In this era of wacky internet and tech stock prices, it seems like common sense has been thrown out with the bath water. Here are some practical, REALISTIC rules to keep in mind when making your investment decisions as described by the "Voice of Reason", Peter Lynch in his books, "Beating the Street" and "One Up On Wall Street". These are probably two of the best books on investing out there (Of course we didn't read them in Business School).
You can lose money in a very short time, but it takes a long time to make money.
You should research the company before you put money into it.
Never fall in love with a stock. Always have an open mind.
Don't pick a stock. Do your homework.
Utility stocks give you high dividends. Growth stocks give you capital gains.
You should not buy a stock because it is cheap, but because you know a lot about it.
You want to see first, that Operating Profits are moving forward at an acceptable rate and second, that you can buy the stock at a resonable price.
Understanding the reasons for past sales growth will help you form a good judgement as to the liklihood of past growth rates continuing.
Don't overestimate the skill and wisdom of professionals.
Take advantage of what you know.
Look for opportunites that haven't yet been discovered and certified by the "Street" (ie. companies that are off the radar).
Invest in companies not the Stock Market.
Ignore short-term fluctuations.
Large profits can be made in common stocks.
Large losses can be made in common stocks.
Predicting the economy is futile.
Predicting interest rates is futile.
Predicting the short-term direction of the market is futile.
Stocks are not for everyone, not even for phases of a person's life.
The average person is exposed to interesting local companies and products years before the professionals.
Understand the nature of the companies you own and the specific reasons for holding the stock.
By putting stocks in categories, you will have a better idea of what to expect from them.
Big companies have small price moves. Small companies have big price moves.
Look for companies that are already profitable and have proven that their product can be replicated.
Be suspicious of growth companies with growth rates of 50-100%. It is not sustainable.
Avoid hot stocks in hot industries.
Distrust diversifications which turn out to be "diworsifications".
Long shots almost always never pay off.
It is better to miss the first move in a stock and wait to see if a companies plans are actually working.
Tips from experts in fields may turn out to be valuable.
Invest in simple companies that appear dull, mundane, and out of favor, and haven't caught the fancy of Wall Street.
Moderately fast growers (20-25%) in non-growth industries are ideal investments.
Look for companies with niches.
When purchasing depressed stocks in troubled companies, seek out the ones with superior financial returns and avoid ones with excessive debt.
Companies with no debt cannot go bankrupt.
Managerial ability may be important, but it is difficult to assess. Base your purchase on the companies prospects, not on the Presidents name and speaking ability.
Look for companies that ACTUALLY consistently buy back shares NOT companies that announce share buybacks but only buy 10% of their shares.
Look for companies that have little intstitutional ownership.
Look for companies where management has a significant personal investment in the firm over people who earn just salaries.
Insider buying is a positive sign.
When in doubt, tune in later.
Invest at least as much time and effort in choosing a stock as you would buying a fridge.
Sometime in the next month, year, 10 years, the market will decline sharply.
Market declines are great opportunities to buy stocks you like at bargain prices.
To come out ahead, you don't have to be right all of the time or even a majority of the time.
The biggest winners are surprises.
Stock prices often move in opposite directions from fundamentals, but in the long-term, the direction and sustainability of operating profits will prevail.
Just because the price goes up does not mean you are right.
Just because the price goes down does not mean you are wrong.
Buying a company with mediocre prospects just because the stock is cheap is a losing game.
Fast growing companies do not stay that way forever.
You don't lose any money by not owning one successful stock, even if it goes up ten-fold.
A stock does not know you own it.
If a stock goes to $0.00 you lose just as much money whether you invested $50 or 50 cents.
Keep an open mind to new ideas.
Over the last 70+ years there have been 40 declines of at least 10% in the market. Of the 40, 13 have been greater than 33%.
A decline in stocks is not a surprising event. It is a recurring event.