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Editor's note: Today, we're sharing some timeless wisdom from our friend Dr. Richard Smith. Richard is a mathematics PhD and the founder of our corporate affiliate TradeStops. He has built a fantastic set of tools that help individual investors diversify and manage risk in their portfolios. Below, Richard shares a crucial step to becoming a better investor...

Getting Out of the "Stock Commentary" Business

By Richard Smith, founder, TradeStops
Monday, July 27, 2015

Shares of home-entertainment giant Netflix soared two weeks ago on better-than-expected subscriber growth. Shares were up nearly 20% on July 16.
 
When asked about his company's soaring share price, Netflix CEO Reed Hastings replied, "I think it probably shows why at least I should keep my day job and not try to be a stock picker. When the stock was half this price, I described it as euphoric. So it's a mystery to me. I think I'm out of the stock commentary business."
 
I couldn't have said it better myself. We should all get out of the stock commentary business.
 
Let me explain...
 
If the CEO can't make rhyme nor reason of the price of his own stock, what hope do the rest of us have?
 
Sure, we can try to explain what's going on with stock prices. We can try to make educated guesses about where company share prices are heading next. But can we really know?
 
More importantly, do you want to risk your financial future with these guesses?
 
I was explaining my core investment philosophy to a friend a few weeks ago. Here's the way I put it in a few simple steps:
 
1.   Stop listening to the stories we tell ourselves in our heads... They're mostly media-driven nonsense.
   
2.   Intelligently surrender to the markets by:
   
  Finding a good source of investment ideas.
   
  Applying a simple but disciplined portfolio risk-management approach.
   
3.   Profit.
   
4.   Enjoy.

The first and most difficult step is getting OUT of the stock commentary businesses. That doesn't mean you can't find and invest in superior businesses. But you can't make up stories about those companies when things don't work out.
 
Let the market tell you if you if you're right or wrong about your investments. And then listen to what the market is saying!
 
That's the second step... Once you have good investment ideas, put them to work in a disciplined approach. Make purchases based on how much you could lose. And always sell when you hit a stop loss.
 
Once you've got this down, steps three and four are simple... profit and enjoy.
 
Of course, getting out of the stock commentary business is the hardest step of all. But once you do that, you'll be a much better investor.
 
Just remember, no one can know the future. That's why, like the CEO of Netflix, I'm getting out of the stock commentary business, and I hope you will to.
 
To the growth of your wealth,
 
Richard Smith




Further Reading:

Steve Sjuggerud urges readers to put as much thought into their exit strategy as they put into the decision to buy an investment. And if you're concerned about potential losses, Steve calls The Trailing Stop Strategy "the best last-ditch measure to save your hard-earned dollars."
 
If you're like most people, you have trouble deciding when to take some money off the table. As Dr. David Eifrig says, "The strategy for selling is determined by why you bought in the first place." Learn how Doc plans his trades here: Before You Sell a Single Share of Stock, Read This.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Progressive (PGR)... insurance
Bristol-Myers Squibb (BMY)... Big Pharma
CVS Health (CVS)... pharmacy
Walgreens (WBA)... pharmacy
JPMorgan Chase (JPM)... financial services
Morgan Stanley (MS)... financial services
Wells Fargo (WFC)... America's largest bank
Bank of America (BAC)... bank
PNC Financial (PNC)... bank
Citigroup (C)... bank
Charles Schwab (SCHW)... online broker
MasterCard (MA)... credit cards
Amazon (AMZN)... online retailer
Dollar General (DG)... dollar stores
Anheuser-Busch InBev (BUD)... beer
Walt Disney (DIS)... entertainment
Activision Blizzard (ATVI)... video games
Electronic Arts (EA)... video games
Google (GOOG)... search engine
Facebook (FB)... social media
General Dynamics (GD)... "offense" contractor

NEW LOWS OF NOTE LAST WEEK
 
AK Steel (AKS)... steel
U.S. Steel (X)... steel
Alcoa (AA)... aluminum
Arch Coal (ACI)... coal
Peabody Energy (BTU)... coal
Barrick Gold (ABX)... gold
Pan American Silver (PAAS)... silver
Chevron (CVX)... Big Oil
ConocoPhillips (COP)... Big Oil
ExxonMobil (XOM)... Big Oil
Chesapeake Energy (CHK)... natural gas
Rayonier (RYN)... timber
Potash (POT)... fertilizer
Norfolk Southern (NSC)... railroads
Union Pacific (UNP)... railroads
3D Systems (DDD)... 3D printing
Intel (INTC)... Big Cheap Tech
Yelp (YELP)... online reviews

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