How To Avoid Disaster -- And Rack Up More Winners

Most investors tend to fly by the seat of their pants. No plan or rules set in place. No discipline.

It's a formula for disaster.

And you don't have to take my word for it...

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Six stocks in Texas paying us an average of 77.5%/year They call me "RR." I run a different sort of income-investing service. Right now, I'm recommending 37 stocks scattered across 20 different states. Texas has the most, with six paying us an average of 77.5%. We have three more in Philadelphia, paying us 67.9%. Some are big, others are tiny. But they all generate enough cash to pay ridiculously high dividends. I spell it all out for you here.

According to Dalbar's annual Quantitative Analysis of Investor Behavior report, over the past 30 years, the average individual investor has trailed the S&P 500 by 6.18 percentage points. Individual investors in equity funds have returned 3.98% versus the S&P 500's 10.16% return.

What's more, the study identified psychological factors -- not fees or taxes -- as the biggest reason for the lagging performance. The real costs for individual investors are the emotional mistakes we make time and time again.

Here are a few of the most common behaviors that plague investors:

Loss Aversion -- The fear of loss leads to selling at the worst possible time; panic selling.

Herding -- Following what everyone else is doing. This leads to "buy high/sell low."

Mental Accounting -- Separating the real performance of investments in your head to justify success and failure.

Most of these irrational behaviors can be fixed by simply implementing investment rules. But you must also have the discipline to stick to those rules, which can be difficult at times. You can bet there've been times I've wanted to hold onto a position even though my system told me to sell. But I have these rules in place expressly so I don't make these kinds of emotional mistakes. The market does NOT care how much you or I like a particular stock.

Why You Need A System With Rules
As you may know, I write a premium newsletter for StreetAuthority called Maximum Profit. In this advisory, I employ a proprietary trading system that scours the universe of stocks to find ones that have the best potential of delivering exceptional returns in a short amount of time (my average holding period is six months).

In Maximum Profit, we take technical analysis (the study of charts and graphs) and combine it with fundamental analysis, and in return we get an elite system that has the uncanny ability to find solid companies that deliver fantastic returns over a shorter amount of time.

Despite the complex algorithms behind the system, we keep things pretty simple. The system doesn't get caught up with what's happening on Capitol Hill or on Wall Street. It simply identifies what's working and what's not working in the market.

One of the best things about the Maximum Profit strategy is that it helps teach investors discipline. It does this by using clear buy and sell signals, thus eliminating the emotion that often plagues investors' performances.

To show you what I mean, here's an amusing chart I made a while back showing what the psychological cycle for most investors looks like...

In the end, we are all human, which means we're driven by emotion. Despite our best intentions, it's nearly impossible to altogether avoid the emotions that come with investing. But that's why I'm a proponent of following a system- or rule-based approach (and also why all great investors have strict investment disciplines that they follow to reduce the impact of human error).

You don't have to have a set of algorithms at your fingertips. A system can simply be a set of guidelines that you follow. Perhaps it's as basic as not investing outside your area of personal expertise, or as simple as having stop-losses in place. The point is that you should have some sort of game plan when it comes to investing.

What My System Flagged As A Buy This Week
It's no secret that the technology sector has had run the last few years. And in Maximum Profit we've benefitted greatly from that trend as we're currently sitting on gains of 61%, 84% and 113% on a few of our technology holdings. But don't think you've missed the boat entirely. My system continues to flag new tech stocks as buys. And just last week it flagged a company that's responsible for supplying much of the technological revolution we've seen over the last few years. In a way, you might think of it as a classic "picks and shovels" play...

But what excites me the most is that the stock sports a Maximum Profit score of 85. Now, I don't have the space to fully explain what this means in detail (although you can go here for more info on my system). But just know that relative strength and cash flow relative strength are the two pillars of my system. And it's rare for a stock to sport a Maximum Profit score this high. This means the stock is in the top 15% of all stocks in terms of potential performance over the next three to six months.

That means my readers and I can feel reasonably confident that the stock will be a winner for us in the months ahead. And that's because our system's track record speaks for itself.

If you'd like to learn more about how Maximum Profit can help you become a better investor -- and rack up more winners than you ever thought possible, then you're in the right place. For more information, click here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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