GROWTH  Stock  Investing

Lesson 1: Penny Stocks Will Ruin You

Yesterday I came across a post  that I thought was quite insightful and well written.  What really jumped out at me was the opinion of penny stocks because it's one that resonates with me.  There are lots of ways to make money investing but I am convinced that penny stocks will never get me to my financial goals.  I prefer to manage my risk by working only with true growth stocks.  The sooner you learn to steer clear of penny stocks the better as far as I'm concerned.  Personally I prefer to be involved with stocks that are priced above $40.  $100 or higher is preferable - especially with average daily trading volume of 500,000 shared per day or higher.  These are institutional types of stocks and I prefer to fish where the big boys in the market are fishing at.

Lesson 2: Know Your Trading 

Personality

In my role as a Meetup coordinator for IBD (Investors Business Daily) and as a mentor to new traders for the last 7 years, I am constantly exposed to people who employ all kinds of different investing methods.  For the last 25 years I've thought of myself as an investor but recently it occurred to me that I've actually become a trader.  If you're wondering what the difference is, it really boils down to your time frame. 

I simply don't have the stomach to sustain the types of double digit losses that investors might see over the life of their positions.  Also, I don't have the patience to sit in a position for more than 8 weeks at a time so long term involvement doesn't really interest me.  Knowing that, I've committed myself to planning all of my positions from the perspectives of a trader instead of as an investor.  However, if the stock makes a substantial gain (+20% to +25%) within 8 weeks, I will take partial profits and allow the rest of the position to consolidate and stair step additional when the stock moves to higher ground.

Lesson 3: Have A Process

My trading process has been methodically put together through years of classroom training as well as trial and error.  I am a Growth Stock trader and the core system I follow is the IBD style of investing in Growth Stocks.  Concentrate my portfolio to just a handful of stocks/etf's  and limit my exposure to no more than 12 to 15 stocks when the market has a  "Follow Thru Day."  Within a short period of time, I quickly identify the true market leaders that are out performing the general market.  Put more money to work to the ones that are helping me build my portfolio and trim back the ones that are not advancing as fast or worse - are losing money.  According to IBD, most retail traders with a portfolio size that is no more than a $million in size ought to have just 8 to 12 stocks.

No matter what process you decide to use, it's only going to work if you stick with it.  The moment you start to stray or take liberties, you've increased your risk along with your chances of losing money.

Lesson 4: Follow Rules

IBD has several Buy Rules and Sell Rules.  As a retail trader, it's critical to follow these rules because they are proven rules that Mr William J O'neil (Founder of Investors Business Daily) published in his book:

How to Make Money in Stocks

I keep a copy of his book in my office and by my bedside for a quick reference.

Infact I take this book with me when I travel or when I go on vacation or a cruise.

He wrote these rules to help him navigate the market and mitigate risk.  Master these proven rules and do not deviate from its true concept.  Mitigate risk by cutting losses to no more than 7% to 8% from its entry on every stock that you initiate a position on - no exceptions for someone starting out.  Most retail traders will never make much of a progress with their portfolio if they don't minimize their losses.  Psychologically it destroys your confidence everytime you open up your brokers platform and see that losing stock position stabbing at you. 

Happy Trading!

Amin Hemani (investorspotlight@gmail.com)