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3 Commandments for New Growth Investors

Today, I’m starting a new mini-series on commandments for anyone considering becoming a growth investor. I’m a growth investor myself.

Stock Market Video

3 Commandments for New Growth Investors

This Week’s Fortune Cookie

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Today, I’m starting a new mini-series on commandments for anyone considering becoming a growth investor.

I’m a growth investor myself. Growth investing matches my personality and gives me a chance to match wits with the market. It’s an optimistic game, which is in line with my own temperament. It doesn’t demand more patience than I possess and it’s more than willing to teach me a sharp lesson if I forget the rules or otherwise act stupidly.

Accordingly, I try to tell you, the reader, why I enjoy it and why I recommend it for anyone with an enthusiasm and bias for action that approximates mine. But it occurs to me that the transition from reading and thinking about growth investing to actually doing it is trickier than it looks.

So I’m going to do a quick series of three lessons on how to avoid the three biggest mistakes commonly made by new growth investors.

One: Thou shalt not buy just one stock. Growth investors who are just starting out often try to ease into it. They think that buying just one stock will keep their risk under control.

They couldn’t be more wrong.

Growth investing is about the search for big winners. But you can’t know which stock will develop into that big winner; you need to have enough bets down so the odds of finding the one or two stocks that will make the bulk of your gains for the year are reasonably high.

Buying just one stock is more like a coin toss. And the odds on a coin toss are nowhere near high enough. A new growth investor who takes his/her investible capital and risks it all on one stock is daring the market to take a big bite out of it.

I think the ideal way to get started as a growth investor is to decide how much money you’re going to allocate to the strategy and then divide it up into 10 hypothetical positions.

Then you buy equal dollar amounts of each stock you select, leaving the remainder in cash.

If you make money on the first few buys, you increase your exposure, adding additional stocks to your portfolio. And if you don’t, you sell out your losing positions and try to figure out what went wrong.

Chances are good that if you aren’t making money with your initial buys, you are either trying to invest in a bearish market or you’re buying the wrong kinds of stocks. And those faults are curable by patience (waiting for the tone of the market to improve) or research (finding better candidates).

Your 10-position portfolio won’t automatically improve the quality of your investment decisions. But it will protect you from the negative potential of a single bad buy. And it will let a good decision make a significant contribution to your annual results.

So, the first commandment for the new growth investor is: Don’t go all in on one stock!

Next week, I’ll have a second commandment, which will be about one popular misconception about stock selection.

Stay tuned.

In this week’s Stock Market Video, Mike Cintolo discusses how the market has slowly but surely put itself on firmer ground during the past three weeks-enough so to turn him more bullish He’s now advising subscribers to put money to work in measured step, mainly in some of the many earnings winners that have lifted off during the past month. There’s no shortage of stocks to choose from (another good sign according to Mike), and he shares a few of his favorites. Click below to watch the video.

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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: The best quote about the power of charts that I’ve ever heard goes something like this. “All investors begin as fundamental analysts, because that’s how we deal with the rest of the world. But some of us learn to invest using chart analysis, and among those who do, none ever go back.”

Paul’s Comment: I’ve always been a little skeptical about the proverb that “A picture’s worth a thousand words,” maybe because I’m a word guy. But with stock charts, I’m a firm believer. And since a chart also sums up what all those fundamental investors are thinking about a company’s future, it’s probably also worth a thousand numbers. Chart reading is the growth investor’s best friend.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 2/9/15 - The Future of Electric Automobiles

Tim Lutts, Chief Analyst of Cabot Stock of the Month, writes in this issue about the future of green energy and green cars. He also gives the ninth of his 10 Revolutionary Stocks. Stock discussed: Tesla Motors (TSLA).

Cabot Wealth Advisory 2/10/15 - There’s No Reward Without Risk

I write in this issue about the risk-reward balance that moves markets and the hope-regret balance that moves investors. Stock discussed: Wipro (WIT).

Cabot Wealth Advisory 2/12/15 - 7 Rules for Earnings Season

Chief Analyst Mike Cintolo of Cabot Market Letter and Cabot Top Ten Trader writes in this issue about seven tips for surviving (and thriving) during earnings season with your portfolio intact. Stock discussed: Harman International (HAR).

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.