Image Source: The Blunt Bean Counter
Man, investing in stocks is tough. I say this only after having my taxes prepared this year. Last year, I took a few losses in some stocks I held in my trading account. One of them was Arena Pharmeceuticals. I lost over 13% of my investment in Arena over the span of three months - ouch! I was going over that investment from last year and came up with a few trading rules I learned from the experience.
So here now are my five steps to becoming a better stock picker. I can't say for certain that these rules will help you. but I do know they've helped me. So, away we go!
Know what you own. This should really come as no surprise. When I owned Arena Pharmaceuticals, I had no idea what types of drugs the company manufactured. Nor did I know how they sold their drugs. Yep, I was clueless! Needless to say, the market clued me into how clueless I was, and I lost money on the trade!
Understand how much you're willing to risk. When I bought shares of Arena, I had no idea how much money I was willing to lose on the investment. I just kept buying shares months at a time; 200 shares one month, one hundred shares another month. I did this until I owned 1,000 shares. I thought the price I paid for the stock was so good, I couldn't lose. Boy, was I wrong! I figured I didn't want to think about the possibility of losing more money, so I sold Arena with a loss. Wise move!
Be patient. I bought shares of Arena yet I had no time frame to work from as I continuously invested. I did not have any idea as to how long I should hold the stock. I didn't know how long to wait for a potential profit to come from investing in Arena Pharmaceuticals. I know I only wanted a profit, quickly! Sadly, when that profit wasn't coming, my lizard brain made the decision to sell for me! Thank you Mr. Gekko! In short, when investing, waiting truly is a virtue that rewards the knowledgeable and fortunate.
Don't be contrarian just to be different from every other investor! I bought Arena on the hope that because everyone was so down on biotech stocks from the bad press that biotech stocks like Arena had nowhere to go but up. Betting on a stock just to be contrarian to the public is a horrible investment move! You will lose your investment only because the herd more times than not is right. In this case, they were right as rain on Arena and other biotech stocks at the time. Thus, I lost some money in my investment with Arena. Dammit, Rose.
Insist on a margin of safety. I didn't buy Arena at a discount to it's intrinsic value. Hell, I didn't even know how to calculate Arena's intrinsic value. so, the concept of margin of safety was foreign to me at the time I bought Arena. Needless to say, I lost money because I had no clue as to whether Arena was a fair value at the times I bought it. Silly me!
So there you have it, those are my five rules for investing in stocks now. I'm a little poorer but wiser, thankfully. And I'm grateful for everyone who follows and continues to read @ellofinance. Your interest and readership is always appreciated!
P.S. - @tvansantana: Thanks for being so awesome!