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How to win in the Stock Market

Updated on October 18, 2008

How to win in the Stock Market

1. Be well informed. Ignorance definitely is not bliss when it comes to making and preserving money. Learn as much as you can about the companies you are invested in or thinking of investing in. Read and listen extensively to what is going on in the stock market, the economy, the country, and the world. If you haven't the time or the interest to keep abreast of the latest developments, follow the advice of someone who does.

2. Be flexible. Don't be afraid to admit you were wrong. If you sold a stock and new information makes it look attractive, buy the stock back, even if you have to pay a higher price. Similarly, if you didn't sell when you might have and things are looking dim for the stock, sell before it goes lower. We all make timing mistakes. Just don't compound them by failing to correct original errors promptly.

3. Keep emotion out of your stock

Decision-making process. Love your spouse, your children, but don't love your stocks. Just because they have been good to you in the past is no guarantee they will be good to you in the future. Similarly, don't dislike a certain stock or industry just because you once got burned. Today it may be the best buy around.

4. Don't outsmart yourself. By playing with eighth and quarter limits or stop-loss-orders too close to the market, you can lose money. Also beware of heavy margin positions and use options and short selling only if you fully understand the risks you are taking.

5. Listen to takeover and merger rumors but consider the source. Only a handful of the hundreds of rumors you may hear become legitimate of­fers and fewer than that are actually completed. Buy each stock on its own merits. If someone later decides to buy the company, consider it an unexpected bonus.

6. Keep good records. Be careful not to let a short-term loss become a long-term loss unless you have a very good reason for doing so or you will lose a valuable tax advantage. On the other hand, try to turn a short-term gain into a long-term gain wherever possible. A year and a day seems like eternity in this short-term world, but hang in there the closer you get to long term. Even if the stock drops a bit, you could be ahead, tax wise, by waiting.

7. Own only as many stocks as you can recite from memory. With most people, this is somewhere between 8 and 15. Review your portfolio posi­tion once a week, if not daily. After ignorance, inattention is the second most deadly sin. Stocks are not a hobby like stamp collecting, which can be put away for a rainy Sunday. Unless you continually exercise your investment judgment, your portfolio can indeed get out of shape very quickly.

8. Some miscellaneous observations: Look to buy what others are not buying. Use caution when buying stocks with big labor problems and big capital problems and stocks that are heavily regulated by the govern­ment. Be careful of inside informa­tion— an employee is not always the best judge of his own company's stock. Watch out for hot new "concept" stocks, which are here today and goners tomorrow. Be aware of stocks with an excessive amount of foreign earnings during these times when coups, nationaliza­tion, and expropriation are all too commonplace. Try to buy stocks that sell in double digits. Don't over-concentrate on any one stock— tech­nological innovations, plant accidents, increased competition, raw material shortages, strikes, and so on can drop the price of a stock in a hurry.

9. Be lucky. There is no substitute for being in the right place at the right time or for doing the right thing for the wrong reason.


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