Follow These Investing Rules and Watch Your Odds Change Immediately

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Given it’s a Melbourne Cup holiday here in Victoria, today’s Daily Reckoning will be briefer than usual.

Yesterday I told you I’d consult my sources and get back to you with a tip for the big race. The problem is, my sources are like Fame Game, the short priced favourite. Everyone likes Fame Game.

But the odds are too low. It’s paying $3.20 on TAB’s fixed odds, which for a race like the Melbourne Cup, with 24 starters, is not a great return considering the risk involved.

There is a bit more value on offer with A Trip to Paris, with fixed odds of $9, or Cox Plate runner-up Criterion, at $14.

For an under the radar roughie, British horse Big Orange ($51) could be an each way bet, along with sentimental favourite Red Cadeaux ($19), three time runner up of Australia’s biggest race.

But who am I kidding? I have no idea. A handful of horses could win it. With so many running, you need luck to win the Melbourne Cup. And luck is something the odds cannot factor in.

So in the true spirit of the words, good luck if you’re punting today, you’ll need it.

The other thing I noticed with the Melbourne Cup field is that there are no Aussie bred horses running. The closest we have to local runners are New Zealand bred.

This is a classic representation of modern day Australia. We’re sprinters, not stayers. We want an interest rate cut over long term reform…short term gain, long term pain.

Sport mirrors life alright!

While I like a good horse race, I hardly ever bet. I backed the winner in the Cox Plate this year, but before that my last bet was in the 2014 Cup. I managed to back the winner then too, so I’m reluctant to break my winning streak, which I surely will with a stab in the dark tomorrow.

Many people view the stock market as a punt too. But if you follow some basic rules, you can put the odds in your favour in a way that you just cannot do at the racetrack or the casino.

Today’s Daily Reckoning will show you how. The rules below form the core philosophy of my Crisis & Opportunity investment advisory. The recommendations I’ve made over the past year all conform to these rules. And on average, these recommendations have outperformed the market in a big way.

It’s only a year of evidence. It could just be beginners luck. But the stock picks are the result of following a disciplined process. I think luck plays a minor role.

Anyway, read on and see what you think. None of the rules are particularly difficult to follow. They’re just common sense really. But for many people, common sense and investing are mutually exclusive.

That’s why I made the rules as they are. They really help you get the emotion out of your investing decisions. Because it’s the decisions made under emotional stress that turn out to be the decisions you wish you could reverse.

If you start investing with an eye to these rules, I’m confident you’re investing results will improve pretty quickly.

Crisis & Opportunity — top 10 rules for investing

  1. Invest with the trend. You’ll improve your odds of success by buying into upward momentum.
  2. Buy cheap companies when the stock price is in an emerging uptrend. Buying value stocks is good, but only do so when the stock price is in an upward trend. If you pick the right stock, this can result in big long term gains.
  3. Never swim against the tide. Never buy into a downtrend. Cheap stocks can get much cheaper. Wait for the downward trend to finish and for an uptrend to emerge before buying.
  4. The value equation: Low PE + high ROE. When assessing valuation fundamentals this is one of the traits to look for. That is, stocks trading on a low price-to-earnings ratio and a high return on equity. This combination usually suggests there is good value in a stock.
  5. Cheap stocks can get much cheaper, expensive stocks can get much more expensive. In other words, trends can persist much longer than you think possible.
  6. Listen to what the market is ‘saying’. Stock charts tell you a lot about how investors are thinking. Don’t ignore the story in the charts.
  7. Fundamental and charting analysis should confirm each other’s view. The charts should confirm a stock’s fundamental story. When these two viewpoints don’t match, be wary.
  8. The market is smarter than you. This is why it’s important to cross check the fundamental story with the charts. If the charts say you’re wrong, take notice.
  9. Be financially, not emotionally, invested. Be prepared to accept you’re wrong. Don’t fight the market and hang onto your bias…the market will always win. Don’t invest your emotions in a position. It will make it that much harder to get out when you need to.
  10. Have an exit strategy. Know at what point you’re willing to cut your losses if you’re wrong. Don’t hang around thinking a stock might bounce back.

If you want to find out more about how this process works, click here.

Regards,

Greg Canavan
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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