Lets Review

Last year around this time, I was discussing the market with someone who I respect. A man who is knowledgeable, accomplished and highly educated. I explained to him how based on my research and fundamental analysis, that i believed that AMD was going to be one of the highest performing stocks of the year. He on the other hand argued that NVDA, which is AMD’s direct competitor within the tech and chip sector, would outperform AMD. Twelve months ago we each put our money where our mouths are and needless to say he won, it wasn’t even close. Now to be fair to me, AMD had a stellar year at 109% gain over the 12 months. However NVDA put that and almost all other large and mega cap companies to shame last year at a staggering 238%. Now I doubled my money in a year which is always my goal, but my well educated colleague outpaced me by a wide margin.

Why do i bring this up to you today? Well, because this story perfectly illustrates many key points i need to share with you. Around this time of year many Americans reflect on their past year, and think about changes they may want to make for the year ahead. This could be about diet or exercise, but I figure I can do the same with stocks.

When reviewing your year of trading it is important for you to analyze trading decisions you made, why you made them and how you can improve moving forward. Look at things that happened within the market, the economy and your particular sector if you are trading one sector heavily. See if their were signs you missed that you may be able to identify in the future. THIS IS NOT TO DWELL ON WHAT COULD HAVE BEEN. Not only is this not a constructive use of your time, but it could lead to making worse decisions in the future.

In my particular case I backed a stock that while i had very impressive returns, it’s direct competitor did far better. Anytime you are going to make an investment, you need to do your homework. This is your money and if you want it to grow, you need to be informed. Part of doing that homework is knowing not only the company you want to invest in but what sector they are in and who their direct competitors are. AMD for example, is in the chip and tech sector. Their direct competitors are NVDA and INTC. Comparing AMD to a company like TSLA isn’t very productive because they are different companies in different sectors. However comparing AMD with NVDA and INTC you are comparing competing companies with similar products, growth and mindsets. This process of comparing competing companies isn’t just about maximizing your returns but can also help you avoid to being stuck with a losing company. Take DIS for instance, you may love Disney movies or theme parks, but their stock lost 7.5% for the year. Who is one their competitors? How about NFLX? Like Disney, Netflix has a streaming platform, and original content including movies. It’s not a perfect comparison because Disney has theme parks and merchandise products. However that gives Disney many opportunities to increase revenue. However NFLX Gained 48% so if the two are competing, Netflix outperformed Disney by over 50 percent. Signs like that should make you think about which company you want to back moving forward. Whether it’s avoiding loss or making bigger returns, you should always look at who is winning their respective race. Final note on this topic, don’t think the big mega cap companies are going to keep outperforming their competitors. To see continuous growth in a stock, the corresponding company must have also grow. This is where their smaller competitors have potential to outpace that growth.

Another thing that many investors, traders and everyday people see when reviewing the bigger picture is that they missed on timing. Not getting in or out at the right time. Maybe you didn’t buy in a stock soon enough, maybe you sold it too late and it jumped up after you sold. Maybe you sold too late and missed the peak and sold at a lower amount. Market timing is very hard and should be avoided due to the risk of making mistakes.

One of the biggest reasons people mistime the market is due to emotion. It’s very hard not to be emotional with money. It could be fear, greed or excitement. When we get emotional, we get irrational and can make mistakes. I have been trading for years and my money has grown exponentially, and still to this day I have trouble keeping my emotions in check. I haven’t found a way not to be emotional about money. What I have found is a simple set of rules that I follow that helps me avoid mistakes.

Rule 1: Take Profit.

I will never be the guy that goes from rags to riches, but i will be the guy that consistently wins. I follow the 30 30 rule, its very simple. Every time your stock gains 30 percent profit, sell 30 percent of your shares. This is to guarantee profits. By doing this, you won’t maximize potential profits, however you will minimize any potential losses. You will always be squireling away profits and you will see sound returns by years end. Following this rule, my stock portfolio grows slowly but my losses are tiny.

Rule 2: Take a step back

Many of us buy a stock to sell a year from now. It takes time for the stock to reach where you plan. It is a great strategy to buy and hold long term. it doesn’t require much involvement throughout the year. Additionally, after 12 months your capital gains tax decreases significantly. However throughout the year, their will be peaks and valleys. If you are a long term investor or a an inexperienced one, I urge you to check on your stock Dailey. It will drive you nuts. Web articles from all different sources try to play on emotion. Emotional readers may be more likely to buy, sell, or simply keep checking their website. I’m not saying not to be informed about your investments, but I am saying not to let yourself obsess.

Check in with us next time for more investment tips and rules. In the meantime, learn from past successes and failures. Always look for ways to grow and suceed.