In this article, Dick Davis reflects back upon lessons learned during a career as a financial reporter which spans nearly a quarter century and gives the stock market investor a set of rules which, if followed, should increase overall long-term investment performance.

We all know that it is not easy to make money in the stock market. There is probably no other human endeavor that is pursued by so many people in which so few are consistently successful. And this will probably always be because the market is a contrary animal and invariably does what it has to do in order to make the majority of people wrong. The most brilliant minds who do nothing but study the market, often make market projections that are both glaringly erudite and dramatically wrong. The market is a mass leveler of human ego. But, if those with genius mentalities make mistakes, what chance is there for the rest of us? My answer is a very good chance—especially the readers of this article—providing you do what’s necessary to put the investment odds in your favor.

The reason why I say “especially you, the reader” is because only a fraction of investors are willing to take the time to learn. By your membership in AAII and your readership of the Journal, you have demonstrated your willingness to take the time to listen to professional advice. That puts you in a very small, select group—and you are to be congratulated. There are so many things that happen in the market arena over which we as individual investors have no control, that it becomes vital to become proficient in those areas that we can control if we are to tilt the odds in our favor. 

And that, dear reader—tilting the investment odds in our favor—is the subject of this article. There are no guarantees—the vagaries of the market prevent anyone from being consistently right—but with an understanding and mastery of certain proven disciplines we can better the odds. And the odds don’t have to be that favorable. We can frequently be wrong, but if we employ the right strategy we can still be bottom line winners. 

The following are some suggestions—nuggets of investment wisdom gleaned from 25 years in the business—to help try to tilt the odds in your favor. These are general observations. The stock market does not lend itself to a rigid list of do’s and don’ts. There are exceptions to every rule. However, there are rules that have stood the test of time. In my opinion, they include the following:

For Short-Term Trading 

ITEM. Buy the strongest stocks in the strongest groups—preferably on a market pullback. On a short-term basis, trade from the list of new highs. The odds are much greater that a stock going up will continue to go up. Don’t fight the trend.

ITEM. When you hit a winner, let it ride. The big money is made not by taking a lot of small profits, but from a few ideas that you stay with and that work out well. At the end of the year, there’ll be a list published of the 20 or 30 stocks that went up 200% or 500%. To get in on one of these stocks fairly early and ride it up is something few of us experience because we don’t have the will to resist taking smaller profits along the way. 

ITEM. The most vocal majority opinion is invariably wrong. Every major stock market advance has begun when pessimism was loudest and prices lowest. 

ITEM. Both the market and individual stocks go to extremes. They go higher or lower than they should based on fundamentals—because human emotions, such as greed and fear, are not bound by reason. Anticipate these excesses and try to profit by them.

ITEM. Don’t over-trade. Most worthwhile moves in the market occur over a period of months or years. It is important to keep your eyes on the overall picture, on the major or primary trend, and not let the wiggles or periods of sideways drift throw you off balance. 

ITEM. Buying quality may be important for the long pull—but for trading, when you buy is far more important than what you buy. You can make money on the most marginal company if you buy it at the right time; you can lose money on the bluest of the blue chips if you buy it at the wrong time. Just ask the buyer of GM at 91 or U.S. Steel at 59.

ITEM. Almost every portfolio is plagued by a few big losses that more than offset the winners. Avoid this by limiting your losses through the use of stop-loss orders. In this way, you can be wrong more often than you’re right and, by letting your profits ride, still come out a winner.

ITEM. Don’t be afraid to add to a stock, as it goes up. But don’t average down. This is contrary to human nature which dictates that you hold on to your losers in hopes that they might come back. Always eliminate your poorest performers and keep your best merchandise.

ITEM. An ability to read and interpret charts is a helpful tool. At the minimum, be aware of where a stock is relative to its support and resistance levels.

ITEM. Forget about buying a stock at the bottom, or selling a stock at the top. Yes, somebody does—but that elusive somebody will never be you. After you buy a stock it will go lower—not sometimes—but always. It is unrealistic to think that you’re smart or lucky enough to buy at the very bottom tick. Once you accept this as inevitable, the pain is considerably less.

ITEM. Picking the right group may be more important than picking the individual stock. In most cases, when a group moves, all the stocks within the group move together. Some do better than others but they all usually move in the same direction. On the other hand, if the group is out of favor, the best stock is going to have trouble.

So much for trading tips.

Investing in General

ITEM. If good news comes out and you can’t understand why the stock (or the market) doesn’t go up—or if bad news is released and the stock doesn’t go down—the answer to the mystery is usually that the news was expected or discounted. The move has already taken place. The single most important factor in moving stocks and the market is the element of surprise. Stocks that make sharp moves are responding to news that is a surprise to the general public.

ITEM. There is a time to be in the stock market and a time to be out of it. This will probably always be as long as bull markets are followed by bear markets—and as long as most of us are not equipped by temperament to sell short in down markets.

ITEM. Try to do your buying of securities at a time when you believe the overall market is going up. To buy a stock at a time when the best minds believe the overall trend is down means you’re trying to pick a stock that will have to swim against the tide—sharply reducing your chances of success. Be in harmony with the primary trend.

ITEM. If you are a long-term investor don’t follow your stock too closely. If you’ve bought right, the best advice is probably to simply “stay healthy”—so you’ll be around to collect your rewards.

ITEM. No one stock has to be bought, no one investment has to be made. The market will always be there. There is always another stock and there’s always another day.

ITEM. It is unrealistic to expect to have an up year in the market year-in and year-out. The mark of a professional is the ability to nail down substantial profits in good years and preserve capital in bad years.

ITEM. Be aware of your limitations. The inflexible person who thinks he has a set formula for success in the stock market—and whose vocabulary rarely includes “I don’t know” is either a newcomer to the market—or a fool.

ITEM. When buying for capital gains, look for a stock that’s expected to experience an explosion in earnings but whose price as yet does not reflect it. To find such a stock before the broad general public does is very difficult. But it can be done.

ITEM. In the quest for capital gains, perfect your sense of timing on the sell side. Probably the most difficult of market skills is knowing when to sell. In the ’50s and ’60s we had sustained sweeping bull markets that bailed us out of our mistakes if we waited long enough. Not so today. Now we have come to realize that every stock is a sale at some point in time. There is a time to be in a stock and a time to be out of it. There are no more sacred cows and a recommendation to sell AT&T is no longer heresy.

ITEM. Instead of shooting for a capital gain, many of us would be financially better off if we concentrated on building a longer-term portfolio. I would decide on three or four growth industries—cable television and genetics, for example, and buy the industry leader on weakness. The key is to keep adding to your position—so that, with the aid of splits, you accumulate a meaningful number of shares. Buying the same few stocks over and over again is dull and requires an iron discipline.

ITEM. Do not underestimate the power of compound interest. A fixed-income investment that throws off a 12% return compounded annually will double in six years. Even allowing for tax liabilities, this compares very favorably with the performance of most stock portfolios.

ITEM. Electric utilities should probably be singled out as having the broadest appeal of any one group in the stock market. This is primarily due to the fact that, unlike bonds and Treasury bills and CDs, the yield on a Long Island Lighting common stock, for example, can grow 16% to 20% over the years because like many other utility stocks, it has increased its dividend every year for the past 20 years. It may be a dull investment, but in light of the risks inherent in the more exciting areas of the stock market, a safe 12% yield with an excellent chance of periodic dividend increases would appear to be an eminently worthwhile investment objective.

ITEM. There are many approaches to the complex subject of investing. Be sure and pick one with which you are comfortable. For example, one man may look for “bargains”—the asset rich, low multiple, screaming value type stock. Another may be attracted to higher multiple, emerging growth companies. One may select stocks from the new high list, another may only work off the list of new lows, and still a third may not make a move until the charts or a set of technical indicators give him a signal. Each approach may have merit—but each is suited for a different temperament. Each of us comes to the investment arena with different degrees of emotional control, all of which must be in tune with the particular market approach we choose. 

ITEM. Employing the use of contrary opinion—that is, buying when almost everyone is selling and selling when everyone is buying achieves the best results when it is the most difficult to do, namely at or near market tops and bottoms. However, there are periods of time—usually in the middle stages of major trends—when the majority of consensus is right.

ITEM. Condition your emotions to take losses. An essential ingredient for the attainment of investment success is experiencing defeats along the way. Taking losses is not a probability, it is a certainty. Once this is realized and we develop the discipline to accept and limit our losses, we can learn to take them in stride. A great home run hitter tries to avoid strikeouts, but he knows he cannot accomplish his goal without them.

ITEM. Some investors, by virtue of a complete lack of discipline, are born losers in the stock market. Every time they buy something, it goes down and every time they sell something, it goes up. If you know someone who is consistently wrong, you can do the exact opposite of what he does and be consistently right. If it’s you that is always wrong, next time you enter an order to “sell,” think about changing the order to “buy more.”

ITEM. In selecting a portfolio, lean toward concentration instead of diversification. By spreading out all over the place, you reduce your risk, but you also greatly limit your gains. The idea is to have a big enough position in a stock so that if you’re right, you’ll own enough shares to make it mean something in dollars and cents. 

ITEM. In the course of a lifetime, most of us will never have access to inside information. It is very difficult to come by. And even with advance information, a stock will often fail to respond the way you might expect upon the release of the news. So don’t envy the insider. In most cases, he is an illusion.

ITEM. There are thousands and thousands of publicly owned companies and each one has a slate of officers, any one of whom, if you met at a cocktail party would likely talk optimistically about the growth prospects of his company. If a corporation officer advises you to buy the stock of his own company, be cautious. His recommendation is based on a knowledge of his company, not the stock market. Most corporation heads know notoriously little about the stock market or market timing. They’re too busy. Worth more than what they say, however, is what they do. If a corporate officer buys a meaningful amount of stock in his own company—and that buying is repeated by other insiders of the same company—the result is an indicator that should be given consideration.

My final suggestion for helping to tilt the odds is to be familiar with what the best minds on Wall Street are saying. Some of this advice is free—including opinions from Wall Street’s top analysts like Robert Farrell of Merrill Lynch, Henry Kaufman of Salomon Brothers and the members of the All-American research team (published by Institutional Investor Magazine). There is also a broad body of investment opinion that costs money. It includes individual investment counselors who charge a fee usually based on the total value of the assets under management. It also includes the hundreds of advisory services that sell from $50 to $800 a year—the area in which my work is concentrated. 

Some of these advisory services are quite good. To last, they have to be. The public is not going to pay for bad advice over any long period of time. And many services have been around for a long time. The advisory services perform another function. They give the investor a broader perspective-not only because so many are written outside of Wall Street, but also because they are independent of brokerage firms whose business depends on generating commissions. Some of the better-known advisory services have compiled excellent track records—and men like Stan Weinstein, Martin Zweig, John Westergaard, Anthony Boeckh, Richard Russell and Charles Allmon have earned outstanding reputations for their market expertise. An awareness of their thinking—whether you follow it or not—will give you an important advantage.

To fill this need, I publish the Dick Davis Digest. In it, I survey over 200 market letters and financial publications, gleaning the nuggets of investment wisdom from the best minds on Wall Street, spotlighting specific stock recommendations, saving long hours of reading by separating the wheat from the chaff—the same thing I’ve been doing in my syndicated newspaper column and on radio & TV in South Florida for the past 18 years. It’s a digest of concise money making ideas every two weeks from the top pros in the investment field.

Let me conclude by reminding you that no human being has ever been consistently right on the stock market. Not only do the best minds make mistakes but they make big ones and they can make them often. But they make them less often than the rest of us. In the stock market games we can never achieve perfection—because it is beyond our grasp. But the poet Robert Browning said, “A man’s reach should exceed his grasp—or what’s a heaven for.” What I have tried to do in this article is to help you reach in the right direction—to help tilt the odds in your favor.

Finally, I would offer this last bit of advice: speak softly about your winnings, always be aware of your limitations, be flexible, patient, tolerant and maintain your sense of humor—and most of all, keep things in perspective. This investment game is important—but when you come right down to it, it’s just numbers. We try and make the numbers as good as we can. That’s one of the reasons why you read the Journal. But some people let numbers control their lives—save the $25, buy for ¼ point less, earn another ⅛ percent. It may seem vital at the time—but looking back over the course of a lifetime, the pursuit of numbers is likely to prove less important than the quest for such values as love, health and service. So keep your priorities. Maybe a lesser return on your investment makes sense in exchange for a higher return on your life.

Dick Davis has broadcast an indepth stock market report every business day for the past 18 years, the longest continuous market coverage in the country. His daily stock market report has won the Janus award for the best business report in the nation. Mr. Davis also writes a business column which is syndicated in newspapers across the country. He has recently launched his own publication, The Dick Davis Digest, a biweekly 12-page distillation of the best from more than 200 stock market letters spotlighting specific stock recommendations and concise money-making ideas from the best minds on Wall Street. (Dick Davis Digest, Box 2828, Ocean View Station, Miami Beach, Fla. 33140) Mr. Davis is an associate of Drexel Burnham Lambert in Miami, Florida.