Four Easy Rules

Here at HX Research, we spend a lot of time talking about the effect of psychology – and even human biology – on trading and investing.

The data is absolutely overwhelming: The vast majority of investors and traders underperform the market.

This is 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.

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.

I've frequently discussed different aspects of "the plan"... and this week, I'll highlight four simple rules that all investors should keep in mind:

1.   Buy Low, Sell High

This is something that every investor talks about... but many people likely forget about it in day-to-day trading.

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.

2.   Be Selective

There are approximately 5,000 publicly traded stocks on U.S. exchanges. Roughly two-thirds of those are what would be considered "liquid" – or trading at least $2 million to $3 million of value per day.

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 to 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.

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

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

The reality is that 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.

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: The phrase, "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.

4.   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 $10 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 the stock still goes up.

(The inverse also holds true – if a company is earning $10 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.

Check out our recent FREE HX Legacy recommendation that is up 48% and just hit a new high on our YouTube below!