What is the difference between an average investor and a smart investor? The average investor loses most of the time in the stock market but a smart investor will cut their losses short. According to Dale Gillham of Wealth Within, 90 percent of traders fail to make money when trading the stock market. You do not have to be part of this 90 percent group. Istead be the 10 percent who succeed.
Investing is not complicated. We make it complicated when we fail to plan. In this blog, you will learn three tips that will help you succeed in investing.
1. Set Clear Buy and Sell Rules
One of the first lessons I learned as an investor is to set clear rules for investing. You want to have rules that guide your decisions for buying and selling stocks. You may think you don’t need rules but you do. For example, when buying a stock you should consider what fundamentals (earning reports, etc.) or technicals (chart patterns) are statistically beneficial. Having a rule that says you will only buy stocks that demonstrate strong fundamentals and technicals increases your chances for success. Considering that 90% of investors fail, you need to use everything you can to succeed. For USA stocks, I only invest in stocks which show a 25% increase in earnings per share over the previous 6 quarters and annually over the past three years. Obviously, this eliminates many stocks out of my portfolio. It, however, insures I am selecting high quality stocks. Also, paying attention to chart patterns indicate key points when it is best to buy.
Once you have your buy rules, you need to also set sell rules. The top investors, know they will not be correct all the time. Therefore they minimize their losses. A good method is the 7 to 21 rule. This means that when a stock drops 7% you sell it. If it rises, 21% you sell it. This rule insures you minimize your losses while locking in your profits. It also means you only have to be correct 33% of the time to make a profit. If you buy three stocks and two of them fall 7% so that you sell, but the third stocks rises 21% then your profit from the 21% stock will cover the losses from the two 7% losses.
2. Never Get Emotional
Have you ever seen how oil mixes in water? Does it mix? It does not. Water and oil repel each other. Emotions and investing are similar. They do not go together. When I started out investing, I learned this lesson the hard way and paid the price. In 2018, I felt like a certain stock was a good buy even though the fundamentals and technicals were not strong. I bought the stock on a feeling and it did well initially until things got bad. The stock dropped overnight and I was down several hundred dollars. Emotionally, I remember saying, “Just hold it and it will go back up. I will sell it when it breaks even.” It went back up but rather cost me $1,600.
My emotions caused me to hold onto a failing stock which cost me dearly. I learned a lesson which cost me dearly. It does not have to cost you. Operate with emotional intelligence. Know your emotions will show up but don’t let them control your investing decisions.
3. Journal and Evaluate
Journalling is a practice many smart investors utilize. It allows you to analyze your buying and selling decisions. You can observe how your emotions have affected you. It is one of the most important evaluation tools you have at your disposal. And it costs nothing but a few minutes of your time.
Write down all of your trades. Write down why you bought and sold the stock. Write down your feelings on what you observe within yourself. There is no specific way to journal. Make it your own. The most important aspect is for you to have a written record that you can use to evaluate your progress. It helps you to see where you can improve as an investor and to see what works or does not work. You may have to revisit your buying and selling rules to make adjustments. If, so, then make them. Evaluate, evaluate, adjust, and reevaluate.
Investing is not complicated. Sure, you need to have a basic foundational knowledge of fundamentals and technicals. However, 90% of investors have that knowledge and still fail. May these tips help you succeed. Set clear buy and sell rules for yourself. Keep your emotions out of your decisions. And journal your journey so you can effectively evaluate your progress.