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If you are an experienced investor, you now know that making money in the stock market really isn’t as easy as purchasing a new pair of shoes.  You should trust your gut and realize that when it comes to investing, anything that sounds too good to be true, really is.  The good news is that you’re not alone.  Misery does love company.  At least it helps you rationalize why you won’t be able to retire at 45.  The bad news is unless you get back to basics and reset your financial clock, you’ll probably make the same mistake again, especially if you’re hoping, make that praying, for the sharp rebound that is unlikely to occur when you need it most.  And I’m not talking about simple, old-fashioned rules such as making sure a company has earnings.  I’m talking about rules that you should tuck away in a safe place and pull out the next time you’re tempted to go against your better judgment, your investment program.  Rules that at the very least will give you an edge at hanging on to what you have.  Rules that will help you get back into the game, although it is not a game.

Investing is not a game.  Want to play a game?  Buy dominoes.  If you have been bit by the day trading bug, you may as well buy a lottery ticket!  They both share the same odds of winning the big bucks!  In a bull market, just about anyone can make money.  It’s in a bear market where the nonprofessionals have to prove their skills and hang on to their cash.  Sure, there will be opportunities to make a healthy profit, however day trading is at the high end of “high risk”.  Unless you are a professional trader, day trading is not for you.  If you want to invest, learn about businesses.

Readjust your expectations.  Sure, it’s an investor’s dream to purchase a penny stock and make millions of dollars in less than a year, but it’s also unrealistic.  Research before you buy.   Check the fundamentals of the company.  Look at a long-term price chart (ten years to the maximum the stock has been trading). Understand the stock’s price trends, so that you have realistic expectations of price fluctuations.  Anything is possible, however, if you can get an average annual return of 10%, consider yourself lucky.

"Risk" is not a four-letter word. It deserves respect.  Remember that without volatile markets, the opportunity for profit would not exist.  A good rule of thumb is before you buy, instead of asking how much you can make, first ask how much you can lose. Which is what an experienced investor always asks before making an investment.  This style may seem irrelevant and outdated, but at least its followers still have their money.

If you don't know why you're buying a stock or understand the company's business, do not buy it! This will be especially important to remember the next time you’re tempted by some internet company you believe will make you millions of dollars.  Unless you really understand the business or that the stock is a “high risk” part of your portfolio, don’t bite.  Especially if you can hardly pronounce the company’s new product, let alone understand it.  If you can not explain in one sentence what a company does, don’t buy it!

Diversify. Unless you have money to lose, don’t buy just one or two companies, or even a single-sector mutual fund, for that matter.  Such concentrated bets can result in huge wins, but equally large losses, as any technology investor knows all to well.  If you do not have a diversified stock portfolio, there is nothing wrong with having a portfolio of mutual funds.

Cash is king.  This is especially important for bargain hunting.  Have some ready cash available to pick up stocks that have good fundamentals, but have been beaten down by the stock market. 

The only margin you should consider the next time you call your broker is the margin of safety.  An investment philosophy I have is not to buy stocks on margin, unless you are a savvy investor.  Buying on margin is using money borrowed from a broker/dealer to purchase securities.  When the stock turns south, your broker will be calling you to put up more collateral in your margin account or sell out your securities.  Also, don’t get fooled by stocks that are mere shadows of their former selves.  Never forget that there is a difference between a stock and a company.

Beware of companies with more debt than cash.  Many companies are counting on a bailout via a stock offering or a new line of credit, but they can forget either if they’re leveraged to the gills.  A key danger sign here is any new credit agreement with terms well above the market rate.  You’ll find this information in the liquidity section of the company’s 10-Q statement.  

Buy profitable companies.  If you learned nothing else from the internet company debacle, remember that earnings are earnings are earnings.  Another investment philosophy I have is to never purchase a company that has not reported a profit.  Sure, you could have mad a bundle if you purchased one of the dot-com companies that ran up.  Of course, you also had to know when to sell to realize any price appreciation.  Those that didn't know the reality of buying a company that haven't made a profit.  A number of these companies have been delisted, filed bankruptcy, or have just gone out of business. 

When in doubt, leave it out.  If you are not sure about a company, don't purchase it until it has been thoroughly researched.  While stocks have a history of generating the best returns over the long term, there is nothing wrong with buying fixed income securities for capital preservation.  Certainly, you may not make a lot of money with this approach, but at least you will preserve some of your capital.

Following these rules will keep you from falling into the trap of investing on emotion, and keep you on target with your investment program.  If you have not already done so, sit down with your investment professional to discuss these investment rules, or to create some of your own.

This article was published in The Network Journal. Jodye Deal, contributed this article for the New York-based magazine.  If you have questions on investing, please send them to Investing@GazelleAssociates.com.

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