Found this topic somewhere and thought i should share:
While it may be true that in the stock market there
is no rule without an exception, there are some
principles that are tough to dispute. Let 's review 10
general principles to help investors get a better
grasp of how to approach the market from a long -
term view. Every point embodies some
fundamental concept every investor should know .
1. Sell the losers and let the winners ride!
Time and time again , investors take profits by
selling their appreciated investments, but they hold
onto stocks that have declined in the hope of a
rebound. If an investor doesn 't know when it 's
time to let go of hopeless stocks, he or she can , in
the worst-case scenario, see the stock sink to the
point where it is almost worthless. Of course , the
idea of holding onto high- quality investments
while selling the poor ones is great in theory , but
hard to put into practice. The following
information might help:
Riding a Winner - Peter Lynch was famous for
talking about "tenbaggers" , or investments
that increased tenfold in value . The theory is that
much of his overall success was due to a small
number of stocks in his portfolio that returned big .
If you have a personal policy to sell after a stock
has increased by a certain multiple - say three, for
instance - you may never fully ride out a winner .
No one in the history of investing with a " sell -after -
I-have -tripled -my -money " mentality has ever had
a tenbagger. Don't underestimate a stock that is
performing well by sticking to some rigid personal
rule - if you don' t have a good understanding of
the potential of your investments , your personal
rules may end up being arbitrary and too limiting .
(For more insight , see Pick Stocks Like Peter Lynch. )
Selling a Loser - There is no guarantee that a
stock will bounce back after a protracted decline .
While it 's important not to underestimate good
stocks, it' s equally important to be realistic about
investments that are performing badly .
Recognizing your losers is hard because it' s also
an acknowledgment of your mistake. But it 's
important to be honest when you realize that a
stock is not performing as well as you expected it
to. Don 't be afraid to swallow your pride and move
on before your losses become even greater .
In both cases , the point is to judge companies on
their merits according to your research . In each
situation, you still have to decide whether a price
justifies future potential. Just remember not to let
your fears limit your returns or inflate your losses.
(For related reading, check out To Sell Or Not To
Sell .)
2. Don' t chase a " hot tip" .
Whether the tip comes from your brother, your
cousin, your neighbor or even your broker , you
shouldn't accept it as law . When you make an
investment , it 's important you know the reasons
for doing so; do your own research and analysis of
any company before you even consider investing
your hard -earned money. Relying on a tidbit of
information from someone else is not only an
attempt at taking the easy way out , it' s also a type
of gambling. Sure, with some luck, tips sometimes
pan out . But they will never make you an informed
investor, which is what you need to be to be
successful in the long run . ( Find what you should
pay attention to - and what you should ignore in
Listen To The Markets, Not Its Pundits.)
3. Don' t sweat the small stuff.
As a long -term investor, you shouldn 't panic when
your investments experience short- term
movements. When tracking the activities of your
investments, you should look at the big picture .
Remember to be confident in the quality of your
investments rather than nervous about the
inevitable volatility of the short term . Also, don 't
overemphasize the few cents difference you might
save from using a limit versus market order.
Granted, active traders will use these day -to- day
and even minute -to- minute fluctuations as a way
to make gains . But the gains of a long- term
investor come from a completely different market
movement - the one that occurs over many years -
so keep your focus on developing your overall
investment philosophy by educating yourself .
(Learn the difference between passive investing
and apathy in Ostrich Approach To Investing A
Bird-Brained Idea.)
4. Don' t overemphasize the P /E ratio .
Investors often place too much importance on
the price- earnings ratio (P /E ratio ). Because it is
one key tool among many, using only this ratio to
make buy or sell decisions is dangerous and ill -
advised. The P/ E ratio must be interpreted within a
context, and it should be used in conjunction with
other analytical processes . So , a low P/ E ratio
doesn't necessarily mean a security is
undervalued , nor does a high P /E ratio necessarily
mean a company is overvalued . ( For further
reading, see our tutorial Understanding the P / E
Ratio. )
5. Resist the lure of penny stocks .
A common misconception is that there is less to
lose in buying a low - priced stock. But whether you
buy a $ 5 stock that plunges to $ 0 or a $ 75 stock
that does the same , either way you've lost 100 % of
your initial investment . A lousy $5 company has
just as much downside risk as a lousy $ 75
company. In fact , a penny stock is probably riskier
than a company with a higher share price , which
would have more regulations placed on it. (For
further reading, see The Lowdown on Penny
Stocks.)
6. Pick a strategy and stick with it .
Different people use different methods to pick
stocks and fulfill investing goals . There are many
ways to be successful and no one strategy is
inherently better than any other . However, once
you find your style , stick with it . An investor who
flounders between different stock -picking
strategies will probably experience the worst,
rather than the best, of each . Constantly switching
strategies effectively makes you a market timer ,
and this is definitely territory most investors
should avoid . Take Warren Buffett 's actions during
the dotcom boom of the late '90s as an example .
Buffett' s value - oriented strategy had worked for
him for decades, and - despite criticism from the
media - it prevented him from getting sucked
into tech startups that had no earnings and
eventually crashed . ( Want to adopt the Oracle of
Omaha's investing style? See Think Like Warren
Buffett. )
7. Focus on the future.
The tough part about investing is that we are trying
to make informed decisions based on things
that have yet to happen. It 's important to keep in
mind that even though we use past data as an
indication of things to come, it 's what happens in
the future that matters most .
A quote from Peter Lynch' s book "One Up on Wall
Street" (1990 ) about his experience with Subaru
demonstrates this : " If I'd bothered to ask myself ,
'How can this stock go any higher ?' I would have
never bought Subaru after it already went up
twentyfold. But I checked the fundamentals,
realized that Subaru was still cheap , bought the
stock, and made sevenfold after that. " The point is
to base a decision on future potential rather than
on what has already happened in the past . ( For
more insight , see The Value Investor' s Handbook. )
8. Adopt a long- term perspective .
Large short -term profits can often entice those
who are new to the market. But adopting a long -
term horizon and dismissing the "get in, get out
and make a killing" mentality is a must for any
investor. This doesn' t mean that it 's impossible to
make money by actively trading in the short term.
But , as we already mentioned , investing and
trading are very different ways of making gains
from the market . Trading involves very different
risks that buy-and- hold investors don't experience .
As such , active trading requires certain specialized
skills.
Neither investing style is necessarily better than the
other - both have their pros and cons . But active
trading can be wrong for someone without the
appropriate time , financial resources, education
and desire. (For further reading, see Defining
Active Trading.)
9. Be open -minded .
Many great companies are household names, but
many good investments are not household
names. Thousands of smaller companies have the
potential to turn into the large blue chips of
tomorrow. In fact , historically, small -caps have had
greater returns than large -caps ; over the decades
from 1926- 2001, small -cap stocks in the U . S.
returned an average of 12 .27% while the Standard
& Poor' s 500 Index ( S& P 500 ) returned 10. 53%.
This is not to suggest that you should devote your
entire portfolio to small - cap stocks. Rather ,
understand that there are many great companies
beyond those in the Dow Jones Industrial
Average ( DJIA), and that by neglecting all these
lesser-known companies , you could also be
neglecting some of the biggest gains . (For more on
investing in small caps , see Small Caps Boast Big
Advantages.)
10. Be concerned about taxes, but don 't worry.
Putting taxes above all else is a dangerous
strategy, as it can often cause investors to make
poor, misguided decisions. Yes, tax implications
are important, but they are a secondary concern.
The primary goals in investing are to grow and
secure your money . You should always attempt to
minimize the amount of tax you pay and maximize
your after -tax return , but the situations are rare
where you' ll want to put tax considerations above
all else when making an investment decision (see
Basic Investment Objectives ).
Conclusion
There are exceptions to every rule, but we hope
that these solid tips for long -term investors and
the common -sense principles we 've discussed
benefit you overall and provide some insight into
how you should think about investing .
'They say money cannot buy me happiness but when i compare when i had none and now, i'm happier' Kevin O'leary