10 ABSOLUTE RULES TO REMEMBER WHEN INVESTING

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If we didn’t have rules, we would live with the animals. Everything has rules. Anarchy has rules albeit the rules of unruliness. Order, even in chaos is unavoidable because the rules require everyone to play a role; everyone without exception. There is a rule for every action and one for every reaction to the action. There are rules about the law of the land, and rules about the law of physics. There is the hierarchy rule and the golden rule. Rules are made to be broken which is itself just another rule. And since there is no escaping the realm of rules, we must learn to live with them because, well, that’s the rule. I want to talk about two particular rules—absolute, unbreakable rules. The twins called “Never” and “Always.”

RULE 1

NEVER RELY ON A SALESMAN FOR INVESTMENT ADVICE

Your Financial Advisor is not a friend. He is a salesman. He knows the ins and outs of selling the products at his disposal, but he knows nothing about what’s in them. He is clueless about how to analyze a stock or a fund. He simply repeats what he’s been taught at salesman school. The conflict of interest engulfing him is inescapable. Talking heads on TV are worse. They strive for sensationalism in order to boost ratings and could care less about the accuracy of their predictions. Only a source that doesn’t benefit from the trade, and doesn’t get paid by the company, can claim to be truly unbiased.

RULE 2

ALWAYS INVEST IN THE DIRECTION OF THE OVERALL MARKET TREND

Only invest against the current market trend, (bull or bear), when the strategy is to lose money. Trying to “beat the market” is an exercise in futility. It simply can’t be done. Fortunately, successful trading doesn’t have to be this way. Creating profit is far more easy, and repetitive, when the strategy flows with financial currents. Never take money from the sidelines and invest it, until market direction is confirmed.

RULE 3

NEVER LET EMOTION DICTATE WHEN TO BUY OR SELL

Novice Investors buy when they feel euphoric about a stock, and sell when fear of devastating loss consumes them. Yet Baron Rothschild, one of history’s most successful investors said, “The time to buy is when blood is running in the streets.” Euphoria, fear, and greed are three bottomless pits, that never tire of stealing money. The remedy to this is automation. Have a plan before each trade, implement the plan with each trade, and NEVER deviate from the plan while trading.

RULE 4

ALWAYS BUY WHEN RISK IS LOW

When a stock is purchased, is key to managing risk. Stocks in an uptrend, for example, are less risky to purchase when their price has dropped to a known support level and halted, (all other factors being equal). Buying these same stocks when they have been running up in price for several days, and are nearing a known resistance level, is perhaps the riskiest time to buy. Novice traders want to jump in after a stock has been rising for awhile, for fear of “missing the train.” Conversely, never “buy in the dip.” There is often a serious reason why a stock’s price plunges dramatically. As they say, “Don’t try to catch a falling knife.”

RULE 5

NEVER BE IN A HURRY TO LOSE MONEY

Patients is a word overused and under utilized with investing. A new investor usually lacks patients and violates Rule number 3 above. The smart investor knows to wait for a confirmation before committing funds to a security. To quote the Baron again seems fitting here. He said, “I never buy at the bottom, and I always sell too soon.” Making profits is not about squeezing every penny out of a trade. The harder you squeeze, the less you’ll realize. Reread Rule number 3.

RULE 6

ALWAYS USE A STOP LOSS TO PROTECT YOUR CAPITAL

Never purchase a stock without entering a Stop Loss. Losses can occur quickly, and unless the trader can afford to sit in front of a computer and watch every tick of a security, action must be taken to protect against disaster. Immediately after a security (stock, ETF, etc) is purchased, a Stop Loss is entered. It must be part of the trade. Decide before pressing the buy button how much loss is acceptable, and set the order accordingly.

RULE 7

NEVER USE A (SELL) STOP LIMIT ORDER TO PROTECT YOUR CAPITAL

Even though number 7 sounds a lot like number 6, there is a huge difference. A limit order is actually two orders with two different price targets. Whereas a Stop Loss is a single price that triggers a trade, a Stop Limit order first triggers an order to trade, and then the trade. However, this lag in action can cause the price to jump past the price area and NEVER fill, thus potentially causing huge unexpected, (and unnecessary) losses. Don’t be cute. Stick with number 6 every time.

RULE  8

ALWAYS WAIT FOR THE MARKET TO OPEN BEFORE ENTERING A TRADE

A Specialist, aka a Market Maker, work on the floor of a stock exchange. She makes her living buying and selling stocks to the public. Her job is to create a level of liquidity so the exchanges can run smoothly. She is also the one who sets the opening price for the stocks she makes a market in. If a bad report is released after hours, she will set the opening price lower, because she knows she’ll have to be buying more shares from a scared public. Conversely, if a good report or news story is released, she knows the demand for the stock will be high, so she marks the price up to make more money. This is what causes gaps. If you put in a buy at the market open, you subject yourself to unnecessary risk.

RULE 9

NEVER FALL IN LOVE WITH A STOCK

In my early days as a Financial Advisor, a client and his siblings inherited a small fortune in a pharmaceutical company that was well known. The stock had faithfully paid good dividends to the parents, and the share price was near a historical high. Instead of accepting advice to diversify, the client chose to keep that single equity, and he convinced his brothers and sisters to do the same. Two weeks later, the stock made a surprising plunge. Overnight the fortune they had was literally cut in half. The stock continued down, until the $50 share price was under $10. It never recovered. Never, ever fall in love with a single stock.

RULE 10

ALWAYS USE A NON-PUBLICE SOURCE FOR UNBIASED INFORMATION

Even though the internet has created an environment where trades can be executed with lightning speed, somebody is always going to be faster at the draw. Information about a company, or the economy that is released to the public, is discounted before a humming bird can flap his wings twice. Even professional traders have a hard time finding a parking spot at the party. This means if a trader hopes to be at or near the ground floor of a stock or index move, one of two things must happen. Either he must become an excellent analysist, and learn how to spot potential opportunities before the masses do, (which takes years of training), or he must gain access to a source that does this for him, yet does not turn around and reveal the findings to the general public. A bona fide Investment Newsletter, which sends timely buy and sell notices to subscribers only, is the answer. This Newsletter is that source.

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