That’s not a bad thing. Feel-good investors buy stocks because they feel good about the stock or the companies that have issued it.
Investors who feel good are motivated by emotion, not financial acumen.
That’s not a bad way to pick stocks. It may not be optimal, and it may not be the most profitable, but it’s not a bad way.
Let me tell you about an experiment done several years ago.
A group of researchers wanted to see what random stock selection actually looks like.
They “commissioned” a monkey to throw darts at a financial stock page.
Then followed the companies that the monkey “selected”.
After following those randomly selected companies for a year, they concluded that the companies chosen by the monkeys performed better than the S&P 500.
That’s a really scary thought: randomly pick a pack of stocks and you can beat the market!
Which shows that the market, in general, can be seen as a random collection of random events.
Our challenge is “How do you profit from these seemingly random events?”
The supplementary task is “When to sell?”
You don’t make any money unless you sell a stock. Simply holding on to a stock that is going up can make your net worth look good on paper, but you can’t take that paper to the grocery store and buy dinner!
Only when you sell. Or if you collect dividends from those shares.
Now we have two tasks ahead:
- What stocks to buy?
- When to sell those shares?
Another rule of thumb is: “Don’t plan to hold those stocks forever.” Nothing lasts forever. All you can do is maximize your profits.
One other thing: the stock market is currently being held and controlled by institutional investors who control billions of dollars worth of stocks.
You can’t beat them.
But you can benefit from them.
Can I tell you a little story?
For several years I was trying to “beat the table” at the craps tables in Las Vegas. But I had very little money and even less knowledge. I noticed that there was a player who had a large stack of high value chips. And he kept adding to the horde of him. Then I began to emulate the “trades” of him. When he put chips in a position, I did too. When he picked up his position, I did too. And I started to accumulate chips. Without having the slightest idea what he was doing, he was actually making money!
Then, thinking I knew something about craps, I went to another table, and you guessed it, I put everything in the casino pocket, and some more!
Moral? Don’t try to second-guess the experts. But you can benefit by following them.
This brings me to my first observation about the stock market: Due to the phenomenon of “beginner’s luck,” amateurs may fare better than the average individual investor.
As your knowledge grows, so does your unfounded confidence, and soon you may find yourself doing [hindsight] terrible decisions. Until you become as smart as the institutional investor, you may fail.
Even the pros don’t get it right all the time. Look at how many “professional” hedge fund managers have gone bankrupt. Look how many stock traders have lost their collective butts.
And on the flip side, look at how many multi-million dollar homes have been bailed out because they were “too big to fail.”
So my advice to you is to create a set of trading rules that work for you. Follow them religiously, until they start to fail you. Make the necessary adjustments.
Properly selected, business rules do not fail: the principles are universal, but must be scrupulously followed.
My personal trading rules are very simple:
- Select stocks that pay dividends according to a set of fixed parameters.
- Set “sell” rules according to rigid parameters.
- Set trailing stop loss orders to protect your profits.
- Take the emotion out of your trading as much as possible. Never fall in love with an action.
Do my rules work for me? Yes. My goal is to achieve a monthly dividend income of $2,500 before taxes in less than ten years. After just five years of trading my way, I have achieved a monthly dividend income of $1,800. I am on target to achieve my goal.
My starting dividend position five years ago was just $208 a month.
Because you have the benefit of my bugs, you can easily achieve better returns!