1. Don’t buy on analysts recommendations
These analysts would appear to be doing the investment world a great service by giving ratings on different stocks. In fact, these analysts often have hidden agendas that the average investor is not aware of. Ever notice how analysts issue buy recommendations when a stock is at its all time high and sell recommendations when stocks are at their all time low?
2. Money management
One of the important things to learn about investing is how to manage risk. Anyone who has no respect for risk is on the road to complete financial disaster. You often hear these great stories about the guy who turned a small amount of money into a million dollars. But what you don’t hear is that, years down the road, these same people are often wiped out as a result of not respecting the risks that go with investing.
Learning how to pick investments that can appreciate in both good and bad times is the key to successful investing. Keep your reward-to-risk ratio at a minimum of 2:1, or higher. In other words, if you are risking 1 point on each trade, you should be making, on average, at least 2 points.
3. Don’t try to hit the home runs on every pick
Everyone wants to be the one to have their portfolio shoot up 200% in a short amount of time. Fact is, there is no way to achieve this without taking on severe risk. Even if you make 3% – 6% on a stock, it can really add up. One way at looking at this, if you make 5% on one of your stock picks every two weeks. That’s a 10% gain on your investment in a month, do this for twelve months and your looking at a 120% gain a year. Have you ever heard of “The Tortoise and the Hare“? The rabbit has more speed, but the turtle has more determination, stamina, and consistency. The rabbit may get a fast start, but the turtle wins the race.
4. The urge to trade
Emotions work against you in investing and it’s very easy to want constant action. The problem is that great picks don’t come along daily. Idle periods are a natural part of business. You should never force yourself to find stocks to invest in, because it may go against you at the worst possible time. You need to be emotionally clean and ready to take on a new investment, rather than get caught in a deteriorating position. As a rule: the more you trade, the more risk you take.
5. All stocks can crash
This is a hard lesson to learn for new investors who ride out a single stock only to see it crash later on. As we have seen recently, even great stocks like Microsoft, Cisco, Citigroup and Home Depot have all crashed. While these stocks are likely to hit their highs again in the future, they, just like any other stock, are bound to crash sometime, no matter how great the company is.
6. Avoid stocks that everybody is talking about.
Most people get interested in stocks when everybody else is. The time to get interested is when no one else is. If you buy a stock because of news that just came out, you’re too late. You can’t buy what is popular and expect to do well.
7. Never chase a stock.
When a stock pick is hot and takes off leaving you behind, let it go. If it doesn’t pull back, move on to the next stock pick. There are always more stocks to buy.
8. When entering or exiting a stock at the market open, be patient.
Notice how a lot of stocks open strongly, gapping up and move up strongly for the first 30 minutes, then start to turn. After the first 30 – 60 minutes things start to stabilize. After the market has been open for an hour or two, use this period to enter or exit your positions, especially if you missed it at the open because of a volatile open.
9. Never fall in love with a stock.
Stick to a plan. If one of your stock picks hit your target price, lock in some profits by using a stop loss, trailing stop loss orders. If the stock continues to climb, move up your stop loss up. Don’t let a profit turn into a loss.
10. Keep the winners and let the losers go.
Both experienced and new stock market investors find it very hard to let a loosing stock go. We all hope that with a little more time it will turn around. No one wants to sell at a loss. What commonly happens because of this human nature is a tendency to sell the winners and keep the losers, hoping for a stock turn-around. The investor ends up with a bagful of lousy performing stock picks and no winners in the portfolio to balance it out. Unless there is a compelling and valid reason to hold on to a loosing stock, just cut your losses short and exit it.