Rules are Imperative to Success - Especially in the Stock Market

Published on June 21, 2019 @ 9:03am

Experience has taught us certain rules are well worth considering if you're looking to be successful in the stock market. Of course those rules can be very different depending on whether or not you're a short-term swing trader or a long-term investor, but the fact remains if you adhere to a solid set of rules and disciplines, you're likely to become far more consistently successful - now and well into the future.

First, I just wanted to mention the importance of something we've relied on for years to be accurate and effective when it comes to helping traders and investors consistently become more successful.

Although charting and technical analysis has been a big mystery for many years, the concept is really starting to become mainstream, which is good for us and good for you.

Why? Although many like to make claims of being expert technicians, the truth is most continue to focus on certain technical tools and theories that recent history has proven to be ineffective, or at the very best modestly reliable. Meaning, there's an awful lot of old and unreliable tools out there many think work well, but simply don't.

However, if you're willing to take the time to learn what actually works, the proper analysis and methodologies can give you the type of edge that will allow you to spot trend reversals before the rest of the heard, an opportunity to sell when maybe others are piling in at the wrong time, and more importantly give you a great indication of what to consider and what to ignore - no matter how fundamentally solid the idea in question is.

Charting and technical analysis can also be a fantastic way to identify and assess where big money is flowing before the actual fundamental reasons ever start to surface. Remember, stocks and the markets in general often trade well in advance of what's to come, so it's usually the smart money that's going to start to reveal what's on the horizon long before the fundamental landscape actually starts to develop.

It's been very well documented for years here we're huge fans of charting and technicals. So much so it's become more and more of our focus here, and for good reason. While fundamentals often tell us which stocks to buy, it's the charts and technicals that tell us when to buy them, when to sell them, and when to ignore them.

I find it fascinating now that everyone from Jim Cramer to other Wall Street pundits on CNBC are starting to share their thoughts and analysis on charting technicals in an effort to better identify when's a good time to buy a stock and when's best to ignore a stock. I've made my living in and around the stock market now going on 20 years, and never have I ever seen so much commentary and analysis on charting technicals in the media like I have over the last few months.

I've said for a long time the advent of the Internet and all of the technology associated with real-time data and charting these days has provided professional traders and investors a significant edge using this fascinating and often reliable form of analysis. And now that these markets have entered a time period of extreme volatility and uncertainty, everyone out there is looking for that extra edge, so of course the media is starting to finally exploit it.

The bottom line is although fundamentals are clearly important when it comes to multi-year long-term investing in any stock; literally nothing is more important to the near and mid-term landscape more than charting and technical analysis.

Of course nothing in the markets is 100% reliable 100% percent of the time, but if you're willing to pay close attention to the charts, and assess things without any emotion whatsoever, you're likely going to put yourself in that top 20% of the investing population that makes 80% of the money.

This is precisely why we work diligently to not only bring you timely and reliable technical and fundamental analysis day in and day out with respect to the broader markets, the sectors associated and the plethora of individual stocks that make up the markets, we also make a big effort to try and educate you all along the way.

At the end of the day for us, it's all about helping you become more profitable, and ultimately help you become a more knowledgeable investor or trader - whatever your strategy might be. Like the old saying goes, give a man a fish feed him for a day, teach a man to fish feed him for a lifetime.

Rest assure, we spend countless hours assessing the markets and thousands of individual quality fundamental names in an effort to pinpoint when's the best time to participate in those names, and ultimately give you the kind of edge it takes to be consistently successful. We're clearly not always right, but it just goes to show just how much time it takes to spot potentially profitable opportunities, while reducing the potential risk as much as possible.

After years of helping professional investors and traders make better decisions, and ultimately more profitable, here are 10 of our most important rules we’ve found to help even the savviest individual.

  1. Before you ever decide to participate in any idea you must determine in advance whether it's going to be a short-term trade or a long-term investment. If it's a short-term trade, make sure to pre-set your parameters. Plan the trade and trade the plan based on your own risk tolerance and desired strategy. Meaning, a protective stop loss and a reasonably acceptable target. If it's a long-term idea in a VERY HIGH QUALITY name, be prepared to exercise patience and don't be afraid to average down in the idea if it ends up moving lower than 20%, but not before.
  2. Fundamentals tell you what to buy. Charts often tell you when the best time to buy them is. Remember, nothing drives the short and mid-term landscape for anything more than momentum, sentiment, fear and greed. However, in the long run fundamentals always win. This is why it's so vitally important you pre-determine your strategy in any idea - no matter what we or anyone else says about the stock in question. It's your money. The worst thing that could ever happen is having a short-term trade gone wrong that ends up becoming a long-term investment. Don't be afraid to cut losers and don't be afraid to ride winners, but never ever let winning trades turn into losing ones.
  3. If you're a long-term buy and hold investor and you hold in excess of 15 individual names, you're probably better off consolidating those holdings into a few multi-year outperforming ETFs like QQQ and SPY, because the chances of a portfolio with too many names outperforming the NASDAQ 100 and/or the S&P 500 is probably pretty slim.
  4. Predetermine how much of your portfolio is allocated to long-term investing and/or short-term trading. Also, predetermine your personality's risk tolerance and patience. This will go a long way toward helping you be successful. Most investors and traders have no real idea of what they’re strategies, timelines and goals are. It’s imperative every individual assesses their own personal risk tolerance, timeframes, goals and strategies. Rather than thinking about how much you might make on an idea, think first about how much you might be willing to lose in the event the idea in question goes wrong. Then, determine if it’s something you’re willing to hold for years, or simply hold for a short to mid-term trade. Keep your expectations realistic, because there’s no bigger place on earth than the stock market where rhetoric (both positive and negative) runs more rampant. Don’t buy the hype. Rather, make sure you have solid context technically and fundamentally for the stock in question. The more reasons you have to make up your bullish or bearish context for an idea, the higher the probability for success will be for the idea in question.
  5. Avoid companies that haven't proven much of anything on the revenue and/or earnings front - no matter how sexy the story might be or what anyone else says. If the Company in question isn't profitable, it better have enough cash on the books to see its way to profitability. Also, avoid companies with astronomical debt levels compared to cash on the books. You can easily look up a company's balance sheet and valuation metrics at sites like Yahoo! Finance by clicking on the ticker symbols statistics or financials. Unless it’s a development stage biotech with a LOT of cash on the books, the Company must be generating millions per quarter in revenue! If it’s not, that’s a major concern.
  6. Unless you love to gamble and lose, it's probably a very good idea to avoid penny stocks like the plague. Most of them our probably going to end up out of business, and that's no way to build a solid portfolio for the future. Again, rather than thinking about what you might make when considering an idea, first determine what you're willing to completely lose and go from there. Many novice investors gravitate to penny stocks because they think a small stock can get big faster than a big stock can get bigger. That couldn’t be farther from the truth. There’s a reason penny stocks are penny stocks, and it’s usually because they have no revenue and/or earnings to speak of, and they have poor cash balances on their books.
  7. Keep your emotions completely out of your trading or investing. Be realistic and see things for what they really are. Nothing can destroy a portfolio faster than pipe dreams or unrealistic expectations. Put in the necessary time depending on your strategy and keep things real.
  8. Take the three to five minutes every single day to read our daily report - not only will this keep you well on top of what's going on in and around these markets every day, it will ensure you don't miss something important regarding a new idea or any previously suggested ideas.
  9. You don't have to participate in every single idea you read or hear about. It's almost impossible unless you have an unlimited amount of funds. Even then, you should only ever participate in an idea your intuition and intelligence is telling you to participate in, and you understand a realistic context for the idea in question. In other words, if we put an idea out there and you really like the context of why we like the idea then participate in it. If something is telling you not to or the context isn't strong enough for you simply ignore it. Sometimes less is more. However, it is VERY important to read why we like something in its entirety before ever participating in the idea in question. We are not a portfolio management service. We cater to those willing to make their own decisions and willing to take the time to stay on top of the markets and further their education by staying well on top of our daily reports via email.
  10. As for our open ideas, when we suggest them we tag the idea in our open picks section with either a mild, medium or aggressive allocation. This is a representation of where we believe the major indices are in their long-term cycle. Mild is late stage bull market. Medium is mid-stage bull market and aggressive is bottoming bear market.

Excerpt from 9/20/2019 Newsletter Edition - Biggest Portfolio Killers and Tips Reiterated

I get an awful lot of emails and phone calls from time-to-time from many of you with questions regarding trading/investing strategies. I also receive many inquiries and questions many of you looking for a second opinion on an individual stock you own, have heard about elsewhere or are thinking about buying.

With that, I've assembled what I believe a very short list of the biggest portfolio killers, and a short list of tips on how one can improve their short and/or long-term portfolio performance.

First and foremost, many investors and trader participate in WAY too many overly speculative small and micro cap stocks that literally haven't proven their ability to substantially grow revenue and/or earnings. It's typically not a good idea to buy something just because someone has a great story about it. I prefer to focus on companies that actually have proven their fundamental worth already, have the necessary financials to grow their business, and do appear to have attractive forward growth prospects. Add all of that to a potentially attractive technical landscape, and you have a much higher probability of success for the idea in question. Even then, you or I are not always going to be right, which leads me to the next big tip.

Basically, it's imperative you participate only in high quality fundamental names and ETFs that trade high volume that are still fundamentally and/or technically attractive. The old adage buy low and sell high is all fine and good, but if you're not participating in proven companies and/or ETFs that have proved performance worthy, and are liquid enough to get in and out of them whenever you want, you're probably asking for trouble. I love to speculate as much as the next guy, but I will only speculate on something that has actually proven more than just a little fundamental something, and does appear to be technically attractive for more than just one reason. 

Further, many investors and traders have a tendency to hang on to their losers way too long - especially when it comes to those overly speculative small and micro caps that haven't proven much of anything. There's absolutely nothing wrong with hold something for the long haul, as long as it's a very quality name that continues to prove it's still a good idea to hold it from a fundamental perspective. Cash and debt on the books are a big tell for any company, so it's always important to look at those two line items before deciding if you're going to continue to hold something or not. There's nothing wrong with cutting an idea when an idea goes south. We've all hung on to losers far longer than we should have at times, but that's human nature - we don't want to accept a loss. Trust me, it's better to cut something before the losses really pile up in the wrong idea.

Another one of the biggest market no-no's is being way too overly active - participating in just about anything and everything that comes your way - no matter where it comes from. I can't emphasize how important it is to be selective, and know when patience is warranted. There's nothing wrong with doing nothing sometimes - especially when the current market environment isn't offering any sort of definitive direction. As for us, remember, we're simply a source of ideas to help you be successful in the markets, so it's very important you only ever participate in those ideas you have strong conviction for after reading the context here in the newsletter for why we like the idea in question.

Know your strategy and stick to it. Play the long game or the short-term game, or a combination of both, but pre-define the strategy on the idea before you decide to enter. Hindsight is always 20/20 so don't spend too much time on the coulda shoulda woulda unless there's something definitive to learn from it. Know your strategy in advance of buying or shorting anything. In other words, before you actually buy or short something, determine in advance if you're going to invest in it for the long haul, or if it's simply a short-term swing trading idea you're going to attempt to shave for some profits.

Lastly if you don't fully understand how the options markets work, don't buy or sell them. Everything from liquidity to implied volatility are important toward determining whether or not an options trade is worth the risk. Consider the timeframes, and always give yourself ample time that makes sense based on the cost of your options' purchase - all in an effort for those options to end up being profitable. It's enough to identify an attractive fundamental idea that is starting to look technically attractive, but often times it takes time for the idea to play out. Meaning, when you add time to the equation things become even more difficult - yet many investors and traders get sucked into buying options because of how much leverage and how profitable they can be when right. Sometimes, it's better to just be a seller of options rather than a buyer of them.

Excerpt from 2/21/2020 Newsletter Edition: Anticipation Vs. Confirmation - Positioning Power - Options Chains Often Don't Suggest What's Really Happening

Before I get into the meat of today's edition, I want to cover a few things I think can help every single trader and investor out there - no matter what your strategy might be. Whether you're looking to learn how these markets actually work, or you're simply looking to expand your already astute knowledge of how these markets work, there's something valuable in every section of today's newsletter to help you accomplish that.

First, I often talk about waiting for confirmation vs. trying to overly anticipate things too much all of the time. One might think those are two in the same when it comes to the equity markets, but there's actually a big difference between the two. Anticipating is jumping on something because of the way something is behaving in a minute or a day, while waiting for confirmation is actually waiting for something technically definitive to confirm itself before making a move.

All too often traders and investors will make knee-jerk decisions, only to end up being whip-sawed very quickly. Will they be right from time-to-time and capture more gains in the process? Sure, but hindsight is always 20/20. The truth is when a trader or investor actually waits for definitive confirmation, they're going to be right far more often than they're wrong. Sure, the more disciplined traders and investors are going to give up some gains sometimes by waiting for confirmation, but in the end they're going to consistently be a LOT more successful.

When it comes to something I call positioning power, I think it's prudent to wait for extremes for the timeframe and instrument in question. Meaning, when we jump the gun too soon (no matter what the chart timeframe in question is), we often can put ourselves in a position that's not optimal.

In other words, when we jump on a short or long trade too soon, and the idea in question moves quickly in the other direction we become trapped. Meaning, now we have to wait and hope for the idea in question to work itself back in the other direction. However, if one waits for an extreme, and then uses disciplined protective stops, they're often going to put themselves in a position of power. And, it's that power that allows them to not only feel more comfortable with the trade in question, but also gives them options.

Don't get me wrong, you could be the best trader or investor on the planet and you're still going to end up in unfavorable positions at times, but that's just one general rule I think everyone should consider before trying to anticipate something too soon.

Lastly, although I'm not a huge fan of options I do want to point out a big misnomer when it comes to the options markets. I see and hear it all of the time in and around the financial media, whereby people say they can tell what's going on with a particular options chain for a company or instrument.

You'll see and hear things like... someone bought a massive number of calls or puts with a strike price of X. However, what nobody really knows is whether or not that call or put purchase is a hedge against a much bigger underlying position - one that's actually meant for the opposite direction. Meaning, if someone buys a large number of puts, many might think that stock is going down when in fact it's merely a hedge against a much bigger bullish position in the stock.

So, just be careful getting sucked into relying too much on how many puts or calls are open or being purchased in an options chain at any given time, and more importantly rely on your charting prowess to determine what a stock is actually in a position to do.

John Monroe - Senior Editor and Analyst