Follow These Four Easy Rules to Become a Better Investor

I spend a lot of time looking at the effects of psychology – and even human biology – on trading and investing.

This matters because of one simple fact: The vast majority of investors and traders underperform the market.

They underperform because they don't have a good understanding of those psychological effects or how to manage them. It's all too easy to let your emotions influence your investing... which leads to poor results.

But you can avoid this fate. The first step is to become familiar with the inherent biases we as humans bring to the table.

The next step is coming up with a plan to manage them in order to become a successful investor. But to do that, you need to know what works – and what doesn't.

So in this essay, I'll highlight four simple rules that all investors should keep in mind... And I'll share one opportunity they're presenting today.

  1. Buy Low, Sell High

This is something that every long-term investor talks about... But many people forget about it in day-to-day trading.

Worse, many investors understand the "buy low" portion of this equation, but almost never do even an adequate job with the "sell high" portion.

I've said it many times: You don't want to get caught in the "middle" of trading and investing. If you're trading, trade a lot. If you're investing, don't trade at all.

And the single most powerful tool in trading is to sell high.

I even have a Post-it note that says these words – "Buy Low, Sell High" – on my computer screen. This should be the single piece of "math" that every investor thinks about each day.

  1. Be Selective

For a diversified investing portfolio, you likely only need 10 to 15 stocks.

But for a trading portfolio, remember that you can spend much of your time without any positions. In this case, most folks also likely don't need more than 10 to 15 positions at any given point. It's important to stay agile and flexible.

It sounds smart to have opinions on lots of subjects and many stocks... But it usually isn't a good way to make money.

The best way is to be patient and highly selective with your investments – wait for the absolute best ideas.

The allure of having an opinion or getting involved in the excitement of a new story often overwhelms selectivity. Keep your number of positions small by choosing only the best ideas.

One simple exercise is what I call "force curving." Before you add a new investment, decide what it will replace in your current portfolio. If you can't find one, then you shouldn't make the new investment.

  1. To Go Up by a Lot, It First Needs to Go Up by a Lot

When it comes to investing, you should only focus on really big returns.

Every single year (even during recessions), 50-plus stocks go up by 100% or more. If you look at any three-year rolling period, there are hundreds.

So if you only own 10 to 15 stocks, why shouldn't you focus on those that can go up a lot?

However, a frequent perception often prevents investors from properly identifying these kinds of opportunities: "Oh, it's already up by a lot."

This is one of the most common investing phrases out there, and it's also one of the most damaging.

To understand why, consider this simple mathematical concept: For a stock to go up by 500%, it has to go up by 100% first.

So the next time you're thinking about trying to find big-upside investment ideas, think about starting with stocks that have already doubled or tripled.

  1. Look for Big Market Potential

The single strongest correlation I see with stock prices is with the earnings of the underlying companies.

If a company makes $1 of earnings per share ("EPS") today and will earn $5 of EPS in the future, its stock will almost always go up... and usually by a lot.

The move higher might be quick... it might be slow... but either way, the stock still goes up.

(The inverse also holds true – if a company is earning $5 of EPS today and it earns $1 of EPS in the future, its stock will almost always go down.)

So if you want to find high-return stocks, the most important thing to look for is a company with the potential for this kind of earnings growth.

One example is special purpose acquisition companies ("SPACs")...

When I started on Wall Street in the mid-1990s, there was a robust initial public offering ("IPO") market in which many small, growth-oriented investment banks brought high-growth companies public.

These were the kinds of companies where EPS could go from $1 to $5... and their stocks produced massive returns for investors.

But over the past 25 years, those banks were gobbled up by larger banks. Those larger banks – like Goldman Sachs (GS) – are only interested in the biggest IPOs.

This has meant that for the past decade, we've seen a great roster of emerging-growth companies with huge potential that haven't gone public... until now.

The growth of the SPAC market as an alternative to the traditional IPO gives these firms the opportunity to go public in an investor- and company-friendly manner.

A SPAC is an investment vehicle put together by an experienced management team (the "sponsor") that raises money in the public markets. It then identifies great growth companies and acquires them in order to bring them public.

Now, this is a hot sector. This means that it's critical for folks to know the right kinds of SPACs to invest in... and how to avoid the ones that are primed to collapse. So I've been delving into this part of the market recently to help readers do just that. This is where the big growth potential is today.

In short, the SPAC market is one example of how to succeed if you're a selective investor looking for huge upside... But it's an opportunity you don't want to miss.

Regards,

Enrique Abeyta

Editor's note: Last night, Enrique hosted an online event featuring billionaire investor Bill Ackman to dig into the world of SPACs. Thousands of viewers tuned in to learn how investing in the right SPACs today can help you make five to 25 times your money... on deals that were once unavailable to the general public. If you missed it, you can still watch a limited-time replay of the event for free – check it out right here.

Further Reading

"It's one of the ways that everyday investors get locked out of the market's best moneymaking opportunities," Enrique writes. Pre-IPO gains aren't available to most folks. But now, a little-known type of investment can help you get in with the early investors... Read the full story right here.

Listening to the financial media could actually end up costing you money. That's why Enrique put together a list of five principles that have led investors to make big gains over the long term... Read more here: To Find the Market's Biggest Winners, Look for This.

Market Notes
THIS SUSTAINABILITY COMPANY SURPRISED WALL STREET

Today, we’re looking at a “boring” business that has caught investors’ attention…

While you typically find the biggest gains in growth stocks, you can also make steady, reliable returns through boring companies. These businesses can do the same thing for generations… providing what people need in good times and bad. Today’s company is helping to feed the world – and more – through the uncertainty of COVID-19…

Darling Ingredients (DAR) is a $6 billion global producer of sustainable natural ingredients. It takes used animal products like grease, frying oil, and other food scraps from restaurants and repurposes them into usable ingredients for feed, soap, and biodiesel. Although the company took a blow from COVID-19 as energy demand fell in the early months of 2020, farmers and other crucial businesses still need animal products… And DAR surprised Wall Street by beating expectations in the second quarter.

As you can see in today’s chart, DAR has soared since bottoming in March. Shares are up 115% over the past year, hitting an all-time high. This boring stock is heating up – and it’s showing investors the power of a reliable business during a crisis…