I have earned a reputation for being a good stock researcher — and a good stock picker. But I have told people for as long as I have been doing investment research that 90% of the money I actually make in the market is generated by how I buy stocks, not by which stocks I buy. And today I’d like to explain this concept again — it’s one of the most important differences between world-class investors and everyone else, professional or amateur.
World-class investors do three things that you probably don’t do:
1. They sell stocks.
Most amateur investors won’t sell stocks. They simply won’t cut their losses, no matter how many times they promise themselves that in the future they will. Call it human nature. People don’t like to admit they’re wrong. But it makes no sense to hang onto a plummeting stock. Remember, you can always buy it back if it looks like it’s on the way up.
2. They manage their asset allocation carefully against a benchmark.
Asset allocation is how much money you put into different asset classes — the percentage of your assets that are in stocks, bonds, cash, real estate, private equity, and commodities. Believe it or not, the choices you make in this regard are the most important part of your investing. I won’t give you advice on asset allocation because it is different for every individual (based on your risk-tolerance, age, etc.). But, there’s a simple rule of thumb that I will recommend to you: Take your age. Subtract it from 100. Under normal market conditions, you should allocate that percentage of your assets to stocks. So, if you’re 40 years old, under normal market conditions, you should put 60% of your investment assets in stocks.
3. They never break their position-sizing discipline.
Finally, the third difference between world-class investors and everyone else is that most people regularly break their own position-sizing rules. They tend to get excited about one or two stocks and invest too heavily in them. This almost always results in big losses.
(Ed. Note: Porter Stansberry is the founder of Stansberry & Associates Investment Research (www.stansberryresearch.com).)