Okay, you’ve chosen to read this report, which means you have some extra money. It’s doing you no good sitting in a traditional savings account, money-market account or certificate of deposit (CD) – especially now that the Fed has lowered interest rates back to zero again in response to the coronavirus pandemic.
You want that money to do a better job of “working for you,” so to speak. So you’ve decided to invest some of it—say, $10,000—in the stock market. Good decision!
The catch, of course, is that you’ve never invested on your own before—or, at the very least, your investing experience is limited. You want to know the best way to invest that $10,000.
This report will teach you how!
Now, rather than simply give you a list of stocks to buy with your $10,000, I’m going to give you some very detailed tips to help guide your investment decisions. These are tips that have not only kept the Cabot Wealth Network afloat for nearly a half-century—through crippling recessions and countless market crashes—but enabled longtime subscribers to double their money 30 times over!
I hope these tips will help you have similar success in the stock market.
Let’s get started!
Eight Helpful Investing Tips
Tip #1: Don’t Argue with the Stock Market.
“Markets are never wrong; opinions are,” is a quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected traders of all time. We agree wholeheartedly with his comment, and we embrace his thinking. You should too, if you want to become a highly successful investor.
Human nature is the same today as it was in the 1920s and 1930s when Jesse Livermore was a major force on Wall Street. Investors have the same hopes and dreams today that they did then. Mr. Livermore saw that the opinions of many of his colleagues were often wrong, as the market went on its own merry way in a direction contrary to what they had expected. This, too, has not changed.
We learned long ago that it’s a mistake to argue with the stock market. To understand why, you need to remember that market prices are determined by the actions of millions of investors every day. Thus, if you believe that the market is wrong, you are actually saying that the net result of all the people participating in the market must be wrong.
Knowing that these investors include thousands of well-trained security analysts, technical analysts, insiders and friends of insiders—in short, a lot of smart people who know just how the stock market works—are you willing to say your thoughts are more insightful than everyone else’s? We think not!
Rather than fighting the action of the market, a much more rewarding strategy is to identify the current trend and stay with it as long as it persists. In other words, let the market tell you what the market is thinking. The only reliable way to uncover the net effect of all the various factors affecting the market is to look at the market itself. No fundamental market analysis will tell you more than the market will tell you. Believing in opinions and forecasts of the market will only lead to poor investment decisions.
It has been said that timing is everything. In investing, market timing may not be everything, but it is a big thing. By using market timing strategies, you can identify the best times to buy and sell your stocks, thereby maximizing your profits.
Tip #2: Buy Your Stocks at the Right Time.
Finding a great growth stock and getting in on the ground floor can be like finding romance. It’s full of intangibles and mystery. It can be exciting, with even your greatest expectations exceeded. And those pleasant surprises can keep on coming, often convincing you that the good times will never end.
Where do we find this romance? It’s usually concentrated in the market high-flyers (including some of our Cabot Growth Investor recommendations). Thousands of investors simply cannot understand why certain young growth stocks soar month after month to astronomical valuation levels, often no apparent reason. Sometimes, these stocks have growing sales but no earnings. The product or service may not be well understood by the masses. And yet, the stock continues to advance past everyone’s wildest expectations. “What does he see in her?” you might wonder.
An old Wall Street adage, one that we’ve found as useful as any, explains this phenomenon: A stock, like love, thrives on romance and dies on statistics. There are plenty of investors out there who are able to understand the long-term potential for the aforementioned growth companies. These investors see something exceptional and even revolutionary that other investors miss, and are willing to buy and hold onto the stock, even at prices that appear to be completely unreasonable and unjustifiable to other investors.
It isn’t until much later that the romance fades. At this time, the mystery and sexy expectations are replaced by cold, hard facts. This reality, even though it may be exceptional, seldom matches the dream. Reality, in fact, tends to suggest limitations. And that’s when the early investors usually jump ship, pushing the stock down and ending its run to record heights.
So how does all this help you make money? Our studies over the years have convinced us that you can make a great deal of money from a stock in its romance phase, before most investors realize the full thrust of the company’s story. If you wait for reality and a slew of fundamental facts (like growing earnings and a knockout of all competitors) to pour in, chances are you’re too late; the stock has already factored in the great news you’re just now reading.
Our advice is to look for exciting growth companies that are presently in their romance phase. Once invested, your job is to exit your position at the end of the stock’s romance phase, when, frankly, all of the news is usually excellent. The fundamental facts will begin to support the stock’s lofty price, and investor sentiment regarding the company will be outstanding.
However, you’ll notice the stock price and the relative performance (RP) line gradually eroding, unable to reach new highs. (Relative performance measures the stock’s performance relative to the market as a whole. More on this later.) Over a period of weeks, if the RP line falters, you’ll know the romance has ended, and reality is taking over. At this point, you’ll want to sell the stock and look for your next love affair.
Tip #3: Know When to Sell Your Stocks.
If we asked thousands of investors what their main desire was, the most popular answer would undoubtedly be, “to make money.” And who can argue with that? It’s why you’ve decided to shun traditional savings accounts and instead put $10,000 of your own hard-earned money into stocks. Increasing one’s wealth can help people pay for their children’s college tuition, a nicer house or a secure retirement. It seems the only plausible goal for investors.
But not everyone is like you. Believe it or not, our nearly 50 years of investment experience has taught us that one of the most pervasive desires of the average investor is actually something other than making money. Most investors have a secret longing to feel right. Now, at first glance, it may seem that these two goals are synonymous. After all, when you make money in the stock market, you feel right. But, in practice, these two goals are diametrically opposed. Let’s take a look at how a typical investor’s story progresses.
When an investor is getting ready to put his money to work, a lot of time is spent trying to find the best available stocks for purchase. Most investors will read various articles about certain stocks, page through a few annual reports and study earnings estimates. After what usually turns out to be many hours of research, the investor comes to a conclusion on which stocks to buy. He then commits his hard-earned money to these stocks, feeling confident (maybe even excited) about his prospects for making money in the stock market.
Naturally, not all of these investments go the right way. It’s most troubling as he watches some of the stocks he had the highest hopes for drop in price right after his initial commitment. Still brimming with confidence, the investor sticks with these losers, confident the decline is just temporary. Weeks pass, but these poor performers do not rebound; in fact, they sink to even lower levels. Stunned by this development, the investor tells himself that the stocks have become bargains. After all, if they were good buys when he bought them, they must be even better buys at these lower prices. Thus, he continues to hold on and perhaps buys even more of these stocks, hoping they will return to their previous highs.
On the other side of the ledger, the investor watches some of his choice selections soar from the get-go. He’s extremely pleased with this development, so much so that he’s eager to take his profits. His thorough research has obviously served him well, so the investor figures he’ll take the money off the table, garnering a quick gain of 30% or 40%. Feeling satisfied, he takes his wife out to dinner, and proceeds to tell her how good he is at making money in the stock market.
The two investment actions described above make the investor feel right. By taking profits out of a stock quickly, he feels as though his research was justified. After all, what can justify your efforts more than an increase in your brokerage account? And by holding on to the rest of his investments, which simply haven’t “come around” yet, he feels right by owning these well-researched and undervalued stocks.
It all seems so right, but there is nothing more wrong. This investor has sold his winning stocks while holding on tightly to his losers—the exact opposite of a strategy that will help you make money in the stock market. By following his emotions (his desire to feel right), he has sown the seeds of his portfolio’s demise. His portfolio now consists of a bunch of lemons and no good performers. Is that any way to make money in the stock market?
A quote from Reminiscences of a Stock Operator, which profiled the life of stock speculator Jesse Livermore, sums up our thoughts: “Experience has taught me that the way a market behaves is an excellent guide for the (investor) to follow. It is like taking a patient’s temperature and pulse, or noting the color of the eyeballs and the coating of the tongue.”
Clearly, holding on to your losers while selling your winners is the wrong way to go. The market is telling you that your losing stocks are losers for a reason—maybe because something is wrong with the company or new competition is coming on board. Conversely, your winning stocks are profitable for a good reason—namely, the market sees an ever-brighter future for those companies.
If you really want to make money in the stock market, you have to discard your desire to feel right all of the time. Instead of giving yourself instant gratification by taking small profits, work to let your winners run while cutting your losses short. This way, your portfolio will consist of a bunch of strong performers with few, if any, lemons. And that will position you to make more money in the stock market over the long run, which is the ultimate goal of investing.
Tip #4: Pay Attention to Investor Sentiment.
In life in general, and in investing in particular, we are all part of the herd. Investor sentiment is powerful, as we are all subject—to some degree—to the forces of mass psychology. When investor sentiment changes about a particular stock or about the market as a whole, the herd has the power to push its target sharply in one direction or the other. On the surface, it appears that by keeping in tune with the herd, we can garner huge profits.
This is true, to a point. In fact, we often preach the intelligence of not trying to predict how far a certain market move will go or how long it will last. Instead, we’ve found that it is much more rewarding to simply observe the current trend and stay with it. In short, you should stick with the herd.
But while riding the power of the herd is usually the most profitable way to go, there are times when it is the worst thing to do. How can this be? When a vast majority of the subjects of the herd feel the same way about an investment, a turning point is at hand. To understand why, we just have to look at basic supply and demand.
When an investor believes a stock, industry or entire market is heading higher, he naturally commits funds to those stocks. This only makes sense; he’s bullish. There’s nothing dangerous about that. But when most people become bullish, and they commit money to those same stocks, a problem arises. Because most investors have already bought in, the buying power to push the stock higher has disappeared—there is no one left to buy the stock. At this point, the sellers take control and prices fall.
Conversely, when pessimism is rampant, most investors have already sold out. They believe there is no money to be made on the long side of the market. When this extreme is reached, the buyers can take control, because there are no selling pressures ready to oppose them.
Our point in all this is to help you use contrary opinion in your investment decisions. Benton W. Davis, in his 1964 book, Dow 2000, explained contrary opinion in a unique way. Here’s some of what he had to say:
“Think of it this way. There is this great big pasture stretching up and down on a long hillside with a fence all around. Today there are eighteen to twenty million sheep in this pasture, the majority quite unseasoned. In fact they would seem to be, at times, conducive to panic. If someone appears shouting ‘wolf,’ these sheep can take off as one, in a cloud of downhill dust and thundering hooves, to wind up a shivering, shaking mass, stopped only by the bottom wire.
“It then took considerable time, considerable coaxing, and factual existence of a great bull market to get these sheep out of their bottom huddle. But, when they finally got started they galloped back uphill almost as fast as they had charged downhill, gathering recruits on the way up, before too long winding up against the top wire, in complete reversal of outlook, a now happy herd of panting optimists.”
What you want to avoid is being the sheep that’s running downhill with all the other sheep just before you reach the bottom wire. And you sure don’t want to be the last panting optimist at the top wire! It all comes down to staying on the right side of shifting investor sentiment until mass perception reaches an extreme level.
While it’s very difficult to pinpoint tops and bottoms based on sentiment, contrary opinion can nonetheless help you become a little more conservative near tops and a tad more aggressive near bottoms. And while these small adjustments in your portfolio may seem insignificant, they become a big help to your portfolio performance because they come near market turning points.
So what should you look for to identify extremes in investor sentiment? There are a number of technical indicators, ranging from the put/call ratio to Investors Intelligence’s survey of the bullishness or bearishness of investment advisory writers. Beyond those indicators, newspaper and magazine headlines and a general willingness to buy on the part of friends and relatives can give you a hint as to where we are in the market cycle. (Is your brother-in-law giving you hot stock tips every time you see him?)
By watching for extremes in the level of investor sentiment and adjusting your investments accordingly, your investment results are sure to improve.
Tip #5: The Charts Don’t Lie.
Learning how to read stock charts is a skill that all investors can benefit from. Technical analysis of stock trends helps investors to determine how the markets in general, and their stocks in particular, are likely to behave in the days ahead. When deciding whether to buy (or sell) a stock, examine both the fundamentals of the company and the technical health of the stock.
Here are some of the terms you’ll need to know to understand how to read stock charts:
Momentum: We measure a stock’s momentum by examining its Relative Performance (RP) line. The RP line compares the stock’s price to a market index. If the RP line is trending higher, that stock is outperforming the market as a whole. If the RP line is falling, the stock is underperforming the market as a whole. At the Financial Freedom Federation, we compare all stocks to the S&P 500, the benchmark U.S. stock index.
Price Chart: We prefer to look at bar charts, which show the high, low and closing prices of a stock for every day (or week, or month, depending on the chart you’re looking at).
Volume: The number of shares of the stock that have changed hands that day (or week or month). This number can usually be found on the price chart.
Moving Averages: Moving averages smooth the fluctuations in a stock’s price. To get a moving average, you simply add up all the closing prices for a stock over a certain time period (say, 50 days) and then divide by the time period (50). You will get the average price at which the stock has closed over that time. Do this calculation every day, for the previous 50 days, and that’s how you get the ‘moving’ part. We usually watch the short-term (25-day), intermediate-term (50-day) and longer-term (200-day) moving averages.
There are a bunch of other technical indicators you can look at, but many of them serve to confuse rather than enlighten. You really want to analyze longer-term stock charts, which capture the real picture of the supply and demand relationship for a stock.
Stock Selection and Momentum
Our system for selecting growth stocks is based on momentum analysis. Any new stock we buy must have positive momentum. A stock has positive momentum if its RP line has been advancing for at least 13 weeks (the number of weeks in a quarter). We’ve found that this period of time is usually enough to establish a new momentum trend, and once a trend (either positive or negative) is in place, it tends to stay in place for a relatively long period of time. That’s why you want to own stocks that are going up!
Once you’ve selected a few stocks that have positive momentum, you need to take your search to the next level. At this point, look for stocks that have particularly strong RP lines, indicated by corrections of two weeks or less. Brief corrections (time-wise) tell you that there are lots of buyers in the market who are willing to snap up the stock on any decline. This is exactly the type of situation you want to be invested in! Ideally, the corrections should be both brief and shallow, but brevity is more important than depth.
Once you’ve selected stocks with a positive RP line, analyze their strength by asking: How long have the corrections been over the past six to nine months? How deep have the corrections been? How steep is the RP line? (The steeper the line, the more the stock has been outperforming the market.)
How has the RP line acted during market corrections? (A stock whose RP line remains strong when there is turmoil in the general market indicates super-strong buying pressures.)
All in all, you should only be buying stocks with positive momentum. The perfect RP line will have a steep slope, with corrections that are brief and shallow. Finding stocks with strong RP lines is half the battle when seeking successful investments.
After examining the RP line, we shift our attention to the stock price. Often, the price chart and the RP line will look similar. But sometimes they will differ, often during market corrections. The strongest stocks hold up the best during corrections, and have price charts that resist the downward pull of the general market. In this case, you’ll see the price trending sideways but the RP line will be heading toward the heavens! This is because, relative to the overall market, the stock is making a lot of progress.
When looking at the price chart, you’re looking for the same characteristics you looked for in the RP line—brief and shallow pullbacks with an overall steep uptrend. And steep rebounds after corrections are also a telltale sign of strong sponsorship by institutional investors.
As a side note, checking the new highs list in your newspaper on a daily basis is one of the best ways we know of to discover new stock ideas.
Studying trading volume is helpful, but there are no hard and fast rules when using it. In general, you want the stock’s volume to confirm its uptrend by rising to a higher level on days when the stock advances, and falling to a lower level when the stock declines. This indicates that the supply and demand relationship is truly in your favor, since there’s lots of buying power but little selling pressure.
Volume tends to confirm your convictions rather than leading you to a great stock idea all by itself. Once in a while, though, a stock will soar or plummet on massive volume, which is what we call a “volume clue.” It’s a sign that big investors are getting in or out. In particular, look for stocks that rise 10% or more the day after reporting earnings—these stocks often have further to run.
We look primarily at the 50-day moving average because it’s long enough to allow for corrections but not so long that the trend hasn’t turned down by the time the stock touches it. But there’s an even better reason: great growth stocks tend to find support (meaning that they stop declining) when they reach this moving average. Buying a stock as it’s bouncing off this moving average is often a good strategy. Any stock you’re considering for purchase should have stayed above its 50-day moving average for most of the past few months.
The 25-day moving average isn’t as vital, but it, too, often lends support to the strongest market leaders. In a powerful situation, contained drops to the 25-day moving average can offer buy points.
A Stock is Never Too High to Buy
Here at the Financial Freedom Federation, we have no preconceived notions about the stock market or any individual stocks. We’ve learned from experience that the big winners are usually the stocks that have already appreciated many times off their lows. And just when people start thinking that a stock is “too high,” it usually begins its next major advance!
You always want to buy on reasonably short pullbacks of, say, 5% to 15% off a stock’s high, but don’t think a stock can’t rise further just because it’s had a few good months. Don’t let your emotions about a stock’s value get in your way. Focus on using our proven system of technical analysis instead.
We’ve covered a lot of material in this investing tip, and it’s pretty complex, so don’t expect to fully grasp all of it at once. It’s going to take some practice with your own money before you are comfortable with (and can get the most benefit from) our momentum system.
Let’s review the main points:
- When looking for potential purchase candidates, look at both fundamental and technical analysis. (We’ll cover fundamentals in the next tip.)
- When doing technical analysis of stocks, you should focus primarily on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.
- A growth stock MUST have positive momentum before you consider buying it. Your goal should be to find RP lines with steep slopes and corrections that are brief and shallow.
- When looking at stock prices, look at the price chart, not just the daily fluctuations of the stock. Look for price charts that have steep upward trends, with brief and shallow corrections. These are the same characteristics a desirable RP line has.
- A stock’s volume pattern can confirm your initial opinion of a stock, but is unlikely to lead you to a great stock idea all by itself. Look for heavy volume on up days (showing accumulation) and lighter volume on down days.
- The 50-day moving average is a helpful stock market indicator in two ways. First, your potential purchase should have held up above this line for the past few months. Second, look for a pattern of sharp rebounds after touching the moving average, and then time your purchases after the stock begins to bounce off the moving average.
Tip #6: Perform Fundamental Analysis.
Once you understand the technical side of the equation, your next step is to examine a company’s fundamentals to see if it qualifies as a super-growth stock. Unlike technical analysis, the fundamental analysis of a company’s financial ratios involves making some judgments about future growth potential. So it takes a little practice. After reading this tip and putting its principles to work in real life, you’ll get the hang of it.
A Stock, Like Love, Thrives on Romance and Dies on Statistics.
In Tip #2, we explained the importance of romance in the stock market. Specifically, we told you that a great growth company can see its stock soar to unheard of heights—on the back of what appears to be questionable fundamentals. This happens because savvy investors are able to understand the longterm potential of a firm, and thus purchase and hold onto its stock. They’re buying the future, the potential. It isn’t until much later that the sexy growth forecasts are replaced by cold, hard facts. More often than not, this is when a stock will reach its point of maximum perception and begin to head lower for many months or even years.
We’ve learned from experience that the biggest and fastest profits for investors often come when the stock is in the romance phase. Thus, it’s critically important that most of your potential purchases have the fundamental characteristics that support a huge burst of romance in the stock.
A Big Idea Creates Fuel for Romance.
Knowing that romance plays such an important role in a young growth stock’s life, you shouldn’t be searching for a particular statistic (growth rate, size of its addressable market, profit margins, etc.), although examining those figures is helpful. Start by looking for a company that has a big idea— one that leaves 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!
But how do you determine if a company has a big idea? Well, there’s no science here, but here are a few characteristics you should look for:
Huge Mass Market. Your target company should have a virtually unlimited market to sell into. This should be measured in terms of dollars (at least a $50 billion market) and customers (hundreds of thousands or more). The dollar potential is more important, but we prefer to see both.
Barriers to Entry. Once you know that a company is targeting a gigantic market, you want it to have that market all to itself! Of course, there are no monopolies out there anymore, but ideally, it will be difficult for a new competitor to make inroads. Barriers to entry can come from a strong patent position, high switching costs (i.e., it’s expensive or time-consuming for a customer to switch to a competitor), a high level of required expertise, or simple market dominance.
Recurring Income. Most of the big winners over the past half-century have been firms that have a recurring revenue stream. The classic example is the razor-and-blade model, where Gillette sells you a few razors and you keep buying the blades for life. Many service firms exhibit recurring income, as customers become dependent on their services (phone companies, for example).
Margin Potential. Just how profitable can this business become? Is it heavily dependent on manufacturing, which usually lends itself to lower margins? Or does its business model add incremental customers and revenue at a low cost? You don’t need to rule out every firm that has lower than average margins, but remember that your biggest winners are likely to be those that can be extremely profitable and become virtual money-making machines.
Statistics. The potential for romance is the most important thing to consider, but fundamental analysis isn’t complete until you study the company’s growth. Here are a few numbers you’ll want to check before you put a stock on your buy list:
Revenue Growth. Considering the number of companies operating at a loss these days, revenue growth has become almost as important as earnings growth. Ideally, you want to see revenue growth over 100% year over year. Acceleration of that growth over the most recent few quarters is also a great sign. For real hyper-growth firms (growing revenues, say, over 300% per year), you’ll want to track the quarter-over-quarter revenue growth figures as well.
Earnings Growth. For those true growth companies that have earnings, you should look for the same trends as with revenue growth—triple-digit growth and an acceleration of growth.
Profit Margins. We’ve already talked about the importance of upside potential for a company’s margins. But you also want to see what those margins actually are! If a company is profitable, its margins should be growing on an annual, or, better yet, quarterly basis.
We track two other metrics that don’t fall within the definition of fundamental or technical analysis. But they are still helpful to include in your overall analysis.
Management Ownership. It’s good to see a healthy percent (15% or more) of the total outstanding shares owned by insiders. Beware of newly public companies, though, because insiders are often restricted from selling any of their shares for about the first six months (the “lock-up” period). A company that went public less than six months ago, for example, may have a large percentage of insider ownership, but that may represent possible future selling pressures on the stock when the lock-up is over.
Mutual Fund Ownership. How many mutual funds own the firm’s stock? Has the number been growing in recent quarters? You want to see at least a couple of dozen mutual funds on board to ensure the stock has some institutional support. And you like to see that the number of funds has been steadily increasing, as these large purchases will drive up the price. But beware—if too many funds own the stock, it may be a signal that it has already had its major advance.
Putting it All Together
Now we have discussed the important fundamental and technical characteristics that are found in most great growth stocks. The key is to use fundamental and technical analysis together. A great chart is nice to look at, but the company may not be worth investing in unless it also has a terrific long-term growth story. Likewise, a company may have a terrific fundamental story, but its stock chart (which is really what you’re buying) may not look so good.
Only if both the fundamental and technical analysis look outstanding should you consider devoting a portion of your $10,000 to buying the stock. By sticking to this system, you’ll automatically focus on only the very best growth stories with stocks under intense accumulation. By buying into these situations, you’re one-third of the way to a great investment.
Tip #7: You’ve Got to Know When to Hold ‘Em.
Here’s the situation: You have completed your research on your preliminary list of stocks. You have narrowed it down to stocks that each have a big idea, and the potential for fast sales and earnings growth. Technically, you selected those with a strong RP line and price chart. So, with some cash to invest, you took the plunge and bought a couple of great growth stocks. After all, that’s how the stock market works, right? You buy, you sell, you pocket the profits.
Not so fast. After buying a stock, the next step in the ownership lifecycle is to hold that stock. It sounds easy to sit and watch your stocks that are going up, but you may find holding stocks harder than you think. And although it sounds passive, there are some things to focus on, like gunning for profits and practicing patience. This lesson will help you learn about holding stocks for as long as their major growth phase lasts.
The One Thing You Need to Follow
In our opinion, the most interesting thing about the stock market is all the factors that influence it. If you read the newspaper each day, or follow one of the investment news websites, you’ll find articles about inflation, interest rates, the U.S. dollar, the Fed, money supply growth, international economies, housing activity, federal budget deficits or surpluses, unemployment data and much more. Many of the articles you’ll find will focus on how these things influence the stock market.
In addition, there is plenty of investment news that relates to specific industries or companies. They usually focus on how trends in the economy or a specific sector can help or hinder these companies and their stocks. Some of those stocks might be ones that you own. After reading a few news articles, investors can easily become unduly influenced about a stock or an industry, to the point of buying or selling because of it. This is not the right way to go about investing.
We know for a fact that, instead of guessing (and that’s really what it amounts to) about what effect these numerous fundamental factors will have on your stock, the best thing to do is simply to watch your stock. This will help you determine if your stock is being accumulated or distributed, which is the only thing you need to know!
Why? Because the only way to tell how all of the fundamental factors will influence your stock is by simply watching the stock itself.
Here at the Financial Freedom Federation, we stay focused on the market. While that may sound obvious, it can be difficult to do considering the two or three newspapers and dozens of online articles we read every day. Most of these articles don’t simply relay news. They also give opinions. (And the ones that do relay news may not always be objective!) So we make sure to keep our focus on our stocks and not let the various opinions get in our way. After all, if the stock is heading higher, who cares what one or two people think of our stock, its industry, or even the market as a whole?
Welcoming Bad News
As a matter of fact, we welcome bad news about our stocks. Of course, we’re not talking about actual bad news, such as a drop-off in business like so many are experiencing now or a missed earnings projection. We mean negative opinions (which are often confused with news) about our stock. When a few analysts or commentators dislike a stock we own, that’s fine with us. We’ve learned from experience that great growth stocks don’t top until most investors believe they are a good investment—much like the market as a whole. It’s simply the theory of contrary opinion: the fewer bulls there are, the less the potential buying power to push the stock higher.
Therefore, we don’t mind one bit if some analysts or commentators say that our stock isn’t a good buy or that it should be sold. These types of opinions breed skepticism, which is what growth stocks thrive on.
So don’t focus much on the media one way or the other. The only thing that should affect your judgment of a stock should be the stock itself.
What to Watch for in Your Stock
Now you know that you just need to watch your stock. But what are you looking for? Simple. Look to see if it continues to show the same type of positive technical patterns that attracted you to it in the first place.
First, watch the stock’s RP line. If the RP line is hitting a new peak every week or two, just hang on tightly and enjoy the ride. This type of RP line is telling you that your stock is under intense accumulation (assuming that the broad market is healthy), which should put to rest any thoughts you might have of taking action. Even if there is an occasional four- to five-week correction, you shouldn’t worry at all.
Next, watch the price action of the stock. Is the price itself hitting new highs along with the RP line? If so, then go outside and enjoy the weather. Again, like the RP line, it’s reasonable to see the price pull back for a few weeks. But the shorter and shallower the corrections, the better the situation. Keeping an eye on the price of your stock helps you determine its actual supply and demand situation. Remember that the RP line can actually move higher even as the stock loses ground if the broader market is falling faster than your stock’s price.
Another part of the supply and demand situation for your stock is its volume pattern. You want to see volume rise when the stock price rises, and volume ease when the price eases. This indicates that your stock is under accumulation and can continue to move much higher.
That’s it! You really don’t need to analyze much else. In fact, just as others’ opinions can affect your judgment, so can a slew of technical indicators, such as a stochastic, MACD histograms, candlestick chart patterns, etc. You can always find a reason to be bullish or bearish on a stock or the market, and often times searching for them can cloud your thoughts. Our advice is to stick with the stock’s RP line, price chart and volume pattern.
Aiming for Big Winners
Our next tip will cover the goals you should have when holding a great stock. Now that you understand that you should shut out all the ‘noise’ out there, you’re ready to formulate your investment goals. And that’s the first step toward attaining the big market winners that make all the difference to your portfolio over time.
Tip #8: Be Patient.
As we mentioned in the previous tip, the toughest thing for many investors to do is nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action. Since you bought the stock, you’ve probably read numerous investment news stories on the market in general and your stock in particular. And even if you are only watching your stock (as we advise), you’ve taken in many days of price, volume and relative performance (RP) action. With so much input, it’s easy to have your thinking swayed, which creates temptation to take action.
Another way to say it is that most investors lack patience. That’s a shame, because almost every successful investor we’ve ever met or read about has an abundance of patience. After all, if you’re correct on a stock, what’s the point of rushing things?
So the focus of this tip, the second one dedicated to holding great growth stocks, is on practicing patience. Many times, the stocks you purchase don’t do an awful lot for many weeks after your initial purchase. But if you have the guts to stick with those stocks, some can turn out to be huge winders. And in the end, those big winners are what make all the difference.
Making Money the Easy Way—By Doing Nothing!
Here’s a quick tidbit that most investors forget from time to time. The way you make money in the stock market is by holding stocks, not buying or selling them. Sounds obvious, doesn’t it? That’s just the how the stock market works. The value of your portfolio rises when a stock you own rises. So you have to be holding on to a stock if you’re going to take advantage of its appreciation.
Through our conversations with subscribers over the phone and e-mail, we know that many are slowly becoming more short-term oriented. But we urge you to have patience once you’ve committed money to the stock market. Oftentimes, a stock will start moving ahead just after most investors have thrown in the towel. Don’t be one of them!
The message is simple: Practice patience and give your investments a chance to grow into mighty oaks.
What’s Your Goal?
When buying great growth stocks, your goal for every purchase should be to develop a huge winner. By huge, we’re not talking about 30%, 50% or even 100% profits. Instead, you should set your sights much higher—300%, 500%, 1,000% profits and higher. All you need is a couple of these big winners every year or two to produce spectacular portfolio returns.
That last point is an important one: All you need is a couple of big winners every few years to produce spectacular portfolio returns. Knowing this, you shouldn’t agonize over a few small losses, or worry if your last few purchases haven’t turned out the way you had hoped. Instead, by shooting for big profits, you put yourself in a position of power, only needing to find a couple of good stocks to produce great returns. Contrast that with the investor who’s eager to take any profit he can get his hands on. He must find perhaps 10 stocks each year that show him good (but not great) profits to garner the same returns you’ll attain by getting only one or two huge winners.
This is why we never use target prices for growth stocks. When you set a price target, you’re automatically limiting the profits you’ll take out of any one stock. And that’s something we will never do!
Remember that if your goal isn’t to develop huge profits, you’ll never attain them. So aim high!
How Practicing Patience Leads to Huge Winners
Clearly, you cannot develop winners without practicing plenty of patience. Developing big winners often takes months or even years. It seems like a daunting task. But our Profit Curve shows us that it’s easier to get 1,000%+ profits than you might think.
The main idea behind the Profit Curve is compound growth, sometimes referred to as the eighth wonder of the world. Compound growth is the reason that the Profit Curve is, well, a curve, as opposed to a line. It means that the growth of your profit in any stock increases each time the stock moves higher.
For example, let’s say you buy a stock and watch it double. Great! You now have a 100% profit. Now assume your stock works its way still higher, doubling again. After your second double, your profit expands, not to 200%, but to 300%. A third doubling would yield a 700% profit. And a fourth would give you a whopping 1,500% profit.
It’s not impossible to attain these huge profits. Believe it or not, dozens of stocks have grown manyfold in just the past two years. Whether or not that type of growth will happen again is anyone’s guess. But the fact is, the market provides a never-ending stream of opportunities for new investors like you.
Now You’re Ready to Invest Your $10,000!
Eight tips and 7,000 words later, I think you’re ready to start investing on your own. Whether you want to spend $10,000, $1,000 or $50,000 on your investments is your prerogative; regardless, I hope the above lessons will you make good decisions with the money you spend in the stock market.
At this point, you’ve probably heard enough from me. So get out there and start looking for stocks you think have the potential for high returns!
I hope this report has helped give you a better idea of how to invest in the stock market— and how to achieve the highest possible return from those investments!