Guest Author - Guido Deboeck

The main objective of this article is to provide a simple, intuitive, easy to learn set of rules for investing and achieving investment results derived from the 20 rules IBD advocates, but has not been able to translate into common english...

Let’s start by reducing the number of rules and putting some order in the set. Twenty rules are a lot to remember; most people find it easier to remember ten rules.

Here are my ten rules for achieving investment results starting with the most important rule of all. First learn to determine what is the direction of the market. Rule 1 suggests that you invest ONLY when the market is in an uptrend, meaning when “you" have the ball (see my article on market direction). Reading key sections such as "The Big Picture" in IBD on a daily basis may obviously facilitate this.

Next, what to buy. Rule 2 suggests that you consider only companies with solid earnings growth over the past three years, with recent quarterly earnings growth well above that of their peers, who have strong sales growth, who have management ownership, and increasing institutional participation. If you have IBD and look on the Investor Education page you immediately notice that this rule pulls together several IBD criteria for picking stocks. Today, with Daily Graphs OnLine, an excellent IBD service, all this information can be found in one chart. Most of it can also be found in the newspaper itself when you browse the highlighted stocks.

Rule 3 when to buy. To start learn to read charts, learn to recognize patterns in charts, and learn to identify buy points. Rule 3 suggests to buy stocks only when they are at their buy point or within 3-5% from their buy point; and never to buy them when their price exceeds more than 5% from their ideal buy point.

Rule 4 what to hold. Stocks that are in your portfolio need to perform. What would be the point of holding onto stocks that don’t? If a stock performs well, it becomes a candidate for accumulation, meaning more shares of that stock would be added. If a stock increases fast you quickly endup with a decent return, then you may hold that stock longer. Other stocks who move site ways are candidates for elimination. Hence Rule 4 suggests evaluate individual stock performance constantly to determine which to hold long, which to hold for a shorter period, which to eliminate quickly.

The rule that is the most difficult of all is when to sell. Rule 5 suggests based on O’Neil to sell any stock that drops 7% to 8% below the original purchase price. Clearly this is not a natural thing to do: you invested in a stock because you researched it thoroughly and you bought it at the right time, nevertheless it moves against you and proves you wrong. It will always be cheaper to accept you were wrong than to try to prove the market wrong by holding on to a stock whose price is going down.

Rule 6 what to avoid expands on Rule 3 but fits after Rule 5 because we talked about prices going down. Rule 6 suggests that you do not buy stocks because they are way down, no bottom fishing; that you avoid stocks that are cheap, avoid buying stocks because they have high dividends, low price-earning ratios or other oversimplified criteria. This rule also suggests to avoid buying on the basis of rumors or advice provide by others (family, friends, dentists, hair dressers, taxi cab driver…)

The next rule does not appear in the IBD’s 20 Rules because the focus of IBD is on stock picking not on portfolio and risk management. Rule 7 suggests that whatever amount you have to invest you divide it approximately equally between 3 to 5 stocks. If you have less than $50,000 to invest maybe you should divide it between 2 to 3 stocks only. If you have over $100,000 to invest, stick to five. Once you know the amount to put in each stock calculate the number of shares this allows for.

Rule 8 how to accumulate stocks. Rule 8 suggests that you buy in stages: start with buying, a few shares, after the stock performs well (i.e. is up 2-3 %) add more shares and later when you have 5% return or higher add even more shares. Start with the bigger number of shares and thereafter each time add half the number you already have.

Rule 9 is the inverse of rule 8. When a stock in your portfolio goes down -- it breaks through its 10 day moving average-- it is time to sell half of your shares; when it goes further down sell another half of your holdings; and when it reaches its 50 day moving average you should be out.

Finally, Rule 10 suggests that on a regular basis you evaluate how you are doing. O’Neil talks about an annual post-analysis of all your transactions but that is really not frequent enough in this rapid moving financial environment. Rule 10 suggests that at least on a monthly basis you compute the rate of return of your portfolio and compare it with standard indices. If you match the performance of the indices you are doing OK (lots and lots of professional managers do not even achieve that much), if you are doing better or significantly better than the market indices then you are doing more than OK. If unfortunately your portfolio is not matching the returns of the indices then you need to revisit the above rules, and become more disciplined in applying them.

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