— Calling the Trend Column, by George Leong, B. Comm.
Once in while, I like to give some insight into investing and trading, which I’ve picked up through over a decade of research and trading.
When you invest, there are some guidelines you can follow to boost the chance of success and reduce the risk of a mistake.
Investor psychology is the single most important factor that affects the price of a stock. When the mood is right, everything can come together and a stock can really move. When the mood isn’t right — no matter how good a company’s story, no matter how fast it’s growing — the stock might not do anything. Experience is really the only way to get a good feel for stock market psychology. Watch all the markets all the time and you will develop your own sense as to the near-term direction of stock prices.
Consider stocks that are unappreciated and under-followed by the investment community. By the time Wall Street appreciates a good company’s story, the stock has likely moved considerably. Run your own stock market screens to find great companies. Consider those companies that you think institutional investors will be interested in.
Look for companies that already have some track record of success. Good companies tend to stay that way. In order for a stock to meet your criteria, it must have done well previously, and the company itself must have had some track record of growth.
Try to find companies with more than one core competency. Not only must a company have great products, but it also needs a great sales force, great customer service, and a great relationship with stockholders. Companies that consistently win industry awards are always worthy of further scrutiny. If a company wins “CEO of the Year,” you know it’s got a good thing going.
Seek out companies that are about to experience new growth in revenues and earnings. Research over the Internet will help guide your way. The “Yahoo! Finance” section of www.yahoo.com is especially useful. Also, companies with impending profitability can provide good trades. A company that’s currently experiencing operating losses is very attractive if it’s predicting profitability in the near term.
Search for growth at a reasonable price (GARP). Look for companies that are reasonably valued considering their growth prospects. Also, a stock must have a reasonable amount of liquidity for investors. Little liquidity means little institutional investor participation. We all know that institutional investors are the clear drivers of stock prices.
Risk is more important than potential return. Always be aware that anything can happen to any stock — anything. It’s never wise to put all your eggs into one basket. Use stop-loss limits to preserve capital. Take your time — a professional, business-like approach to managing your portfolio is key to long-term success. Develop an approach to the market that you’re comfortable with, use strong risk management, and diversify your holdings.
Read these guidelines over and over until they become second nature to you. The next time you invest, I’m sure you will be more informed and able to better understand what it takes to create wealth with stocks.