Don’t Buy Another Stock Until You See This
The best way to win a game is to know all the rules.
The same applies to the stock market.
It could mean the difference between $0 and a 1,000% winner.
If you don’t have a strategy for investing, you’ll end up on an uncontrollable roller coaster ride.
You may know our original rules of the game, but today I’m adding three NEW ones so you can be well-prepared for any and every stock market situation!
Check out my video for the eight key rules to investing. Save it, write it down, hang it on your computer. It’s that important to know before buying your next stock:
The Rules of the Game: 8 Stock Investing Tips
This week I am going to talk about what I refer to as Rules of the Game. These are like what the name implies. You need a management system if you are trying to make money in the stock markets.
If you just randomly go about it like throwing darts, buying and selling without a system around managing your money, thinking about when to put it in and how to get it out, you end up doing a lot of the wrong things at the wrong time. Now you are constantly on this roller coaster in terms of gaining or losing money.
Also, in terms of how it affects you and how you feel about yourself. One of the things I have known from being on Wall Street for a long time, managing money for big investors, hedge funds, mutual funds and even myself, is that the critical factor in investing is in terms of how much control you keep of yourself and your emotions.
That’s what ultimately drives your decisions. When you look at it, when things go wrong most people sell out of fear. They may even understand and know all the information but the feeling is so intense they sell out of fear. This is why I came up with Rules of the Game.
We have it for every single one of our services. It’s something I talk about week in and week out for every service. It’s often the answer when people ask me lots of questions in terms of what to do about a stock. Eventually, the answer goes to Rules of the Game.
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Now on to Rules of the Game. I actually wrote this down so I would not forget. I came up with a total of eight. Officially there are only four or five. Some of these are things I am constantly refining. You are actually getting the benefit of some refinements.
1. Never make an all-in bet on a single stock.
The number one rule, from my own personal experience and having been in this role for seven years, many people start in the stock market and pick one stock and go all in. They put all their money in one stock. I understand why people do it.
If you put all your money in and it works out, let’s say the stock goes up 50%, 100%, 200%, you’ve doubled, tripled your money and it feels great. The thing is, there’s a downside. If you put it all in something that’s wrong, now you lose money. That’s how I came up with rule number one: Never make an all-in bet on any single stock.
I explained why. If it goes well, you benefit. If it goes badly you have lost money and initial capital. Now it’s difficult for you in terms of money and your feelings to make another investment that may turn out better. This leads to the second Rule of the Game.
2. Make a Portfolio.
We tell our subscribers to make a portfolio. That’s a minimum of five stocks. That is a number that is plucked a little out of the air. There is no perfect basis for that number of stocks, but it’s a minimum. It’s intended to give you many chances to win. In this case, five chances to win.
Then if you are wrong about one stock, one of the other four can bail you out. If you are wrong about two, three can bail you out. You can be wrong, in some cases, about four stocks and even one single stock can bail you out. A great example of this is our STUF portfolio from last year.
Now that was four stocks. Nonetheless, if you invested in STUF last year, Tesla went up by 1,000%. The other three could have been losers and you would have still been a winner. That’s one benefit of having a portfolio rather than picking one stock.
The other thing this does is that when you are invested in a portfolio, you also can be invested in multiple things. For example, we have two mini portfolios — yes, they are four stocks and it sounds like a violation, but our mini portfolios are just there to showcase our ideas.
We have BUZZ which is Bitcoin (BTC), Uber, Zillow and Zoom. What you will see is there are four different investments in there. In addition, to have four chances to win, it’s four different ways to win. Rather than being all-in on any sector, industry or one part of the stock market, you have lots of shots on goal.
It increases the likelihood that you have a shot of making money, potentially big money like what happened with Tesla last year. So that’s number two.
3. Buy in slowly over time.
The third one is a mistake I have made a great deal in my life. I have to be truthful that I still make this mistake from time to time. Sometimes my excitement gets ahold of me. The rule is to buy in slowly over time. The reason for that is if you look at any chart of any stock, you will see a lot of ups and downs.
You can look at it on a one-day basis, a one week basis, monthly basis, five years or 10 years, it is always filled with the same ups and downs. If you put all your money all at once and it happens to be a bad point in time when markets are high, then what you might experience is regret.
You might feel badly because you put all your money in. You might have to wait a little longer for yourself to see the stock go into where it’s in a gain position where you start to feel good about yourself. By buying in slowly over time you can be opportunistic.
You can use volatility in your favor. You can buy when stocks are selling off. So last week when we had this big selloff in stocks where prices went down a great deal, you were able to go in and pick up stocks at lower prices.
By buying in slowly over time, you can target an average price, rather than just going in all at once in one day when you feel most confident. Then perhaps the next day or next week you feel badly. That’s the third thing: Buy in slowly over time.
4. Keep cash in your investment account.
The fourth thing is a follow-on from the third one: Keep cash in your investment account. In other words, in your actual brokerage account. If you have Robinhood, Fidelity, E*Trade, TD Ameritrade, whatever brokerage company, keep cash in there.
As I mentioned earlier, the number one reason people sell is out of fear. They experience volatility. The stock was up 25% and suddenly it shows only a gain of 5%. Now you panic. You start to imagine it going to a loss. That leads to you wanting to sell.
By keeping cash in your account, it accounts for the fact that stocks are volatile. That’s something that happens by nature of the market. As buyers and sellers come and interact, some sellers are willing to take lower prices. Those are recorded and published and transmitted.
That is experienced by you as a decline or being in a decline position. That drives fear. By keeping cash in your account you have a volatility buffer and emotional security blanket. Even if everything is down, that cash position is staying the same. It reduces the volatility you experience and you feel.
Now you can go through periods of volatility and endure through them and wait for the moment when stock prices can rebound. Also, if you have cash in your portfolio, the weighting of cash is going to rise as stocks go down. Now you feel like you can take a little cash and buy more stocks.
That’s actually what happened for a lot of our subscribers who we have been telling to keep cash in their portfolio. Into the March crash, a lot of people actually bought into Tesla. A lot of people bought into 3D Systems, Wayfair and Zillow and made extraordinary amounts of money.
Well done to all of you. I know what I am telling you is easy for me to say and hard for you to do. So that’s the fourth rule.
5. Focus on the return of your portfolio.
Now the fifth one is something that, even now, I still do and am constantly working at getting better. It’s to focus on the return on your portfolio. Focus on the portfolio return rather than going line by line and saying “This stock is down 20%. This stock is up 70%.”
What sticks in your mind is the stock that’s showing a loss. You end up focusing on that. By changing your focus and focusing on portfolio return, you now allow that stock that might just be at a temporary loss position — perhaps it’s a moment in time when there are sellers pushing the price down.
Because you are able to focus on your portfolio which has winning stocks, it allows you to sit in it. Also, by focusing on your portfolio return it makes you less likely to do something to hurt your returns. Many people looking at that sometimes think the winners should be capped and then use the winners to buy the losers.
This naturally lends the question to how you should weight your portfolio. Perhaps you are buying five or 10 stocks. How much do you put in each? We guide our readers to equal weight by dollar amount. What do I mean by that?
6. Equal weight your account.
Let’s say you are buying five stocks and you have $5,000.
You would put $1,000 into each. That’s what we mean by equal weight. Just understand, the higher the dollar amount you put in any stock, if it goes down, the higher the volatility you are going to experience.
Based again on my experience from managing money, what I felt is the best way to go about this is to equal weight by dollar amount. That way you end up capturing the biggest winners or even stocks you may disagree with.
I have read a lot of emails from people who have written me and say, “Paul, I actually disagreed with Tesla, but because you said to equal weight I just swallowed my feeling and equal weighted it and that ended up being my best-performing stock.”
So by equal weighting, you take your emotions out in terms of allocating the money. Now you put your money into things that you may disagree with. In some cases, that might end up being the stock that went up the most. Or, that might be the stock that ends up going up the fastest.
By equal weighting you get your shot at, from what I can tell, everyone wants. Everyone wants the stocks that are going to go up a lot and also that will go up very fast.
7. How to sell stocks.
Now to the other side. Many people want to know how they should sell or when they should sell. The next rule gets to when you should sell. Right now, let me talk about how you should sell. We tell readers to sell on the way up. Sell when you see the stock rising up over time.
I know this may contradict what we also guide you to in terms of keeping winners. But if you are looking to sell, we would tell you to sell on the way up rather than trying to hit the perfect peak or perfect top. It’s unlikely you will be able to do that.
The second aspect of selling is to never sell entirely out of a winning stock. Sell a small slice on the way up, keeping whatever you can in your portfolio so it can continue to rise and make you a lot of money. So that’s the seventh rule: Sell on the way up.
8. When should you sell a position?
The last one goes to when you should sell. We tell our subscribers to use the stock market as a means to an end to make your life better. When you feel you have needs in your life, maybe to pay off a loan, buy a house or a car, whatever it is, those are the moments to take money and sell.
That way the timing is dependent on you rather than making judgments about the market which you never completely know if you will be right or wrong. The other aspect is, if you are using the stock market to make a better life for yourself, your family, your friends, spend money on the things that make you happy.
Reduce your stress. Give you and your loved ones peace and happiness. To me, these are the ultimate things the market has delivered for me and are really the primary reason to be an investor and a speculator. Use the stock market to make your life better.
That’s the Rules of the Game. They are a little bit more extended than what’s in the official document, but that’s what we tell our folks when they ask questions. Hopefully, you were able to find this of some help to you.
Also, I mentioned our free e-letter Bold Profits Daily, be sure to subscribe to it if you liked today’s content. I’ll have another one of these next week.
Editor, Profits Unlimited