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Seven Rules For Better Investing

Here are seven simple rules that will help you make better investing decisions.

Focus on Your Stocks

Forget trying to predict which way interest rates or crude oil prices are heading. Instead, focus on your stocks. Start by reading the transcripts of the analyst conference calls following each quarterly earnings report. You can find many of them on Seeking Alpha (seekingalpha.com). Spending around 10 minutes reading a transcript will give you tremendous insight about a firm’s management competence and outlook.

Sell When Company Cuts Forecasts

Stocks prices reflect expected earnings growth. When a firm cuts earnings forecasts, its share price usually takes a hit. Sell anyway. Your first loss is your best loss. Things will get worse. Management always portrays problems as temporary and easily fixable. But bad news often leads to more bad news. Sell at the first sign of faltering growth.

Sell When Competitor Cuts Forecasts

Consider yourself lucky when a competitor announces the bad news first. Analysts will tell you the problems were company specific. But they weren’t. Everybody in the same industry faces the same problems. Sell before your company issues similar bad news. 

Never Average Down

Averaging down means buying more shares after a stock that you’ve bought went down instead of up. Say you pay $20 per share, then your stock drops to $10. You’re thinking you could cut your breakeven to $15 by buying an equal number of shares at $10. Bad idea! The stock dropped because something went wrong. Chances are; it falls even further.

Require Earnings

Many stocks with great stories have come and gone over the years. But, as said earlier, eventually share prices reflect earnings. Stocks that are burning cash this year will probably repeat that story next year.

Check Yahoo’s (finance.yahoo.com) Analyst Estimate report (Analyst menu) to see analyst’s earnings estimates for the current and next quarters and fiscal years. Require positive numbers for the current and next fiscal year’s earnings estimates.

Diversify

Not long ago, biotech stocks were hot. Now they’re not. Fast-trading hedge funds rule this market. Industries quickly move in or out of favor. Don’t put more than 15% of your investable cash into any single industry, e.g. social media, pharmaceutical makers, online retailers, etc.

Don't Pay Too Much

It’s tempting to overpay for a hot stock. Trees don’t grow to the sky. Pay attention to valuation. The price/earnings ratio (P/E) is the current share price divided by the last 12-month’s per-share earnings. It’s the most popular valuation measure. But, for fast growers, you’re better off using forecast future earnings instead of historical numbers. Yahoo’s “forward P/E,” found on its Statistics report, compares the current share price to next year’s forecast earnings.

Forward P/E ratios in the 10 to 20 range are reasonable for established steady growers such as Apple or Verizon Communications. But for faster growers such as Alphabet (Google) or Facebook, 20 to 30 is reasonable. Whatever you do, avoid stocks with forward P/Es above 40.

Those are my ideas. Over time, you’ll probably modify them to suit your own investing style. That’s okay, as long as you follow them. Successful investing is more about discipline than fancy analysis.

8/8/16

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