Important Rules and Guidelines
1. Don’t buy cheap stocks. Buy mainly Nasdaq stocks selling at between
$15 and $300 a share and NYSE stocks selling from $20 to $300 a share.
The majority of super stocks emerge from bases of $30 and up. Avoid
the junk pile below $10.
2. Buy growth stocks where each of the last three years’ annual earnings
per share have been up at least 25% and the next year’s consensus earnings
estimate is up 25% or more. Many growth stocks will also have
annual cash flow of 20% or more above EPS.
3. Make sure the last two or three quarters’ earnings per share are up a
huge amount. Look for a minimum of 25% to 30%. In bull markets,
look for EPS up 40% to 500%. (The higher, the better.)
4. See that each of the last three quarters’ sales are accelerating in their
percentage increases or the last quarter’s sales are up at least 25%.
5. Buy stocks with a return on equity of 17% or more. The great companies
will show a return on equity of 25% to 50%.
6. Make sure the recent quarterly after-tax profit margins are improving
and are near the stock’s peak after-tax margins.
7. Most stocks should be in the top six or so broad industry sectors in
IBD’s daily “New Price Highs” list or in the top 10% of IBD’s “197
Industry Sub-Group Rankings.”
8. Don’t buy a stock because of its dividend or its P/E ratio. Buy it because
it’s the number one company in its particular field in terms of earnings
and sales growth, ROE, profit margins, and product superiority.
9. Buy stocks with a Relative Price Strength rating of 85 or higher in
Investor’s Business Daily’s SmartSelect ratings.
10. Any size capitalization will do, but the majority of your stocks should trade
an average daily volume of several hundred thousand shares or more.
11. Learn to read charts and recognize proper bases and exact buy points.
Use daily and weekly charts to materially improve your stock selection
and timing. Long-term monthly charts can help, too. Buy stocks when
they initially break out of sound and proper bases with volume for the
day 50% or more above normal trading volume.
12. Carefully average up, not down, and cut every single loss when it is 7%
or 8% below your purchase price, with absolutely no exceptions.
13. Write out your sell rules that determine when you will sell and nail
down a worthwhile profit in your stock.
14. Make sure that at least one or two better-performing mutual funds have
bought your stock in the last reporting period. You also want your stocks
to have increasing institutional sponsorship over the last several quarters.
15. The company should have an excellent, new, superior product or service
that is selling well. It should also have a big market for its product
and the opportunity for repeat sales.
16. The general market should be in an uptrend and be favoring either smallor
big-cap companies. (If you don’t know how to interpret the general
market indexes, read IBD’s “The Big Picture” column every day.)
17. Don’t mess around with options, stocks that trade in foreign markets,
bonds, preferred stocks, or commodities. It doesn’t pay to be a “jack-of-alltrades”
or to overdiversify or engage in too much asset allocation. Either
avoid options outright or restrict them to 5% or 10% of your portfolio.
18. The stock should have ownership by top management.
19. Look mainly for “new
a new issue within the last eight or ten years) rather than too many laggard,
“old
20. Forget your pride and your ego; the market doesn’t care what you think
or want. No matter how smart you think you are, the market is always
smarter. A high IQ and a master’s degree are no guarantee of market
success. Your ego could cost you a lot of money. Don’t argue with the
market. Never try to prove you’re right and the market is wrong.
21. Read Investor’s Corner and “The Big Picture” in IBD daily. Learn how
to recognize general market tops and bottoms. Read up on any company
you own or plan to buy; learn its story.
