How to Invest in Stocks

Dice cube with word BUY,stacks of golden coins rising, calculator on the financial stock charts

Want to know how to invest in stocks? Don’t ask Harvard University.

Harvard lost 2% of its endowment last year investing in the stock market and other more exotic ventures. (They have $37.6 billion left, so there’s no need to pass the hat yet.)

But the school’s loss does raise the question, “If a school that can afford the very best money managers can lose 2%, what chance do individual investors have?”

And the answer is, you have a great chance, because you have one great advantage that Harvard lost long ago, and that is flexibility.

As an individual investor, you can buy almost any stock you want, without fearing that your trades will impact the stock. Institutions like Harvard need to tread carefully, for fear of pushing stocks around, so their buying is often spread over many days and weeks—as is their selling.

Also, they can’t even look at little stocks like DigitalGlobe (DGI) and Mercury Systems (MRCY), which I reviewed here last week. Those little companies, which hit new highs recently and have great potential to grow as the U.S. government expands its defense efforts, are simply too thinly traded.

And when times get tough, you can sell a stock and switch quickly to the safety of cash. Harvard can’t do that.

So regardless of the size of your portfolio, when you look at Harvard’s, or any other institution’s huge portfolio, it should not be with envy but with sympathy, because you have an advantage they don’t have!

However, you still need three things.

A Goal

A Plan

And Rules.

The Goal is the simplest. Are you looking for large capital appreciation (which entails high risk), or slower and steadier growth with less risk, or high income to supplement your Social Security? You need to define your investing goal(s) before you go further.

The Plan is a bit more complex. This is where you decide what investing system(s) you’re going to use. Are you going to chase momentum stocks, buying high and selling higher? Will you choose to be a longer-term investor in large-cap growth stocks?  Will you use market timing? Will you invest for growth and income, giving up some appreciation potential for reduced risk? Will you venture into emerging markets like China, where the economy is growing faster? Or will you use a combination of these systems?

Last but far from least are your investing rules. These can be quite detailed, governing both buying and selling, but the more time you put into formulating them, and the more diligent you are about following them, the more confidence you will have in your investing.

If you’re a devoted growth investor like Mike Cintolo, for example, you’ll focus on how to invest in stocks that are growing revenues fast—generally at double or triple-digit rates. You’ll always cut losses short. And you’ll keep your positions concentrated, so that outstanding performance by any one issue can have a meaningful effect on your portfolio. For example, right now, Mike’s shareholders are looking at profits of more than 200% in a leading social network stock.

For more on Mike’s winning investment system, which has been refined in our Cabot Growth Investor over the past 46 years, click here.

If you’re a dedicated value investor, on the other hand, like Roy Ward, you’ll only buy stocks that are clearly undervalued. And once you buy them, you’ll simply hold patiently until they reach their Minimum Sell Prices. It’s a great system for investors who want lower risk and don’t want to watch the market every day.

In fact, since inception in 1995, Roy’s system has provided an impressive return of 1,172%, while Warren Buffett’s Berkshire Hathaway has earned “only” 574%.

Of course, Warren Buffett, like Harvard University, has the challenge of investing very large sums of money!

For more on Roy’s successful value system, click here.

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