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Editor's note: Today, we're sharing some timeless wisdom from our friend Dr. Richard Smith. Richard is a mathematics PhD and the founder of our corporate affiliate TradeStops. He has built a fantastic set of tools that help individual investors diversify and manage risk in their portfolios. Below, Richard shares a crucial step to becoming a better investor...
Monday, July 27, 2015
Shares of home-entertainment giant Netflix soared two weeks ago on better-than-expected subscriber growth. Shares were up nearly 20% on July 16.
When asked about his company's soaring share price, Netflix CEO Reed Hastings replied, "I think it probably shows why at least I should keep my day job and not try to be a stock picker. When the stock was half this price, I described it as euphoric. So it's a mystery to me. I think I'm out of the stock commentary business."
I couldn't have said it better myself. We should all get out of the stock commentary business.
Let me explain...
If the CEO can't make rhyme nor reason of the price of his own stock, what hope do the rest of us have?
Sure, we can try to explain what's going on with stock prices. We can try to make educated guesses about where company share prices are heading next. But can we really know?
More importantly, do you want to risk your financial future with these guesses?
I was explaining my core investment philosophy to a friend a few weeks ago. Here's the way I put it in a few simple steps:
The first and most difficult step is getting OUT of the stock commentary businesses. That doesn't mean you can't find and invest in superior businesses. But you can't make up stories about those companies when things don't work out.
Let the market tell you if you if you're right or wrong about your investments. And then listen to what the market is saying!
That's the second step... Once you have good investment ideas, put them to work in a disciplined approach. Make purchases based on how much you could lose. And always sell when you hit a stop loss.
Once you've got this down, steps three and four are simple... profit and enjoy.
Of course, getting out of the stock commentary business is the hardest step of all. But once you do that, you'll be a much better investor.
Just remember, no one can know the future. That's why, like the CEO of Netflix, I'm getting out of the stock commentary business, and I hope you will to.
To the growth of your wealth,
P.S. Once you have a good source of investment ideas, you need to put them to work the RIGHT way. I've spent years developing tools that will help you do just that... My TradeStops software can help you choose trailing stops, decide how much money to invest in any position, and know how to easily manage risk in your portfolio. I even have tools that help you know when to buy. You can find everything you need to manage your portfolio right here.
Steve Sjuggerud urges readers to put as much thought into their exit strategy as they put into the decision to buy an investment. And if you're concerned about potential losses, Steve calls The Trailing Stop Strategy "the best last-ditch measure to save your hard-earned dollars."
If you're like most people, you have trouble deciding when to take some money off the table. As Dr. David Eifrig says, "The strategy for selling is determined by why you bought in the first place." Learn how Doc plans his trades here: Before You Sell a Single Share of Stock, Read This.
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