The Internet is brimming with winning investment strategies, successful trading systems, and top guru picks. Seems hard NOT to get rich, with so much free advice coming at you from all directions. Then why isn’t everybody getting rich trading, and so many are outright losing?
I believe the key is in what NOT to do, tuning out 90% of the investment “noise,” and focusing on the few key elements.
“Stop listening to professionals!”
This timeless advice from Wall Street legend and veteran stock picker Peter Lynch still tops the list.
Nobody on Wall Street ever opens their mouth without benefiting themselves. Most publicly disseminated advice comes from big players with billions under management: portfolio managers, brokerage analysts, etc. When these guys are buying or selling, they are moving the markets. Logically, when they are buying, they want to keep the stock price down. When they are selling, they want to jack up the price. If you follow what they SAY – not what they DO – you are buying and selling largely for THEIR benefit, not yours.
This does not mean that ALL advice is bad – just untimely. Which brings us to the next point:
WHEN you buy is as important as WHAT you buy.
This particularly applies to small caps that can move fast. We feel more comfortable with familiar things. New information is heavily discounted. But how do we get to know new things? Repetition. If everybody is talking about the same thing, we take notice. Eventually. We become convinced that “that’s the one” because it begins to sound familiar. So we buy. And that’s where the problem is:
The move ALWAYS precedes the story. When a new leader emerges, only a handful of sharp operators take notice. After they’ve loaded up on the stock, they start talking. As more people notice, they buy too. Then talk. NOBODY is going to talk first for YOUR benefit. A mutual fund manager is not going on CNBC to tell you what he is going to buy to give you a free ride. He is going to tell you what “he likes” currently that he thinks is a good buy. (Translation: he’s fully loaded and is now promoting the stock for his own benefit.)
Again, it does not mean you cannot trust anybody, just that the bigger the portfolio, the less timely the advice. A newsletter writer will also recommend a stock after loading up on it first, but since his position is presumably smaller there is more upside left in his picks.
Do NOT “invest only in things you know or understand.”
This is where I respectfully disagree with Peter Lynch. Your chances of having knowledge in or exposure to an area of a hot new stock are pretty slim. You still need to understand what you are doing but let me modify the above by saying: take the time to learn about new things, do it fast, and take it seriously.
Have as few selection criteria as possible.
Do you really think that a stock with a 17% ROE will make you more money than a 14% one? Other things being equal – maybe, but they never are. Having too many criteria will keep you out of most winners and in backwater duds, or get you bogged down in details. Do this: make a list of top 10 most recent big winners and research their key ratios. Keep only those that ALL 10 have in common. Any deviation, throw out the ratio. See what you’ll be left with.
Learn how to read charts.
Charts reflect what people do, not what they say. Although not perfect, a chart is more reliable than 90% of what is being SAID out there.
Now, this advice may leave you with a: so how DO I pick the big winners? – but if you cut out all the fluff and focus on the above simple steps, you will dramatically increase your chances of getting to the next big one ahead of the crowd.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC – a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com/
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