Monday, January 21, 2008

Champion Investor Rules

1. Realize that short term traders or people who buy and sell a stock within one year pay a capital gains tax of 33% while long term traders or people who buy and hold a stock for more than one year will only have a capital gains tax of 20%. This might seem unfair but the government does this to try and prevent volatility.

2. Recognize that compound interest is the most powerful tool at your disposal. Best example of this is how a stock valued at ten dollars in 2000 becomes 100 dollars in 2010 meaning that your money has grown over 1,000% from the original investment. Had you bought this stock for 15 dollars on a day of stock market happiness in 2000 you would only have your original investment multiplied by 6.5 or raised by 650%.

3. Notice the fact that doing what everyone else is doing is usually a recipe for disaster. If you remember the dot-com bust, oil bust, railroad bust, etc, you should know that following the crowd pleasing stocks and all of its excitement is great for a while but ultimately in the end all of these very exciting stocks will have to produce and return a profit because otherwise the only place for them to go is down. Be aware!

4. Never pay for an overpriced stock which means do not pay for a stock that has a price to earnings ratio above 30. Back in the day of internet stocks like,, all of these stocks were having P/E (Price to Earnings) ratios of over 200! Now I wonder who bought these overhyped stocks and how much money they made because unless you can actually see profits already present in a company then stocks like and others are not worth any second of your time.

5. Realize that the stock market does not have to be nor should it be an emotional experience. When people get scarred that is the absolute best time to buy stocks because more than likely many great companies will be on sale during this time. The opposite happens when the stock market is very happy and it seems as if everyone is making money. This would be the time to sell stocks not to buy more.

6. Always and I repeat always buy stocks in intervals. This means that if a person is willing to invest 10,000 dollars in one company he or she must be willing to buy at ten different intervals. For example when this person with ten thousand dollars buys a stock at 50 dollars with a P/E ratio of 30 he or she must only invest 1,000 dollars instead of all ten thousand into this one stock. The reason for this is because when the stock price goes down you can buy more at a better value. So when the stock goes to $47 he or she buys $1,000 more of the same stock, and when it goes to $44 he or she buys more once again and continues to buy more when the P/E continues to decline. Therefore when all of her 10,000 dollars is invested he or she will receive the best price possible which most importantly brings down the average cost per share significantly.
Therefore instead of paying $50 per share he or she will pay $45 per share from the $10,000 interval investment! This means that when the stock goes back up to $50 the return on investment will be 10%! This might not seem like much but considering that the company is growing and as a result of that 5 years later the stock price is $90 the person with the average price per share of $45 will make an extra 2,000 dollars compared to the other person. Now think about people with lots of money and you will soon realize that the impact of compound interest is very big if someone for example invested 1,000,000 dollars like I mentioned above. That person would make an extra $200,000 off his or her original investment just because he or she bought shares in intervals which allowed them to make $200,000 more than they would have made previously when they were thinking about using all the million dollars at one time when the stock price was 50 dollars. So compound interest is definitely king of all things when it comes to the stock market!

7. The same way you buy stocks is the same way you should sell them. This means when a stock goes up 50 percent for no apparent reason the best thing to do is to sell 25% or more of your holdings at once in this stock. If it goes up another 50% then sell another 25 percent or more of your holdings. Keep on doing this and you will see that eventually the stock you sold that was overpriced will fall back down to a reasonable price in which you can buy the same stock at a cheap or cheaper price. The reason for doing this is to make sure that you come away with something before it’s too late. Believe me over-priced stocks are notorious for free falling leaving you with nothing even thought the stock had doubled in three days.

8. Don’t let greed rule you! This is very hard for most investors to learn and therefore prevent but unfortunately the best way to learn this is usually through experience but hopefully you can learn this ahead of time and use this advice to your advantage. Number 7 above helps you tremendously in this regard.

9. Splits in a stock do not increase the value of each share you own. Remember this because a 100 dollar stock maybe a better bargain than a stock that is worth 50 dollars due to a recent stock split.

10. Own stocks that you know best or know a lot about because stock picking is not easy and requires you to do a lot of homework to make sure the company you picked is really growing. Unfortunately to many people this also requires that you read financial statements that the company releases. Make sure though that you read the very bottom of these statements because this is usually where companies might try and hid things they think are not beneficial to the company.

11. Be open minded but not too open minded. Realize that your stock picks must be companies you would not mind owning for at least ten years because the more time goes by the more stocks are weighed on a scale meaning the more profits they have will ultimately decide what price each share will be.

12. Leave 25% of all the money you have in cash or bonds because as the market goes down you can easily convert that cash and bonds to stocks that happen to be very great companies whose price relative to earnings is way too low.

13. If you ever have doubt ask Warren Buffet (2nd richest man in the world) who will tell you to read the book by Benjamin Graham (Buffett’s teacher) called “The Intelligent Investor”.
This book can change your life and can help you overcome Mr. Market which is a person who has mood swings representing the market. How you deal with Mr. Market can either make you rich or poor.

*If nothing was received from the information above then I suggest you just simply buy cheap great value stocks on sale with a P/E ratio below 30 and I suggest you always remember compound interest and buying in intervals and taking advantage of the downturns of the emotional market.