Tolerable risk should be the goal of every investor. Know your limits! Here are my big three don’ts:

1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.

2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as “the trend always changes rule.”

4. If you are looking for “reasons” that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know thatmarkets are moving – not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.

5. Stock markets generally move in advance of news or supportive fundamentals – sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period oftime to maximize profits. Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves – not by day trading or short term stock investing.

7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading “system” in itself.

8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.

The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information – and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.

The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.

9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.

If you eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers.

10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years.

Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something – not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.

11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.

You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.

In Monopoly there are a Boardwalk, a Marvin Gardens, Utilities, Railroads, etc. In the stock market you have the same type of properties (stocks), as in the game of Monopoly. For example, a Boardwalk may be a GE; a railroad, a CSX Corp.; Duke Energy, a utility. The rent a player collects in Monopoly could be compared to the dividends collected by a shareholder in the stock market. How much rent collected in Monopoly would depend on the property owned and how many houses are owned on the property. In the stock market game this would translate into which company is owned and how many shares of each company is owned.

To win the game of Monopoly a player will need to own properties (three of the same color) before building houses and, eventually, a hotel to attain that comfortable, worry-free income that the player knows will come. (The game is not won by selling the properties you own to your opponent, even at twice the price paid.) The game is won by building houses on the properties owned and collecting that worry-free rent.

Taking this approach in the stock market game, you would not win in the stock market by selling your shares owned, but by adding to those shares owned, so every “rent” (dividend collected) would be higher than the previous “rent” collected. This would be accomplished by holding on to those shares owned, and by having the dividends of each company owned rolled back into more shares each quarter. (This would be compared to building houses on the properties you own in the game of Monopoly.)

In Monopoly three properties of the same color could translate in the stock market game as having three properties (owning three different companies) that pay their dividends, one in January, the 2nd in February, and the 3rd in March. This would give the player in the stock market game a dividend every month of the year. To aid in the worry-free “rent” collected, the companies owned would have a history of raising their “rent” (dividend) every year. Owning one house on a property in the game of Monopoly could be compared to owning one hundred shares of stock in the stock market ‘game’. A hotel would translate into 500 shares of a company’s stock.

There are opponents in the stock market game, just as there are in the game of Monopoly. An opponent in the game of Monopoly is anything that takes money away from you (remember those fees you sometimes had to pay from those pesky Community Chest cards?). In the stock market game the opponents are also anything that takes money away from you – taxes, credit card payments, commission-fees, fast cars, booze, etc.

To eliminate any of these opponents in the stock market game will aid the investor in accumulating more shares for even higher dividend collecting “rents”. All dividends on qualifying dividend-paying stocks are now 85% tax free, eliminating one tax opponent in the stock market game. And, did you know you could eliminate another opponent – those pesky stock commission fees to stockbrokers? All stocks purchased can be purchased commission-free, without the need of a stockbroker.

How much money do you need to begin a stock market investment game, played like the game of Monopoly?

As little as 100 dollars can be invested commission-free into a company to start collecting those ever-increasing cash dividends.

My friend has a little over $200,000 invested in the stock market through 27 different Mutual funds. In my opinion, 27 Mutual funds is 27 too many collecting load fees, management fees, commission fees, operating and advertising fees. Diversity is important, but just as important is over-diversification. Also, in my opinion, $200,000 should not be put into more than 12 stocks, let alone 27 different Mutual funds.

2. Do not pay commission fees to purchase a stock.

If you are going to invest your hard earned dollars into a company, the least the company could do is provide you a way to invest in their company commission free – and they do!

3. Only purchase those companies that pay a dividend.

The same company that you invest in commission free should also offer you another incentive for you to invest – a dividend for the use of your money.

4. Only purchase those companies that have a history of raising their dividend every year.

The same company should continue rewarding you for your faith in their company by increasing the amount of their dividend every year. Rising dividends are also the proof that the company is dong something right.

5. Dollar-cost average into each stock position.

By dollar-cost averaging (buying the same stock at different prices through the years) you’ll never pay too much for the company’s stock, even if the initial purchase is at a 52 week high. Have all the dividends from each company rolled back into more shares of each company, until retirement. The companies you invest in should do this for you, automatically, commission free.

6. Forget making a profit; instead focus on the income provided from your stock portfolio.

That’s right! Forget making a profit. The burden is now lifted – no more pressure on making a buck in the stock market (Instead of trying to bend the spoon, that is impossible, instead just think of the spoon as – omigosh! – I’m in the Matrix). When you focus on the amount of money your holdings are providing in dividends – and when those companies selected have a history of raising their dividends each year – a lower stock price allows the dividends that are being rolled back into the stock to accelerate your income. The total value of your portfolio may go lower, but your income from that lower priced portfolio would increase dramatically. Profit by income!

7. Make every stock purchase with the intent that the purchase will be a long-term investment.

Do not trade in and out of your holdings. There have been many up and downs in the stock market. The down markets only accelerate your income. GE has raised their dividend for 28 years in a row. Why sell it? 100 shares of GE ten years ago has turned into 1200 shares today due to stock splits, and that is not counting how many shares you would have now if the dividends were being rolled back into more shares of the stock through those years.

8. Understand that a lower stock price, after your initial purchase may be a blessing in disguise.

The income from your stock holdings should grow every quarter, no matter what the total amount of your stock portfolio is worth. (If your Mutual fund declines in price from one year to the next and if your income is not increasing (accelerating) from that fund, why are you in that fund?) A company pays their dividend not on how much their stock is worth in the market place. For example, a company pays a quarterly dividend of 50 cents a share. A company has little control on how much its stock price is worth in the market place on any given day. You will receive 50 cents a share per quarter whether the stock price is at 50 dollars a share, or drops to $40 a share or goes up to $70. While the stock is down at $40 a share your dividend reinvestment is loading up on more shares.

9. Develop a savings plan to add to your holdings each quarter to help your dividend reinvestments to accumulate more shares on a dollar-cost averaging basis.

The savings could be as little as $5.00 a week. Why put that savings in a savings account at 1.2 percent, when there are so many companies out there that are paying a 4 to 5% dividend yield and increasing their dividend every year? And since none of the companies you are investing in charge a commission, all of that $60.00 a quarter you saved and invested would help your dividend reinvestments to dollar-cost average into your holdings. Every cent you save and invest would work toward your ROI (Return on Investment).

10. Read my book ‘the Stockopoly Plan’ soon to be released by American Book Publishing.

I believe it will profit you and your family for the rest of your lives.

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. (ex: a retail outfit can’t make money if it doesn’t have goods to sell; the same goes for investors, without cash, you can’t invest). You need rules and you need to follow these rules or money WILL be LOST.

Once proven rules have been established, they cannot be broke or you will lose money. Everyone loses money in investing but we must learn to cut losses quick and allow gains to develop. Small losses are acceptable because they teach us lessons that allow us to win big!

Start your search by looking for stocks with superior fundamentals. After fundamentals are established, look to see if this particular stock is in good company, by this I mean a strong industry group – similar stocks, historically move in the same direction (this is fact not opinion). This is not to say every stock in the industry group will move higher or lower because a sister stock is going in that direction (this is a generalization rule). After the industry group has been confirmed strong, determine if overall market is in a specific trend (up, down or sideways).

If you are long a stock, the market must be in a confirmed up-trend, if you are short a stock, confirm a down trend. Note that 75% of all stocks will follow in the direction of the overall market. Don’t fight the trend, the market is always RIGHT.

Let the market and the stock dictate how long you will be in a position. Don’t worry about time frames; price and volume will tell you when to exit the position as long as you follow rules.

After fundamental have been established, you must study the technical side of each individual stock, the specific industry group and the general market trends. Record if the stock is forming a proper base, if it’s about to break out of a base, if it’s extended or if it’s pulling back to a key support line.

At this point, add any qualifying stock to your watch list or buy the stock according to the technical entry signals (remember the fundamentals have been established earlier).

Key numbers to use in fundamentals:
Earnings (current, past: quarterly, yearly and future estimates)
Sales (current, past: quarterly, yearly and future estimates)
Return on Equity (ROE)
Price/Earnings Growth (PEG)
Price/Earnings Ratio (rise over time of base)
Debt/Equity
Assets, Liabilities
Accumulation/Distribution ratio
Up/Down Volume over past several months
Number of Institutional Holders (is this increasing or decreasing recently)

Key things to use for technical analysis:
Look at the 1 year daily chart
The 1 year weekly chart
Check volume action when bases are formed
Look at Point & Figure charts for support and resistance lines
Look for new 52-week highs

The game is won by lowering your risk by properly turning the numbers in your favor. Cutting losses is the best insurance to keeping your cash.

Emotions fuel the decisions of many investors; leading the pack is hope, fear and greed. In order to control these emotions, proper money management skills must be developed through a defined set of rules. How do you know if an investment is working and moving in the right direction?

If it shows a profit, you are correct, if it shows a loss, something is wrong and it may be time to protect your capital.

Most investors develop the emotion of hope after a stock has declined from the initial purchase price. They hope that it will rebound and make promises to themselves that they will sell at breakeven. If and when the stock rebounds, they break the promise and become greedy and decide to hold on for a profit instead of selling.

Typically, the stock will start to decline and the investor will start to accumulate losses. Investors are full of pride and will not admit that their judgment is wrong, so instead, they decide to hold on and accumulate additional losses.

When a stock is purchased and starts to decline, especially on heavy volume, it is time to admit that you may be wrong and sell before the loss is too steep. If the stock rebounds after you sell, you can always re-enter your position. Cutting losses is the best insurance an investor can have in their portfolio.

By developing rules and eliminating emotion, investors can start selecting high quality stocks and buying them at their proper purchase points. This will lower your risk and help prevent you from using insurance. In my previous post, I explained how to develop a watch list of high quality stocks using fundamental and technical analysis.

The same old group, every day of every year – Why? Because they don’t know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news -

WHY?

They aren’t going anywhere. Some of the stocks that make the headlines every night were leaders of the market 20 years ago. New cycles bring new leaders; this has been proven year in and year out. So many of these TALKING HEADS shout out about “buy and hold” but what are they really holding?

They hold old high-flyers that were superstars but have now become fallen stars that sit 20%, 50% or even 90% off of their all-time highs (some may have given you a small return – 10% or less over the past 5 years – WOW – BIG DEAL!).

Yes, maybe over 15 or 20 years, you will get your money back – but what is the point? Many of these “so-called” investors tell you how they own XYZ stock and it has returned them 65% BUT they leave out the key factor that it has taken 16 years to get to that point.

One of the strongest and most promising stocks of the early 1900′s (1920 decade) was RCA – this stock was one that people claimed you put in your portfolio and hold it till near death – it will NEVER fall and if it does, hold on because it will come back. Well, let’s take a look: RCA soared over 1100% during the 1920′s and crashed with the rest of the market in the early 1930′s.

It went from a low 0f $8.70 to a high of $106 to a crash level of $3.00. Some said to hold, some said buy on every dip. – Guess what, it didn’t climb back to pre-crash levels until 1963! 30 years to break even for some. Maybe that stock in your portfolio is the RCA of yesterday; history always repeats itself because human nature is always the same!

Stocks are worthy to be held over long periods of time, this is a proven fact but don’t EVER hold a stock when it is flashing SELL signals left and right (especially if everyone on TV is telling you to buy now on the dip, “it is a bargain”). These talking heads were saying this about every stock on their computer screen in 2000 and 2001 – “buy the dip”.

The only dip was the guy on TV and all of the suckers watching him/her. I don’t mean to offend anyone but you need to take control of your investing life, you need to learn why stocks go up, why they go down and that NO STOCK is immune to a bear market like the one we just had.

Leaders of the market now, won’t be leaders in the future – on some rare occasions, a stock here or there will defy everything and grow decade after decade, but even these stocks end their amazing rise at some point. Same is true for old leaders, they won’t lead the markets of today – they become too large and their growth slows, preventing them from being excellent growth stocks and giving you excellent returns.

Now – I never said you couldn’t own a stock like this, many people are satisfied with these companies, they “feel secure”, that is fine; everyone has different goals.

Let the market tell you what is going up or down. Watch “sister stocks”, I talk about them in our education section of the website. What do I mean by sister stocks? They are stocks that are in the same industry. When an industry is strong, most of the stocks in this group will rise, hand in hand. (I say most – not all, laggards always stay behind). Fundamentals will be strong for most stocks in the group and technicals will guide you along the trip – think of technicals as a road map.

Once fundamentals have been established, check the charts, if several stocks from a particular group are breaking out of bases, this is a strong sign that something great is about to happen in this group. The more positive the overall market the better the group will perform (bear markets tend to hold down just about everyone).

Why buy a stock that has great fundamentals in a weak group? If all other stocks in that group are acting weak, this may be telling you that the “one” bright spot in this group will eventually come back to the pack, so don’t chance it. Investing is about lowering your risk! Don’t take a risk on a stock that looks good but the industry is hurting.

Buy the leader of a group where several stocks are showing strength. Never buy the cheap stock that is lagging in performance, this is a sure way of losing money – buy the best of the group – the one with the best fundamentals (accelerating earnings, ROE, sales, etc.) and technicals (basing pattern, breakouts on huge volume, relative strength, etc…). What may look high to the general public; usually turns out to be low to the smart professional investor.

I am not talking about the “talking heads” on TV – the smart investors work for institutions – they move the market! When they buy, everyone knows because volume jumps to extreme levels or levels not seen in prior months or years. The everyday guy doesn’t have this power – ONLY institutions have this power – learn to understand this power, here lies the smart money.

Finally, as I grind this educational information into your subconscious mind, ignore the “Talking Heads” and learn to listen to the market. Price and volume will always give you the best advice.

If you wish to invest in stocks, treat it like a business, NOT A HOBBY. For example: A retail outfit can’t make money if it doesn’t have goods to sell, the same goes for investors, without cash, you can’t invest. What do I mean? All investors need rules and you need to follow these rules or money WILL be LOST. If you lose your initial investment, you are out of business (just like the retail store). I don’t necessarily care what your rules are but they need to be proven and then followed to a “T”.

Think about this for a moment: How much time do you spend researching and following up on your investments? Most people will spend more time researching their next car to buy, their next pair of sneakers, the best suit, the best dress, the best pasta sauce, etc. but these same people rarely spend more than 15 minutes a month researching their own stocks.

I know of a person that spends hours clipping coupons (saving cents to a few dollars) but just minutes investing thousands in stocks.

This is why the majority of people FAIL at investing, because they don’t know what they are doing, they don’t care to know where their money is and they don’t know who to hire to invest their money.

If you are not interested in learning how to invest properly using your OWN system of trial and error over many years, I suggest that you invest in mutual funds or similar diversified vehicles.

Over the long run (minimum 20 years), mutual funds and dollar cost averaging will give you favorable results with minimal worries. I will elaborate into methods that can be used to invest successfully in individuals stocks in following articles.

The first little pig liked chips so he went tothe DOW market. He was told by everyone youcould always rely on their products. They werealways good. The manager told him you could putthem away and forget about them.

The second little pig liked spicy things. Heshopped at the NASDAQ market where they hadunusual products. He said that his purchaseswere good to put away even though they had somestrange ingredients. He took his home and saidhe did not need to worry about them even thoughothers had told him to be careful.

The third little pig went to both of thosemarkets. He would pinch the tomatoes and squeezethe Charmin. He was a very careful shopper. Manytimes he would put things in his shopping cart,but later take them out because they were not”just right”.

Our first little piggy brought home hispurchases, put them away and many times forgetabout them. The store manager had told him theywould always be good and he believed him so hedid not bother to check on them periodically.

When the second pig got home he also put thethings he picked out at the market on his shelfand would brag to his friends about the greatthings he would have in the future when he wasready to retire. He would have more than hewould ever need. He rarely looked in the pantry,but once in a while he knew that one of theproducts was spoiling. That didn’t worry himeither, as he knew they would still be fine sometime in the future when he wanted them.

The third little guy put his purchases away,but regularly checked to see that they were allright. If one of them was not “just right” hewould take it back to the market. Our third pigmade sure that none of his market purchases wentsour.

Time passed and our first little pig got to thepoint that he needed to start eating out of hissavings. To his dismay he found many of hisguaranteed chips has spoiled. There were stillenough there so he could eat, but not the way hehad before.Our second pig also no longer bought at themarket, but when he went to the pantry he foundalmost all of his purchases had become rotten.In order to eat at all he had to take a job atWal-Mart as a greeter.

Mr. Third Pig’s purchases all were good becauseevery month he had checked to be sure nothingwas going bad and if it was he would get rid ofit right away. He was able to enjoy being athome or playing golf because his pantry wasfull.

It seems it doesn’t make any difference whereour 3 pigs did their shopping – DOW or NASDAQmarkets. The important difference was that theone who checked to be sure his purchases neverwent bad was the one who ended up with plenty.

We all learned that when we took a position -either long or short – that we better be able tojump out if the trade was not going our way.Many of my friends were scalpers. That meansthey were trading for just a few ticks and everynight went home flat. Flat is no positions atall.

Others, myself included, took a longer look and planned to hold a position for a period of time.That could be several days or weeks. If you wereright the longer you held on the more money youwould make.

The general public seems think thatexchange members know everything and always made money.Tain’t so. Many traders were wrong more than 50% of the time. Huh? Yes, fifty percent. My accounthad losses 40% of the time and 20% were scratchtrades (neither winners nor losers).

You ask, “If you are out of the money60% of your trades how can you make money?” Thisis what every professional knows: Keep your lossessmall and let your profits run. How many timeshave you heard that one? BUT how many times haveyou ignored that rule?

At the end of the year when youanalyze your trades you find that you made $3.00 for each $1.00 you lost you will show a nice big profit.

I don’t care what business you are inyou don’t put your whole wad on a single outcome and stick with it until it either works or go broke. That is what brokers and mutual fund managers want you to do. They want you to buy, but never sell.

It is a tragedy for the smallinvestor today that mutual fund families are putting in selling restrictions to discourage investors fromdumping funds that are headed down. Many requirelong holding periods and if you sell prior tothat time they charge an extra fee of 2%. Theygive lame excuses that I know are not true fordoing this. Never buy any fund or trade with anybrokerage company that has that kind of rule.

It is cheaper to pay the 2% or whateverfee there is and get out than hang around and lose20% to 40% of your equity. Look back at 2000 to2003. This can happen again despite what yourbroker tells you.

Be wrong and run home with most ofyour money. You still have enough to invest in a better opportunity. If you are disciplined to get outof any bad situation early you will end up arich person.