Investment Rules

JDH’S Investment Rules – Updated January 4, 2008

On this page I list my investment rules. Additional information can be found on my Investment Philosophy and Legal Disclaimer pages.

These rules are rules I have developed in both good times and bad. They are very simple.

  1. Buy high, sell higher. Don’t try to catch the exact bottom; wait until a stock has started to move up, then start buying. The perfect time to buy is at the end of a period of consolidation when a stock has just made a new high for the first time in many months. Often this buy point is indicated by the Relative Strength Index (RSI) increasing over the 50 level for the first time. Visually, the stock will also be in an obvious uptrend, at least in the short term.
  2. Take profits. It’s not a profit until you sell, so decide in advance when you want to take profits. Once a stock doubles, sell half, or sell 25% if you think it still has room to double again. Keep selling all the way up.
  3. Use Mental Stop Losses. Keep a list of the “high” price since you bought the stock. (Each day that a stock increases, increase the high price). Once a stock drops 20% from the high price (or a lesser percentage for less speculative stocks) sell it, because obviously it is no longer going up. Many speculative stocks can move 5% or more in one day, but it is very rare that a stock will fall 20% and then immediately go on a big run. Normally if it has fallen that much, it has farther to go on the downside. The advantage of this rule is that you will never lose much more than 20% on any stock. If a stock increases after you buy it, your loses will always be less than 20%, since the 20% is measured from the high for the stock, not from your purchase price.

That’s it. Those are the rules.