23 Timeless Stock Market Tips
Any seasoned investor or trader has their own set of stock market rules which were culled from the school of investing and its “hard knocks”. These following rules are my own biased compilation, filtered and “sifted” from the 35 years I have spent studying the stock and options markets:
1)Pick no more than 8 stocks for your portfolio and know everything you can about them. Read Internet news every day to keep abreast of any news that might have recently been made public. Know which analysts have a good feel for the stock’s potential. React to those analyst’s predictions and recommendations. Know the stock’s options market, the volatilities of their options and changes in those volatilities. Know when the ex-dividend date is, as well as potential for a rise or fall in that dividend. Know when the earnings for that last quarterly performance will be announced and watch the reaction of the market when announced.
2)Invest or trade a stock that has a rising chart pattern. Never try to guess a stock’s bottom when it is declining. That can be as dangerous as akin to trying to catch a “falling knife”.
3)Approximately 70% of the movement of any stock is directly correlated to the overall direction of the “Standard & Poors” 500 stock index (SPX). The remaining 30% of the cause for any stock’s move is due to the fundamental assessment of that stock and the expectation of the performance of the stock’s business group (autos, oil, tech, etc.). Thus, having the correct “feel” for the overall direction of the S&P 500 index over the time frame of the investment or trade is key to success or failure.
4)Most rumors have some truth in them. Some rumors are extremely accurate regarding their truthfulness. Regardless of that fact, if the market decides the rumor to have merit, and in spite of the point that you might know that the rumor is most likely false, do not underestimate the effect of the rumor.
5)Make your own decisions. You can get opinions from others whom you respect, but let the final decision to buy or sell be yours only. To make a move based on other’s opinions only sets you up for future confusion, as well as not learning from the experience. The learning curve for a trader/investor is a long time, but the rewards are worth the effort.
6)When a panicked market is near, sell out and wait for the “dust to settle”. Thus the adage, “when in doubt, get out”!
7)Have a few or more “foxhole” buddies. When the market gets extremely chaotic, and you have your account handled to your satisfaction, check in with your “foxhole” buddies. Traders/investors can “freeze” due to a bad position rapidly becoming worse. You can help them through that period, being the “cool head” that sees things as they are, thus able to give proper advice to those who cannot.
8)Never make a trade on what could be inside information. You do not need the legal problems that can ensue from doing so nor should you be that greedy. Know what constitutes inside information and what is not. Perusing an internet stock message board is one way to legally gain information about a stock.
9)Take all gains on moves in your favor of 10% or more gained in a three month or less holding period. Should you be able to make 10% every three months or less, that amounts to at least a 40% overall profit, which far exceeds holding the same stock for the entire 12 month holding period in order to receive long term capital gains benefits. Almost every stock does not increase 40% in a year, or even 10% a year for that matter.
10)Never hold a position for tax reasons alone. Take the profit and pay the tax. The more tax you pay logically implies the more profits were made. Be happy to pay as much tax as you are able.
11)Remember that “Columbus used charts”. Stock charts are primarily road maps to where the stock has been, but not necessarily to where the stock is going. To get a unique feel for a stock’s chart that might be indicating a potential directional bias ahead, simply turn the chart on its side (a 90 degree turn). Then, ask yourself if the pattern is suggesting a potential move to the left or to the right! Doing so eliminates the emotional reaction as to guessing whether the stock is going “up or down”.
12)The fed is your friend and your enemy. Do not fight them. They will win that war as only the most powerful can.
13) Watch, test and then note bellwether stocks. These stocks are sensitive to the overall condition of the market, both daily and on an intermediate time frame. Also be aware that bellwether stocks can come and go over time. As your experience grows you will learn to spot them and use them and then discard them for better ones.
14)If you choose to work with a broker, find one who has plenty of experience, which is for me at least 4 years in the business. This is especially true when working with an options broker. The best way as to how to choose an options broker is to see if that broker knows that there is NO difference between a “buy write” and its synthetic identical twin, the naked sale of a put. The profit or loss of either play is exactly equal (using the same striking price and month of expiration). Should that broker not know that point, move on to the next candidate.
15)Do not equate someone who can talk quickly with someone who is intelligent. There is no correlation between the two.
16)All of your eggs in one basket make for a bad financial omelet. Diversify (see #1).
17)Always have excess cash in your account to take advantage of opportunities that present themselves when ephemeral chaos comes into play. A cash amount of about 25% of your total portfolio value should suffice. This percentage of cash is good for investors as well as traders.
18)The most difficult thing to accomplish for the trader/investor is to get back to even! Thus keeping your losses small at all times in very important. Keep that “getting back to even” bar as low as possible.
19)If you find yourself in an investment or a trade, where you are in “prayer mode”, get out of that position! Asking for divine help implies you are in the “hope” stage, which is one emotional tick away from the “despair” stage. Stay out of “despair” or suffer the consequences of not doing so, which for most is permanent financial damage.
20)You can watch the television stock market “gurus”, but only watch and listen to discover what they know. Generally speaking, what they say is mostly priced into any stock by the time they are saying it.
21)In the long term, those who own quality stocks will overcome the inflationary effect upon their financial holdings.
22)Own stocks that pay dividends. The dividend yield percentage can be smallish but make sure that the stock is consistently paying a dividend, and raising that dividend over time.
23)Timing is everything!