Here is some general investment advice that I have summarized from successful investors including Jim Rogers, Warren Buffett, and Doug Casey. You may find this advice helpful in your quest to profitable investing.
The Trend is Your Friend
Look for quality investments in markets where you can identify a positive trend. Then stay in that market until your expectations has been met or until something better comes along. You will notice that it is much easier find a trend and go with the stream rather than fight the current. As in all markets there will inevitable be corrections along the way so set realistic price target, and sell once you hit those targets.
Be Careful with Leverage
When someone goes completely broke, it is almost always because he used borrowed money for speculation. Using a margin account puts you at risk because one wrong move or a market correction can completely wipe out your account. You may even be right on the trend, and still be forced to liquidate your position when you get a margin call. If you decide to use leverage, donât invest money you canât afford to lose, and decide in advance on how much capital to commit.
Donât buy Every Stock
A lot of stocks that look attractive may flash in front of your eyes and you might get an urge to place a bid. But you cannot buy every deal, at least not without selling other positions to make room for new positions. If you buy without selling, you will in no time end up with an unfocused portfolio and be out of touch with most positions. An active investor can keep track of maybe 12 to 20 stocks without losing touch.
Donât Chase Performance
Be disciplined about your orders, set a maximum price that you are willing to pay and then let the market come to you. Donât chase a stock you think will go to the moon when it has already hit the stratosphere. You may lose out on a couple of homeruns, but you will manage your risk.
Use Stop Losses
Losses are psychologically difficult to deal with but it is better to limit your potential losses then to let them grow in hope that you will recover one day. Setup stop orders between 10% to 25% below your purchase price depending on the volatility of the stock, and the level of risk you are willing to bare. Then review your stop losses periodically and make sure that you are covered.
Take a Free Ride
Donât be afraid to take a profit, particularly if the price has doubled or tripled. No one has gotten hurt from taken their original investment off the table and taking a free ride on the rest. If you are certain that your stock is heading for the moon its ok to stay in for the long run, but decide on a target in advance and sell once the target is reached.
Panic Selling
In any market there are good selling and bad selling. Good selling relates to selling for justifiable reasons such as a fundamental problem in the company or the market. Panic selling is associated with selling of quality companies whose stock price plummet for no other reason than that the market participants are all heading for the exit at the same time. This can create a buying opportunity as quality companies that become over sold quickly bounce back.
Buy Low
Be fearful when others are greedy and be greedy only when others are fearful â Warren Buffett. Panic and fear on Wall Street usually present excellent buying opportunities and the time to buy is after everyone else have already sold and prices are depressed. Prices tend to overshoot in one direction and then fall more than what common sense suggest in the opposite direction.
Only Invest in What you Understand
Putting money in any investment or speculation that you donât fully understand is asking for trouble and it doesnât matter if your best friend, mate, or investment advisor pitch you a money making idea. You may later discover some risks or pitfalls you werenât aware of. You are better off sitting on cash until you find an investment that you fully understand so you can assess the risks and rewards.
Learn
Take the time to study the businesses and market you to invest in. The more you know, the better equipped you will be to invest. It requires a commitment of time to research companies and markets. Far too many investors and speculators fail to do the basic upfront research before placing a bid and then consider watching a companyâs ticker symbol as their way of studying the company.
Start by reading a companyâs annual report and its competitorâs annual report. There are also trade journals and investment publications that will provide good information. The more you know the more of an edge you have!
Make Your Own Decisions
Don't let anyone make your decisions for you. Many people have lost entire fortunes because they handed over their decision making authority to their financial advisors and attorneys. History shows that far too many advisors have made risky bets, been dishonest, or right out incompetent. Furthermore, you cannot expect a financial advisor to treat your money with the same care as you do.