that they were growing their businesses 30%, 40%, 50%….a 100%  per year. And the market paid up for that greatness.

Find those companies with product that have strong demand and the ability to keep that demand going or accelerate that demand AND YOU FIND BIG WINNING STOCKS.

RELATIVE STRENGTH

• It is easiest to isolate strength, when the market is weakest.
• It is easiest to isolate weakness, when the market is strong.

For example, we’re in a bear market for stocks and everything’s going down. But there’s a group of 15 or 20 stocks. They have all the good fundamental characteristics. They’re all growing 20% to 50%…some more than that. While the market keeps going lower and lower, those stocks start to sit. The dropped a little. All these stocks find support levels. They refuse to drop any further, regardless of what the market does.

When the market rights itself, which stocks lead? The stocks that when down the least. We are constantly following this on a daily basis.

This is not easy. It requires work. It takes time. It takes study. It takes toil and sweat.  In the shows that I have done, I have given you what books to study. Books like:

• HOW TO MAKE MONEY IN STOCKS by William O’ Neil
• SECRETS FOR PROFITING IN BULL AND BEAR MARKETS by Stan Weinstein
• MONSTER STOCKS by John Boik
• THE INVESTORS EDGE by me, Gary Kaltbaum

They all teach you the same thing: How to understand, gauge and use strength in the markets.

OTHER THOUGHTS:

• Q: Should you buy penny stocks or stocks priced under $10? A: They’re there for a reason.
• You must watch IPOs. The great winners of the future are your newer companies.
• Should you by on margin? Only if you’re very good at it.
• Should you short stocks? I don’t mind it. But learn how to. You can also short ETFs. But make sure you’re in a bear market. In bull markets it is folly to short stocks.
• How many stocks should I own? That’s up to you. But I don’t like too many stocks. Don’t be over diversified.
• Options? I’ll leave the options up the options gurus. If you’re great, that’s another way to add octane to your account.
• I follow what insiders do. We’re looking for companies who stocks are going up and insiders are buying stocks in their own market. The people that are running the company are believing in higher prices. Conversely, if a stock is dropping and we find insiders selling, we don’t want to be near the stock.

This is just a glance at what we do here.

SPECIAL NOTE: Be sure to register now for my next live Webinar on Saturday January 21, 2012. I will talk about the important implications of early-January’s market action…and much more.  Click here for more information.