Topic: How To Invest

Follow these Investment Rules For More Profitable Investing

investment rules

Follow these Successful investment rules to help you find winners like spinoffs—and avoid potential losers like new issues.

You might say there are two kinds of investment rules that can help you with investing decisions—soft and hard. Soft rules apply to things that can change such as laws about securities and other financial matters, accounting procedures, industry practices, technological development and so on. Soft rules can remain fixed for lengthy periods, but they are always subject to change. Changes can come abruptly or gradually.

Hard rules come out of human nature. They are much more fixed than soft rules, and they never really change. But hard rules are more like tendencies than laws. Other considerations can temporarily overshadow or neutralize them, so much so that they seem to have disappeared. However, their disappearance is only temporary.

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Follow these investment rules when you are thinking of investing in new issues, or IPOs (Initial Public Offerings)

You can get lucky in the new-issues market, but the odds are against you.

New issues only come to market when it’s a good time for insiders or the company to sell. That isn’t necessarily a good time for you to buy. Often, it’s a good time to stay out.

On those out-of-the ordinary occasions that a new issue comes to market when it’s a good time for you to buy, then you probably won’t be able to buy much if any, at least at the new-issue price. That’s because the underwriters know when they have a “hot new issue” in the pipeline—that is, one whose share price is likely to shoot up as soon as public trading begins. In that case, they reserve most of the shares available at the initial new-issue price for their biggest and best clients.

If you’re not in that favoured group, you’ll have to buy in the after-market, once prices have moved up and the favoured buyers are taking profits.

With new issues, the best rule for conservative, risk-averse investors is to wait till they’ve gone through an industry setback, if not a full-blown recession. By then you’ll know if they’ve matured into high-quality stocks, or joined the ranks of played-out speculations.

We look at a lot of new or recent new issues, and mostly decline to get involved. Every now and then, we do recommend one, but without illusions. Sometimes these recommendations pay off, on occasion spectacularly. But they succeed with less regularity than our recommendations of the well-established, profitable, mainly dividend-paying companies we focus on.

Use these investment rules to spot top spinoffs and boost the value of your portfolio

On the other hand, we’ve also written about spinoffs, which are an example of an investment situation in which human nature is on your side.

From time to time, companies set up one or more of their divisions or subsidiaries as an independent company, then hand out shares in that company to their own shareholders, as a special dividend, or “spinoff.” This mainly happens when the company wants to get rid of the division for operational reasons, but recognizes that the shares offer good value. So, rather than sell, the company hands them out to the owners of the company—its shareholders.

You might say a spinoff is the antithesis of a new issue. Companies sell new issues to the public when they feel it’s a good time for the company or its insiders to sell. That is often a bad time for outsiders to buy. In contrast, companies do spinoffs when they feel it isn’t a good time to sell. This is often a good time for patient investors to buy.

In fact, spinoffs provide opportunities that are as close as you can come to a sure thing in investing. Numerous academic studies show that spun-off stocks and the companies that spin them off tend to do better on average than comparable companies not involved in spinoffs. Our past record bears out this pattern. Our spinoff buys and their parent companies tend to be among our best recommendations. The academic research and our own experience led us to launch our Spinoffs, Takeovers and Special Situations newsletter.

You can find lots of exceptions to these tendencies in both spinoffs and new issues, of course. But you should practice eyes-wide-open investing. Before making big investments or consumer purchases, consider human nature and how it can influence the future value of what you’re buying.

Bonus tip: Use our three-part Successful Investor approach to pick safer stocks

Our Successful Investor philosophy has three key rules: 1. Invest mainly in well-established stocks with a history of sales and earnings, if not dividends; 2. Spread your money out across most if not all of the five main economic sectors—Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities; 3. Downplay or avoid stocks in the broker/media limelight.

Many good stocks are well-known, well-managed and widely followed companies. They often are “household names,” as some investors refer to them. That’s a good description of most of the stocks we analyze and recommend. However, the broker/media limelight is far more exclusive.

The limelight casts a soft, forgiving light on companies. This spurs investor expectations to unrealistically high levels. When stocks fail to live up to those high expectations, stock price downturns can be brutal and sometimes permanent.

What if any IPO have you bought at the IPO price?


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