Rule #1 for making money in the stock market

dan_s · Post by **dan_s** » Sat Apr 13, 2019 4:34 pm

This is from The Stansberry Digest Masters Series

Rule #1: Don't speculate, avoid the hottest sectors, and think independently...

Investing and speculating are at different ends of the spectrum.

Investing means looking for the rare "needle in the haystack" – a stock or other asset that can be purchased for far less than its intrinsic value. To find such investments, you generally must do in-depth research to understand a company and its industry, and then develop an investment thesis rooted in knowledge, information, and analysis.

Speculating involves none of that. You have no idea what something is really worth. Instead, you buy something hoping to get lucky by having someone even more foolish buy it from you at a higher price. This is gambling, not investing.

The first key to making big money in the markets is avoiding big losses. And the surest way to lose a lot of money quickly (and permanently) is to get sucked into the hottest sectors, which are invariably bubbles.

That's how folks who bought bitcoin at its peak of nearly $20,000 in late 2017 or marijuana company Tilray (TLRY) at $300 a share last fall ended up losing a fortune.

If you're buying what everyone else is buying, what are the odds that you've found something undervalued? Just about zero.

While piling into whatever is hot can be costly, it doesn't necessarily mean you should limit yourself only to stocks and sectors that are hated. One of the mistakes I made early in my career was avoiding companies unless they were truly out of favor. But some insanely great companies never really fell out of favor. That's how I missed the historic gains in search titan Alphabet (GOOGL), which has risen from a split-adjusted $42.50 a share in mid-2004 to more than $1,200 today.

Investing is neither about being a momentum follower nor a contrarian... It's about thinking independently. Don't worry whether you're standing with the crowd or by yourself on any stock. Do the research, come to your own conclusions, and stick to your guns.