IBD’S 20 RULES FOR INVESTMENT SUCCESS

A vital point is these rules are not based on our personal opinion, our

beliefs or those of Wall Street’s analysts and experts. Investor’s Business

Daily built models of the most successful stocks and investors of the last

half-century. We analyzed all their common characteristics, what variables

occurred before the best stocks had huge advances and how these

variables changed when the stocks topped. So these rules and principles

represent how the market actually works. If you ignore them and rely

instead on personal opinions, feelings or emotions, you are potentially

arguing with how the market has functioned for 50 years.

1. Consider buying stocks with each of the last three years’ earnings up 25%+, return on equity of 17%+ and recent earnings and sales accelerating.
2. Recent quarterly earnings and sales should be up 25% or more.
3. Avoid cheap stocks. Buy stocks selling at $15 a share and higher.
4. Learn how to use charts to spot sound bases and exact buy points. Confine buys to these points as stocks break out on big volume increases.
5. Cut every loss when it’s 8% below your cost. Make no exceptions so you can always avoid huge, damaging losses. Never average down in price.
6. Have selling rules on when to sell and take profit on the way up. Review “When to Sell and Take a Profit” in “How to Make Money in Stocks.”
7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when general market indexes show five or more days of volume distribution.
8. Read IBD’s Investor’s Corner and Big Picture columns to learn how to recognize important tops and bottoms in market indexes.
9. Buy stocks with a Relative Price Strength Rating of 85 or higher in the IBD SmartSelect Corporate Ratings.
10. Pick companies with management ownership of stock.
11. Buy mostly in the top six broad industry sectors in IBD’s New Highs List.
12. Select stocks with increasing institutional sponsorship in recent quarters.
13. Current quarterly after-tax profit margins should be improving and near their peak.
14. Don’t buy because of dividends or P-E ratios. Buy the No. 1 company in an industry in earnings and sales growth, R.O.E., profit margins and product quality.
15. Pick companies with a new product or service.
16. Invest mainly in entrepreneurial New America companies. Pay close attention to those with an IPO in the past eight years.
17. Check into companies buying back 5% to 10% of their stock and those with new management (what is management’s background?).
18. Don’t try to bottom guess or buy on the way down. Never argue with the market. Forget your pride and ego.
19. Find out if the market currently favors big-cap or small-cap stocks.
20. Do a post-analysis of all your buys and sells. Post on charts where you bought and sold. Evaluate and develop rules to correct your major