I’m going to review some basic growth investing rules that were originally published here in May 2010. Longtime subscribers will likely know these by heart, but it never hurts to review them.
1. Cut losses short. We could write a book about this rule, which is definitely growth investing rule #1. If you can’t jettison your losers before they do major damage, you can’t succeed as a growth investor.
2. Search for growth stocks with strong sales and earnings growth. Triple-digit sales growth is especially attractive).
3. Search for revolutionary products with major benefits. (First Solar and Crocs filled the bill in 2007 and were our two biggest winners. Last year, subscribers benefited from discovering 3D Systems’ revolutionary three-dimensional printing technology. Baidu’s unique Chinese search services also produced big profits for subscribers.)
4. Heed the message of the overall market. Never fight the main trend!
5. Never average down in growth stocks.
6. Be prepared for all contingencies. Always have an exit plan ahead of time.
7. Never try to buy at the bottom or sell at the top. If you try, you’ll just lose more money).
8. Stick with stocks that are liquid to avoid gut-wrenching volatility (at least 500,000 shares traded per day or more).
9. Only put more money to work after your past purchases are showing you a profit.
10. Be humble. Making money in stocks is tough, so don’t kill yourself over one or two bad trades. Be thankful when you hit a big winner.
11. Find an investing system that works for you. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it’s too late—by then, your emotions are out of control and you’re likely to do the exact opposite of what’s constructive.
12. “Markets are never wrong; opinions are.” At Cabot, we agree wholeheartedly with this quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected market speculators of all time. We truly embrace this thinking, and you should, too, if you want to become a successful growth investor.
13. Examine both the company’s fundamentals and its stock’s technical performance when you’re looking for potential purchase candidates. When analyzing the technicals, focus on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.
14. Find a company that has a big idea … one that has few, if any, limits on its future growth potential. It’s these big ideas that create an atmosphere that can push a growth stock to dizzying heights!
15. Follow these growth investing rules. Warren Buffett once said there were only two rules to follow with your investments: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.
16. Be heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money! But, of course, no market moves in one direction forever. So, when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases, while building up cash by selling your weakest stocks is a good idea.
17. Be an optimist. In our more than four decades of publishing investment advisories, we’ve seen many ups and downs for both the market and our country. But after every tough event, our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because the U.S. and our stock market will give you some dazzling opportunities!
18. Diversify your portfolio. For our Model Portfolio in Cabot Market Letter, our maximum of 12 stocks provides plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
19. Once you’ve invested in a stock, be patient. Recognize that time is your friend. Frequently stocks don’t go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you’ll have a great advantage. We call this STAYING POWER!
20. Buy growth stocks with strong RP lines. Relative performance (RP) studies are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!
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Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory