Two Top Investment Strategies for 2010

by Andrew Horowitz

In our last article, I gave a few quick and dirty tips about how to get 2010 off to a great start, including forgiving yourself for past mistakes and keeping a journal of your good and bad moments--as well as of the things you learn during the year.
 
I know, I know--it's all easier said than done!  So in this article, I wanted to mention some more quick tips to start the New Year off right.

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Two Top Investment Strategies

As you may or may not know, two of the most commonly quoted pieces of investment advice are the following:

• "The Trend is Your Friend" and

• "Let Your Winners Run and Cut Your Losers Short or Quickly."

These two similar bits of advice can help keep you in winning stocks—after you do your research, of course. This advice can also keep you on track for a winning portfolio because it advises you to avoid massive losing positions by selling stocks early but stay committed to hold positions that continue to move in your favor month after month.

Let's start with the first bit of advice.  "The Trend is Your Friend."

What Does “the Trend is Your Friend” Mean

What this means is that once we observe that a trend in a stock or a market is taking place, then we can expect this trend to continue as more people recognize the trend or the fundamentals of the company keep improving. More people and funds will continue to buy the stock as it rises higher.
 
That isn't to say that stock prices rise forever, but we get the best bang for our buck--or best favorable movements in our investment--when we invest in alignment with what is called the "primary trend" in a stock or a market.  Primary trends can last at least two years but sometimes last four, five, or even more years before a stock begins to peak and reverse.

How Do You Find a Trend?

The easiest way to find a trend is to look at the simple price chart of a stock over time--usually on the daily frame for those with shorter holding periods like traders, or weekly frame for most investors.  You can use any free financial website like stockcharts.com, Yahoo or Google Finance, Finviz.com and many more.  After doing your background analysis on a stock and maybe comparing ratios, type in the symbol of the stock into the search bar of the website and a stock chart will appear for you to view.
 
Sometimes the program puts moving averages on your charts automatically, but if not, just insert the 50 day simple moving average and the 200 day simple moving average.  These are for those looking at the daily chart of the last 6 months or up to 2 years.
 
For investors, look at the Weekly Chart and also show the 50 week simple moving average--that's really the average price of the stock over a full year which has 52 weeks--and the 200 week moving average, which shows you the average price of about the last four years.

What Should You Look For?

What you want to see is price moving higher in an observable trend, but not too steep of a trend.  Anything less than 45 degrees as an angle of rise is stable.  Also, look to see that price is above the 200 day simple moving average and the 50 week simple moving average--this is telling you that price is currently above the average price of the last year.  Many investors will sell a stock or refuse to purchase a stock as long as it is beneath the one-year average price.
 
That is how we look for trends using price charts of stocks.

What Does “Let Your Winners Run and Cut Your Losers Short" Mean?

The other advice comes from a highly recommended book Reminiscences of a Stock Market Operator in which Jesse Livermore says "Let Your Winners Run and Cut Your Losers Short."
 
This means that after you do your research and buy a stock with good fundamentals and a stable rising price trend, then you hold that stock until it meets your fundamental investment target price, begins to drop through its 200 day moving average, or falls some percentage that you specify in advance, like a 15% decline from a recent high. 
 
Until price falls under an average, falls a certain percent, or you find that the fundamental position or financial ratios decline relative to peers, you should keep that stock in your portfolio.  That way, you can ride the trend for maximum profit for as long as the trend lasts.  And as long as the trend keeps going up, you will keep making money.
 

However, if you do your research and buy a stock in a stable uptrend, and then you see price fall 10% or 15% from where you bought it--or whatever percentage you specify as a stop-loss--then you should take your stop loss without hesitation and move on to buy your next stock.  Don't tie up your capital in stocks that are declining; there are almost always other stocks going higher and if you can't find other stocks in uptrends, like was the case in 2008, then you stay out of the market or invest more heavily in bonds.

Your Investments Are Up to You

Remember, no one is forcing you to own stocks.  You chose when you enter and exit your investment and pretend like the stock has to "prove" itself to you to be added to your winning portfolio.
 
So if you have not used these strategies in the past, try them in 2010.  Buy stocks in stable uptrends with strong fundamental backgrounds, and hold them until they meet one of your criteria for selling a stock.  If a sell signal is given, sell immediately without emotion or hesitation.

Here is a tip….

"My friend Corey Rosenbloom who I've had three times on my Disciplined Investor Podcast series is a chartered market technician which means he specializes in using technical analysis on stock charts.  He runs an educational website entitled "Afraid to Trade" which focuses on teaching basic and advanced methods of using technical analysis, which is what we do when we look at stocks or markets after analyzing them on a fundamental basis. 

Not only does he offer free content on basic charting about trends, moving averages, and other indicators, he focuses on inter-market analysis which is the method of looking at bonds, stocks, gold, oil, and the US Dollar Index to get a hold of the bigger picture of the investment landscape.  He offers a weekly subscription report entitled the "Weekly Intermarket Report" which takes a look at opportunities for traders and investors across the broad markets, as well as offers private mentorship and educational lessons for those wanting to learn more.  You can get more information about this by visiting premium.afraidtotrade.com and read his daily blog at blog.afraidtotrade.com, or just remember his catchy name at www.afraidtotrade.com.  His tag-line is "Overcome fears through education."  Remember, we need to learn as much as possible when building our portfolios and sometimes having a mentor to guide us can save time and money from having to learn costly mistakes by ourselves."
 
Keep with us as we discuss even more ways to become a winning investor in our next podcast! If there’s a question you’d really like to ask, just email me at winninginvestor@quickanddirtytips.com or call 206-338-0836. That’s 206-338-0836 and maybe your question will appear on the show.

And if you like the show, tell a friend or leave a review on iTunes. Until next time, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Making Money in any market - wishing you all the best on your quest to investment success.