That’s not a bad thing. Investors who feel good buy stocks because they feel good about the stock or the companies that issued it.
Investors who feel good are motivated by emotion, not financial acumen.
That’s not a bad way to pick stocks. It may not be optimal, and it may not be the most profitable, but it’s not a bad way.
Let me tell you about an experiment conducted several years ago.
A group of researchers wanted to see what random stock selection really looks like.
They “commissioned” a monkey to throw darts at a financial stock page.
Then followed the companies that the monkey “selected”.
After following those randomly selected companies for a year, they concluded that the companies chosen by the monkeys performed better than the S&P 500.
That’s a really scary thought: randomly pick a stock package and you can beat the market!
Which shows that the market, in general, can be viewed as a random collection of random events.
Our challenge is “How to take advantage of these seemingly random events?”
The complementary task is “When to sell?”
You don’t make money unless you sell a stock. Simply holding on to a stock that is going up can make your net worth look good on paper, but you can’t take that paper to the grocery store and buy dinner!
Only when you sell Or if you collect dividends from those shares.
Now we have two tasks ahead:
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What shares to buy?
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When to sell those shares?
Another general rule of thumb is, “Don’t plan on holding those shares forever.” Nothing lasts forever. All you can do is maximize your earnings.
Another thing: the stock market is currently being held and controlled by institutional investors who control billions of dollars worth of stocks.
You can’t beat them.
But you can benefit from them.
Can I tell you a little story?
Several years I was trying to “beat the table” at the craps tables in Las Vegas. But I had very little money and even less knowledge. I noticed that there was a player who had a large stack of high value chips. And he kept adding to his horde. So I started to emulate his “trades”. When he chipped into a position, I did too. When he picked up his position, I did too. And I started accumulating chips. Without having the slightest idea what he was doing, he was actually making money!
Then, thinking I knew something about craps, I went to another table, and you guessed it, I put everything in my casino pocket, plus some!
Moral? Don’t try to guess the experts. But you can benefit by following them.
This brings me to my first observation about the stock market: due to the “beginner’s luck” phenomenon, hobbyists can do better than the average individual investor.
As your knowledge grows, so does your unfounded confidence, and you may soon find yourself doing [hindsight] terrible decisions. Until you become as smart as the institutional investor, you may fail.
Even the pros don’t get it right all the time. Look how many “professional” hedge fund managers have gone out of business. Look how many stock traders have lost their collective asses.
And on the flip side, look at how many multi-million dollar homes have been bailed out because they were “too big to fail.”
So my advice to you is to create a set of trading rules that works for you. Follow them religiously, until they start to fail you. Make the necessary adjustments.
Correctly selected, business rules do not fail: the principles are universal, but they must be scrupulously followed.
My personal trading rules are very simple:
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Select stocks that pay dividends according to a set of fixed parameters.
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Set “selling” rules according to rigid parameters.
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Set trailing stop loss orders to protect your profits.
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Take the emotion out of your trading as much as possible. Never fall in love with a stock.
Do my rules work for me? Yes. My goal is to achieve a monthly dividend income of $2,500 before taxes in less than ten years. After only five years of trading my way, I have achieved a monthly dividend income of $1,800. I am on target to achieve my goal.
My starting dividend position five years ago was just $208 a month.
Because you have the benefit of my mistakes, you can easily achieve better returns!