IBD’s 20 Rules for Success
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.
CP: This is an excellent rule to follow as it will filter most of the poorer
performing stocks from your initial screens. Many of my fundamental screens
contain these parameters although I do eliminate or loosen the ROE
parameters at times.
2. Recent quarterly earnings and sales should be up 25% or more.
CP: Love this rule as earnings results do have a direct relationship to share
price
3. Avoid cheap stocks. Buy higher quality stocks selling $15 a share and
higher.
CP: I follow this rule about 95% of the time. It’s a must for novice investors
as much of the market’s garbage is priced below $15 per share. However, I
will occasionally trade a stock below $15 per share if the risk-to-reward ratio
warrants the position.
4. Learn how to use charts to see sound bases and exact buy points.
CP: Learning technical analysis is a must to become a successful trader.
Thousands of methods exist so discover the few that fit your trading style.
Read through this blog to become familiar with my technical methods.
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.
CP: First – NEVER average down in price, NEVER! Second, always cut your
losers based on your position sizing calculation which should have a direct
relationship to your risk-to-reward setup. Don’t allow losses to grow larger
than 8-10%.
6. Follow selling rules on when to sell and take profit on the way up.
CP: Always sell when a rule is violated. Examples could be a price falling
back below a specific moving average, a specific retracement from new
highs or a trailing stop.
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.
CP: Follow the trend! Whether it is up or down, trade accordingly!
8. Read IBD’s Investor’s Corner and Big Picture columns to learn how to
recognize important tops and bottoms in market indexes.
CP: I do recommend these sections of the newspaper but you can also
formulate your own methods for signaling market tops and bottoms (I like to
monitor the NH-NL ratio and my own index of 20-30 of the market’s leading
stocks).
9. Buy stocks with a Composite Rating of 90 or more and a Relative Price
Strength Rating of 85 or higher in the IBD SmartSelect® Corporate
Ratings.
CP: This is a great rule for strong bull markets but the parameters must be
loosened in flat or weak markets. I set my fundamental screeners to a
minimum rating of 70 for both EPS and RS. I rarely use the smart select
ratings from IBD.
10. Pick companies with management ownership of stock.
CP: I don’t care about this rule and don’t follow it in my research. It can help
but I have never based a trading decision off of this rule.
11. Buy mostly in the top six broad industry sectors in IBD’s New
High List.
CP: A solid rule for novice investors but this rule will limit opportunities for
more experienced investors. Buy stocks in groups trending higher or groups
starting to make a move. They don’t have to be in the top six as most will be
lower when they start their initial move.
12. Select stocks with increasing institutional sponsorship in recent
quarters.
CP: This is a great rule and I always check the institutional sponsorship of
every stock I trade. Sponsorship, along with earnings, are my two most
important fundamental checkmarks.
13. Current quarterly after-tax profit margins should be improving,
near their peak and among the best in the stock’s industry.
CP: An important statistic to check but it doesn’t weight as heavily as
earnings and institutional sponsorship in my research.
14. Don’t buy because of dividends or P-E ratios.
CP: I agree 110%! Growth stocks will always be trading at higher P/E
multiples (history will prove this statement). Great products (stocks) usually
cost more!
15. Pick companies with a new product or service.
CP: New products and services will drive earnings growth which should drive
the stock price so pay attention to these news stories.
16. Invest mainly in entrepreneurial companies. Pay close attention
to those that went public in the past eight years.
I love to focus on IPO’s from the past few years as they should be hitting
their stride and growing faster than their peers with a minor track history on
Wall Street. Bread and butter growth stocks are found in this category.
17. Check into companies buying back 5% to 10% of their stock and
those with new management.
Another rule that sounds good but I don’t pay too much attention to for my
own research. I don’t ignore when companies buy back stock but I rarely
ever trade based on this type of news.
18. Don’t try to bottom guess or buy on the way down. Never argue
with the market. Forget your pride and ego.
CP: Again, I agree 110%. Do not average down or try to guess the bottom!
It’s a losers game.
19. Find out if the market currently favors big-cap or small-cap
stocks.
CP: This is a secondary indictor of lesser importance that I follow but does
come in handy from time to time.
20. Do a post-analysis of all your buys and sells. Post on charts
where you bought and sold each stock. Evaluate and develop rules to
correct your major past mistakes.
CP: All traders must keep journals to learn what went right and what went
wrong. Keeping a journal can make you a better trader if you study and learn
how to correct past mistake and replicate past successes. Understand why
you did what you did as this will allow you to make more intelligent decisions
in the future. With experience, the subconscious will take over and you
should become more profitable and consistent with your trades. Studying
past trades teaches your subconscious what to look for in future trades. Call
me crazy but I believe this to be true.
