For the sophisticated investor, trading strategies involve technical analysis, exhaustive investment research and years of experience in the stock market. But there’s no reason that everyday investors just looking to plan for retirement or protect their 401(k) investments have to feel like second-class citizens on Wall Street. Investing money in mutual funds or stocks is a serious business, but that doesn’t mean it has to be overly complex.
Yes, online stock trading can be affected by a host of variables. And yes, all trading strategies need to adapt to the current stock market conditions. But by following these five simple rules for buying stocks, you can dramatically improve your chances of success. After all, simple trading strategies can sometimes be the most effective.
1. Buy What You Know
Each investor forms their own trading strategies and rules for buying stocks based on their personal goals and risk tolerance. And similarly, each investor buys and sells stocks and mutual funds based on what makes sense to them, right?
Not necessarily. The problem is that many investors fall victim to the latest fads on social media and dubious advice on investment websites, and they’re eager to buy the stocks everyone else is talking about. This is how traders got taken for a ride by the dot-com bubble, as folks piled into stocks that hadn’t yet turned a profit and that had no realistic way to make money.
Remember Flooz.com, which pitched a kind of online currency that would serve as an alternative to credit cards?
It sounds like a crazy concept, but the company raised somewhere between $35 million and $50 million from investors and enlisted a few retail giants such as Barnes & Noble to join in. But at its core, Flooz was a glorified gift card company with limited partners. Three years after going public, Flooz was bankrupt — which shouldn’t have surprised anyone who took a hard look at the company’s business model.
On the other side of the coin, take Nvidia (NASDAQ:NVDA), a maker of semiconductors for electronics. Thanks largely to its revolutionary AI chip, Nvidia grew its revenue by 262% year over year in the first quarter of 2024. It also looks like the demand for AI chips will outpace supply for at least several months, so Nvidia is unlikely to drop anytime soon.
Never underestimate the power of your personal experience. If you notice consumer trends or new products with big potential, chances are other folks will, too. This will help you anticipate investment trends and profit from them instead of chasing other people’s stock picks.
2. Buy Stocks Great Investors Own
Of course, there’s a pitfall to relying on personal tastes alone. It’s always valuable to have an outside perspective on your stocks to make sure you’re on the right track. And if you want a second opinion, why not go right to the top and pick the brains of the best traders on Wall Street?
There’s a reason Warren Buffett is a bit of a rock star to individual investors: His trading strategies and ways to invest money seem almost superhuman. Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) makes timely and very profitable investments.
In May, Berkshire Hathaway came out on top again in a powerful earnings report. Its operating profit grew 39% from the previous year, and it reached a record-high cash hoard. How can individual investors enjoy similar success? Simple: Buy what Buffett buys.
While it may be impossible to reproduce Warren Buffett’s investment strategy — and it’s highly unlikely you’ll ever get the chance to pick his brain for stock tips, many of Buffett’s investments are public record. Berkshire Hathaway must report its holdings quarterly; investments in equity securities are a regular feature of BRK holdings. And any stock that sees an influx of cash from Warren Buffett and company has trouble keeping it a secret due to the insatiable appetite for all things Buffett.
Take Apple (NASDAQ:AAPL), one of Buffett’s longtime favorite stocks. Although he has occasionally sold off portions of his Apple holdings, Buffett has overall increased his shares over the past several years. By the end of 2017, Buffett held roughly 162.6 million shares in the company. By 2024, he held a staggering 905.6 million shares.
As for Apple’s stock performance? While there have been some peaks and valleys, its growth has generally trended upward. On June 17, 2024, it reached an all-time high closing price of $216.67.
There is, of course, a danger to groupthink — and even Warren Buffett gets it wrong sometimes. It’s worth noting that while Buffett may be America’s favorite investor, there are a host of others with investment strategies worth watching. George Soros and Peter Lynch have been highly successful, and any investor could learn something from them.
3. Buy Stocks for the Future, Not the Past
Sifting through quarterly reports and past performance for a company can provide insight into the health of a prospective investment. But it’s important to realize that these numbers are lagging indicators. When you look for the best stocks to buy, you should put a premium on future growth trends over previous successes.
Consider shifting demographics and evolving geopolitics, such as the fact that China became the top automobile sales market in the world in 2008. This was thanks to an emerging middle class in the People’s Republic and lagging consumer confidence in the United States during the recession.
China’s automotive industry is still the largest in the world, partially because the industry easily adapts to market trends; in recent years, China has been working on developing electric cars and cars with advanced safety systems.
That trend has led to rising stocks in the automotive sector. The most notable is BYD (OTCMKTS:BYDDY), a Chinese manufacturer with a focus on electric cars. While it’s had a few dips along the way, BYD is largely a growth stock — and it doesn’t hurt that Warren Buffett is an investor, either.
If investors could tell the future, it would be easy to play the stock market. But there is no crystal ball that will provide answers as to which companies will see success and which ones won’t.
Still, you can increase your chances of sizable returns by doing your research. Remember that the stock market doesn’t exist in a vacuum, and real-world events can (and often do) inspire drastic changes. Ultimately, if you want to invest wisely, your rules for buying stocks should include focusing on future trends more than past successes.
4. Buy Stocks With Great Leadership
The success or failure of a company relies in large part on the leadership and vision of its top executives. Growth comes from the top, not from random successes at a smattering of stores that trickle upwards. When you buy a stock, you have to realize that you’re buying its management too.
Consider the successes and failures of Apple over the last three decades. In the early 1990s, Apple was considered a second banana to Microsoft (NASDAQ:MSFT). Windows rolled out cheaply and on a massive scale as Apple clung to high profit margins and a controlling, proprietary outlook.
On July 9, 1997, after three years of poor stock performance and crippling financial losses, the Apple board of directors placed Steve Jobs at the helm as CEO and began restructuring the company’s product line.
What followed over the next 10 years was a parade of Apple successes — the iMac, the iPod, iTunes, Apple retail stores and the iPhone. Apple took that popularity and ran with it, and its newfound success was almost entirely because of its new leadership. Steve Jobs may no longer be Apple’s leader, but his legacy has shaped the company’s C-suite and helped continue Apple’s success.
Sure, there are stocks that succeed because they manage to cut costs and boost margins. But such a strategy can not keep a stock healthy and growing for long. If you want to invest intelligently, make sure your simple trading strategies include investing in smart leadership with a proven record of success and a willingness to challenge industry norms to get ahead.
5. Buy Stocks With a Clear Plan to Sell
You might think that the best plan when buying a stock is simply to sell it for a profit, but many investors run out and buy “great stocks” without a clear plan for what their investment goal is and when they want to sell.
This practice can be brutal on your portfolio. After all, what is a great stock? Footwear manufacturer Crocs (NASDAQ:CROX) was a great stock to buy in early 2007 at $23 a share — but only if you sold by October of that same year when prices were pushing $70, locking in your 200% gain.
If you held on a little longer, things didn’t look as cheery: Crocs stock dropped to $10 around 2010. But if you decided to hold CROX until 2024, you would have been pleased. Currently, it trades for a much higher $154.74. Whether CROX was a great stock or not depends on your investing horizon and what you expected to get out of the stock.
If you don’t have a general sense of your investment timeline, you’ll be stuck in an endless loop of uncertainty. You might be afraid to sell at a peak because you want to see if the stock rises more — and then find out that you waited too long. At the opposite end of the spectrum, you might rush to sell the stock at a peak and then see it continue to grow after you sell.
Short-term traders who get greedy and refuse to sell can be just as bad as buy-and-hold investors who panic and sell too quickly. Many traders who sold off their stock when the market crashed in March 2009 not only locked in historic low valuations for the equities they sold but missed out on one of the biggest rallies in the market’s history in mid-2009.
Whatever your tactics — simple trading strategies or not — keep your goals clearly in mind before making any purchase. Set a reasonable price target or holding time for any asset, and use this investment strategy to color your decision. Simply knowing that a company is a great stock provides little consolation if you sell your shares too early or too late to make any money.
On the date of publication, Sarah Edwards did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
