Albert Einstein said “The significant problems we have cannot be solved at the same level of thinking with which we created them”. This can be applied to many different problems that we encounter in our lives. However, in applying it to our investing strategy, we need to remember that if we continue to invest money the way we have always invested it, then we will continue to obtain the same result. What we need to do as investors is to find a different strategy, unless the one we are using is working for us. Then it would just be more of the same.

A couple of things that have been attributed to Warren Buffet are “it’s far better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.” He also said “Rule No. 1; Never lose money. Rule No. 2: Never forget rule number 1″. I feel that what that means is we should be on the lookout for wonderful companies that we can purchase stock in, at a reasonable price. If we do that then when the price of the stock goes up, so will our profits.

I think what we also need to do as investors is to learn to think outside of the box. To think outside of the box you have to first of all, define what the box is. After we define the box’s parameters, then we can learn to think outside of those parameters. The box is defined as the normal way of looking at things, doing things and all of the routine assumptions that everyone is making about a subject. The best way to begin to think outside of the box is to challenge all of the assumptions that are being promulgated by everyone who discusses the subject.

The hard part of challenging these assumptions is that of obtaining a listing of the assumptions. You should begin by listing every assumption that you can think about of what people have said it takes to make money in the stock market. Do not be afraid to border on the absurd. For instance, the buy low and sell high assumption. Is there some way to think outside of that assumption and still make money with your investment strategy? If you can come up with a solution to that problem, you will probably find yourself quite rich.

Some unusual methods of making money with your stock investing include buying gold or silver. These commodities are wonderful things to own when the stock market is unstable. They do not lose their value in this environment. However, they will lose their value when the market stabilizes. So you will want to keep your eye on the situation. If you do decide to invest in gold or silver, you can choose to buy either coins or bullions. One rule of thumb, is to never invest in futures. You will always lose your investment with futures, even gold futures.

Buying or selling options is another methodology to make money with your investments. You should probably never do a naked transaction, that is never act on an option with no support. Their are many different strategies including straddles, calendar spreads, strangles and others. There is information on this site about investing in options. Buying hedges are another way to make money with your investments. It is important to understand these strategies fully before trying them out. Do some research. Ponder the standard assumptions and learn to think outside of them. It will be worth the time you spend doing this exercise.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Many stock traders are choosing to make stock picks from the information obtained from option trading. They feel that this information can provide them an additional amount of information when compared to fundamental and technical analysis. For instance the amount of open call positions for any stock will indicate how bullish investors are for that stock. In an article published in the National Bureau of Economic Research, the analysts Pan and Poteshman wrote about their studies of options. They reviewed ten years of CBOE data and determined that if an investor did nothing more than buy stocks with low put/call ratios and sold stocks with high put/call ratios, that investor would net a return of one percent a week.

Implied volatility can also be determined from the option pricing for the underlying asset up to the expiration date. In reviewing the pricing for a stock, the analyst can determine what the market is thinking will happen to that stock. The option market will price in expected movements in the stock. This can be determined by what the market is willing to pay for that option. Watching the option pricing over time will indicate to the savvy investor what the market is thinking will happen to that stock.

Watching the volume of calls or puts can also send a message to the investors. By comparing the average daily traded volume with the numbers of options being placed, you can see where the option traders are setting their stalls. Lots of calls would be bullish while lots of puts would be bearish. You will need to filter out unusual activity which may be occasioned from news, earnings and government announcements. When you see no apparent reason for the increase in volume then you should begin to wonder. It is possible that someone knows something.

When reviewing the stock options, you should be careful before jumping to a conclusion. You should look over the entire cross section of a stocks strike prices and expires. A large increase in calls may be due to a spread trade, a rollover or other multi-legged strategies. Review your ideas over time before taking action. Determine that an action may be warranted and then watch to see if you were right. Track your decisions and the results on a spreadsheet. Learn from your correct and incorrect guesses. You have the time to create an worthwhile investment strategy. After you have tweaked your style, then you are ready to act on your stock picking tips.

An informed investor will understand the need for proper diversification strategies within their investment portfolio. They will know that this is the only way to truly enhance their stock market returns while at the same time, minimize their risk. The stock market does not reward you for taking unusual risks. The best method to use with your investment strategy is to create a portfolio which gives you the best chance to make money.

In a study completed by Professors Alok Kumar and William Goetzmann, they found that the individual investor does not properly diversify their stock portfolio. In their study completed in the 90’s, the younger, less wealthy, and non-professional had the least diversified portfolios. About 25 percent of the funds held only one stock and about half of the portfolios held only one to two stocks. Those individuals who did try and diversify by purchasing multiple stocks were haphazard in their investment style. They did not attempt to find those stocks with minimal correlations. It appeared that they were merely following the herd. Going with what the crowd said was a winning stock pick appeared to be their investment strategy. It kind of reminds me of young children playing soccer. Instead of having a well thought out plan, the investor simply tries to follow the ball around the field with the other investors.

Make the decision right now to look at your investment portfolio. Find an asset allocation calculator or site that will help you to determine what stocks have low correlations. I have discussed asset correlations in other postings. One of these articles is entitled “stock-market-diversification-tactics”. This will give you some additional ideas on asset correlation tactics.

In your stock diversification strategy, you should invest across different asset classes. You should also diversify your different investments within each asset class, and across industries and sectors. You can check out the article entitled “strategies in picking winning stock sectors” or “which sectors are going to be the best investments for growth” for ideas on finding stock sectors to invest in. Both of these articles are on this site. Another diversification tactic is to maintain a form of liquidity. You do not want to be 100 percent invested in non-liquid investments and have a financial need arise, or find another investment you wish to take advantage of.

Your asset mix will also depend on your age and how soon you are to retirement. If you have taken the correct approach to diversifying your investment strategy, and taken advantage of all opportunities to invest for your retirement, you will be like an acquaintance of mine. He happily decided to leave the rat race and retired a few months ago. I would hope that each of us could be in that situation when the time comes.

When you are working to establish your investment strategy, one of the things you need to do is invest for growth of your portfolio. In order to do this, you need to make some decisions on where you are going to put your investment funds. You need to take a look down the road, and decide where the best growth potential exists.

Gordy Crawford is a Senior vice president of The Capital Group Companies. In an interview, he said some very interesting things about your investing strategy. He was asked what criteria he uses to choose companies for his portfolio. He indicated that he looks for those industries and countries that have tailwinds behind them. He will first look for the forest, as he puts it. Once he gets “the forest right”, then he is able to worry about the trees. He tries to visualize what the world will look like in two or three years, and then does his stock picking to fit that world. He chooses his stock from the bottom up, one stock at a time.

He sees the major investment markets in a state of decline while the emerging markets, such as Brazil, India, China and Russia are all gaining market share. He feels that over the next 20 years, over 70% of the incremental growth will be in these emerging markets. He acknowledges that there are risks associated in placing your investments in these markets, but he feels that is where the “unmet needs” are going to be.

Energy is going to be one of the most important economic themes of our lifetime, according to Mr. Crawford. The impact of the internet on the media and the digitization of the world are other major considerations for your portfolio. He advocates once again of looking ahead and finding those companies positioned to take advantage of the changing world. Imagine where you would be if you had had the foresight to see the rise of Google or Microsoft when they went public.

Lastly, he feels that equities are still positioned to outperform the other asset classes. He states that depending on an investor’s age and risk tolerance, they should definitely have a diversified portfolio that includes a good mix of equity investments. He also feels that investors should have a substantial investment outside of the United States.

Being able to pick a good stock is what makes investing in the stock market work. Unless you can do this, you will not be successful in your investments. Manypeople allow their broker to pick their stocks for them. I would suggest that you should develop your own system and see if you can move away from a dependence on your stock broker. If you were to do this, you would be able to have an online investment account and save some money on brokerage fees. Some stock picking tips to help you are as follows:

You should be your own person. Study and learn what makes up a good stock. Find out how to look at the fundamental and technical analysis of a company. Look at what indicators were present when a particular companies stock did well. This means looking back at some history. This shouldn’t be that hard. In your studies you can find what others suggest as good ideas, and then test them with actual historical results.

After your research, establish your entry criteria. You should only search for those stocks that fit your criteria. Be patient and wait for the investments to meet your criteria. Do not panic. You have established in your mind what will make up a good investment entry point. Do not let what you may hear or read affect your decision making.

As soon as you find a stock or a situation that fits your criteria, then act right away. Do not try and second guess if this is right. You have established what makes a good investment, now have the courage to act on your research.

Be consistent with your investment strategy. You should also have a determined exit point. This would be events dealing with either fundamental or technical analytic occurrences. When you have reached your exit point, then get out of the stock and move on. If you have acted right, you have probably made a good profit from the stock investment. Find another stock that will allow you to repeat this successful action.

Be able to exit a loser when you need to do so. Too many times we become emotionally attached to a stock, or are afraid to pull the trigger to minimize our losses. You should be able to pull the trigger, and walk away from a mistake.

The idea behind proper asset allocation is more than not putting your eggs in one basket. It is actually the process of developing an investment strategy that optimizes your investment to get the most return with the least risk.

Let’s say you have two stocks that you are looking at investing in. These stocks have very similar characteristics. In fact, their stock prices generally move together. If you chose to invest in a 50/50 scenario with these two stocks, you would not accomplish the best use of your money. You might as well have chosen just one of the stocks. Now let us say that when one of the stocks goes up, the other one goes down. Thus if you invested in a 50/50 scenario, in all cases half of your investment would be going up at all times. Covariance is the statistical term used to explain how stocks are correlated to one another. The smaller the covariance, the more they are unrelated.

Another statistical term to introduce is the standard deviation. This is a measurement of the amount of risk an investment has. Let us say that a stock has an average return over the past 10 years of 15 percent. Now let’s say that the stock has a 10 percent standard deviation. That would mean that there is a 65% chance that the stock will generate a return of 5% to 25% return. There is also a 95% chance the stock will generate a return of -5% to 35%.

Asset allocation theory states that you can add a second investment and get the potential return to a 18% return with a standard deviation of say 11%. You have increased your return without increasing your risk by that much. If you add two more assets to diversify your portfolio you can obtain a greater amount of return and possibly reduce your risk from investing in only one stock.

So the idea behind proper asset allocation is that you find the optimum asset classes to invest in. You should look for asset classes that are not related to each other. This can be done by using an asset allocation software. You would then find the best stocks within each asset class and also use the asset allocation calculator to determine how they are related to one another.

The optimum mix would be where the percentages of each stock purchased will maximize your return with the least amount of risk. You might invest in 10% of one stock and 20% of another stock. It depends on what the asset allocation software indicates you should do to create the best mix. In this way, you are able to create the greatest opportunity to make money with your investments. There are many different allocation software programs on the market. In another post, I will evaluate the software programs and indicate which one I feel you should purchase.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

When deciding what road to take in your investment strategy, it is important to know what kind of an investor you really are. Can you handle being a little aggressive or are you a more conservative investor. Do you get nervous if your investment goes down 2% or can you deal with a downturn of over 10%. This will help determine what avenue you choose to go down with your investments. My premise in these postings has always been that you should find good strong investments and stick with them. However, you may be the type of person who prefers a little adventure and that is alright. You just need to know what you are getting yourself into. I thought I was the aggressive type until I pretty much lost my entire portfolio by trading on margin. My attitude has changed somewhat now.

There are two methods you can use to pick the stocks you are going to use in your trading system. The first is where you pick the sector you wish to invest in and then choose strong stocks within that sector. Another approach is to look for strong companies in the stock market regardless of the industries they are in and after analyzing their financial data, choosing some to invest in.

One method of selecting companies to invest in is to track what the different company’s director’s are doing. If they are buying stocks in their own companies, the company may be worth looking into. The University of Exeter School of Business did a study of stock purchases by directors from 1986 – 2003 and found a pretty impressive track record of successful investing.

The best returns came from investing in value stocks, i.e. stocks which are undervalued. Returns were 20 percent higher in companies in small, undervalued companies when directors bought their own shares. Director’s trades in larger companies showed a 6% outperformance return. Of course, this strategy may not always work. For example, new directors often feel the need to purchase shares in the company they just became a director of. Even though there is no guarantee, this strategy is certainly one to look into.

After purchasing your stocks, be patient. Stocks will often double-peak. That is, they may dip down a little then surge upward. If you exit too soon, you may miss out on the best part of the ride.

Another tip is to avoid penny stocks. They simply are not worth the time. They are extremely volatile and you have to buy a large amount of shares to make it worth it. Also there is not the volume available in the stock to provide a safe return. I was involved with a company who bought a large amount of a penny stock. The price of the stock went up 300% but the trading volumes were so low, they could never sell. If they sold any kind of quantity, the price would tank. It was a tough position to be in. Here they were sitting on a potentially valuable stock and they could not get their money out of it.

Another strategy is to let your gains compound. If a stock is doing well, sell off some of it and get your initial investment out of it. That way, the remainder is all profit. You should also be willing to admit when you were wrong. Take your losses early if you have made a bad decision. You can then put that money in a winner and get the losses back.

In summary then, choose your strategy carefully. Decide what methods you will use to invest and then do it. As my grandmother told me once, nothing ventured, nothing gained. She wasn’t talking about stocks but it may fit.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Using mutual funds to diversify your portfolio is perhaps the easiest way to invest. You can pick the fund’s that fit your desired risk and preferences and instantly be able to be invested in hundreds of stocks within that mutual fund family. The problem a lot of people run into, is they do not stop to think about the proper mix of their portfolio. Asset allocation is the process where the proper mix is determined. You need the type of mix that will continue to grow even when the stock market is not growing.

A companies size is determined by their market capitalization. Market capitalization is merely the multiplication of the number of outstanding shares by the current stock price. There are three different categories that companies are grouped into. These are Large Cap, Mid Cap and Small Cap. This grouping is done by the company’s market capitalization.

The website, Morningstar.com, is a good place to go to determine the type of the stocks or mutual funds you are looking at. At the top of the page, across from the welcome words, is a search field. Type your fund name here. Morningstar will display information about that fund you have input.

Part of the way down the page, you will find a box that has 9 different boxes within a larger box. This is called the style map. It details the type of fund this is. For example, it may be large, mid or small and also may be a growth, value or a blended fund.

Many times investors think they need to own a mutual fund for each one of the nine boxes that Morningstar classifies stock as. This is not correct. This will create a counter productive mix of your funds. What you want is a simplified mix of large, mid, small cap funds divided between growth and value funds.

Growth fund investors are looking for fast growing companies and value investors are looking for a bargain. Growth fund managers are looking for the companies that are growing faster than the average and value fund managers are looking for stocks that are undervalued.

A proper mix to begin with is to have one large cap value fund and one large cap growth fund. Next pick two funds that have a mix in the small and mid cap funds. One can be a growth style and one can be a value style. For example you may have a small cap growth and a mid cap value or the other way around. Next choose a good international fund. As you look around Morningstar you will find a graph that rates the performance of the funds you are looking at. This will help you to determine the funds to choose. We will spend more time on that in another article. As you become more experienced, you may want to branch out a little, but remember, keep it simple and do not try and make your portfolio complicated. No more than 5 – 7 funds is needed.

It is also a good idea to check the mutual funds holdings. The mutual fund you choose should have investments in more than 10 stocks and should not have more than 10% invested in one particular stock. If the fund you are looking at is not diversified, you may want to rethink your selection.

You should also choose several different industries. Too many times, investors overweight their investments in the same industries. This increases your risk and is counter productive. Choose industries that are in vogue and are growing. If you like an industry that is not growing, wait, it will come back. It is not worth it to invest in an industry that is not going anywhere for a couple of years. Then you are just waiting and not growing.

Another mistake investors make is to not invest using an investment strategy. They take the time to set their goals but do nut use a well defined, appropriate asset allocation strategy that accurately reflects individual objectives. The selection of mutual funds becomes just a haphazard exercise. The investment ends up not doing what the investor intended. Take some time to plan, and then take some time to implement your plan.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.