Sail Into the New Year With Better Strategies

 | Dec 30, 2011 | 7:00 AM EST
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Good investors do not become great investors overnight. As with anything else, it takes years of practice. Great investors learn from past mistakes and they are disciplined.

I'm a growth/aggressive growth investor and I follow a strict set of buy and sell rules for my model portfolio. When I'm right on a stock, the ultimate goal is to sit tight and hold for a big profit. But when the market tells me I'm wrong, I'm not afraid to cut losses short and protect capital. I use a system that tends to keep the emotion out of it.

No doubt, many different investing styles exist that can make money. If you're looking to juice up your returns in 2012, here are some New Year's resolutions to consider:

1) Target stocks with positive qualities, not negative qualities.

I continue to be amazed by investors' allure to stocks with bad qualities, such as slowing earnings growth and decreasing market share. That said, I realize that everyone's definition of quality is different. For example, I continue to hear online retailer (AMZN) talked about as a high-quality company, but I know that institutional investors have been selling the stock since mid-October. A high-quality stock can quickly turn into a low-quality stock when institutional investors start unwinding positions. To me, a high-quality stock shows a consistent track record of annual earnings growth; it's a leading price performer in its industry group -- not a laggard. High-quality stocks also tend to be newer companies still in the early stages of growth. A blue-chip name with a strong brand does not mean it's a high-quality stock.

2) Target stocks showing relative price strength, not weakness.

I believe 2012 will be a solid year for U.S. stocks. We're not in a bona fide market uptrend yet, but I think a good chance exists for one to start in the first quarter. New market uptrends begin in earnest when institutional money starts to come in from the sidelines. Recent low-volume gains for the market tell me it's not happening yet. One of the great market paradoxes is that stocks showing relative price strength in the early stages of a new bull market can be the big leaders. An area of the market currently showing relative price strength is home builders. I'm expecting a strong 2012 for the group, and I'm particularly encouraged by recent price and volume trends in iShares Dow Jones U.S. Home Construction Index Fund (ITB). It's been under accumulation for several weeks now and its chart continues to look bullish. My favorite individual name in the group from a fundamental and technical perspective is D.R. Horton (DHI).

3) Do not let a small loss get out of control.

Market volatility is not going away any time soon, which means that risk management is paramount. When the market tells you you're wrong on a stock, don't argue with the market. Cutting losses short is paramount to long-term investing success. If a small loss spirals out of control, you're suddenly a "hold and hope" investor, which is far from ideal. It often takes years to get back to even when you watch a once-manageable loss spin out of control.

4) Do not ignore a growth stock just because it has a high multiple.

Earnings growth is one of the main drivers of a stock's price. If a company has a proven track record of growth and growth prospects continue to be bright, there's nothing wrong with investing in high-multiple stocks. Keep in mind that it's best to own them in the early stages of a market uptrend as opposed to the latter stages. Never, ever chase a high-multiple stock that is extended past a proper point. The ideal entry point is when it's breaking out from an early-stage base in heavy volume. Recent new issue (RATE) currently sells at 50x trailing earnings, but it's worthy of a high multiple because it shows strong growth in recent quarters. Even better, it could be on the verge of a breakout from an early-stage base. It went public in June.

5) Focus on institutional-quality stocks.

Investors' love affair with low-priced stocks isn't going to disappear any time soon, but for more consistent investment results, focus on liquid names. Low-priced stocks generally are not institutional-quality stocks. Generally speaking, institutions like to buy liquid, higher-priced names. Institutions like to buy and sell without easily being noticed, which is virtually impossible to do in illiquid names. Generally speaking, you're better off buying 100 shares of a $50 stock rather than 1000 shares of a $5 stock.

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