As an individual investor whether you are new or experienced, you want to make money and perform well through investing in common stocks. First, you need a system to determine your buying and stock selection rules. You want to select the best stocks and use charts to determine the right time to buy and exit. Second, you need to create your selling rules to make profit or cut loss to avoid larger losses. This requires discipline. Third, you need to understand the overall market trend because you do not want to pit against the market.
The reason you need to carefully evaluate the market indices is when they are over the top, and on the way down, emerging into a decline trend. Most of your stocks will follow the market’s trend. Many growth stocks, secondary, lower quality companies in an industry can drop two to three times more than market averages. In the worst case situation, some companies might not come recover or could take years to do so. For example, in a bear market when the market drops by 20 – 25%, some of your stocks could drop by 40-75% from peak price. It is not worthwhile to give up all your gains during the bear cycle.
60% of my personal investment is devoted to fundamental analysis because I try to buy great companies that have unique products or superior services. We need to discover true market leaders, companies that are superior to competitors.
Is the company’s quarter earning per shares increasing over time? Are the percentage increases in profits increasing over time? If it is a turnaround stock, does it have two consecutive quarters of strong earnings increases? Has the trailing twelve month earnings recover back to the peak of prior years? Does the company have strong sales growth?Is the profit margin close to its peak? Are the company’s profit margins among the best in the industry? Is ROE 15% or more? Does the management has skin in the game, meaning own the company’s stocks? Are they buying more stocks or selling? What broad economic sector is the market chasing after? For example, technology or consumer? Does the company solves a problem, widely use, have repeated sales? What is the expected future demand for the company’s products and services? Do you understand the business? Have you used the products and services before?
40% of remaining depends on technical analysis, I will use long term chart to determine the overall market trend and zoom in to short term time frame such as 1 year then 1 month to identify entry or exit point. For example, if I identify an entry point, I will enter a position with 60% of the fund to be invested, when the price goes up by another 3-5%, I will add another 20% of the remaining fund. When the price goes up by another 3-5%, I will continue to add another 15%, followed by last 5%. I usually enter at a “breakout” point.