24 Essential Lessons for Investment Success

1. Master Risk Management: Cut Losses & Control Emotions

Whether you’re a new or experienced investor, the hardest lesson to learn is that you’re simply not going to be right all the time.

Protect your capital. The single most important rule in investing is to protect your investment account by cutting all losses short. This means selling any stock that falls 7% or 8% below your purchase price, without exception. This acts as an insurance policy against larger, potentially devastating losses that can be difficult to recover from.

Overcome emotions. Human nature often leads investors to "hope when they should fear" (holding onto losing stocks) and "fear when they should hope" (selling winning stocks too early). Successful investing requires establishing and strictly following buying and selling rules derived from historical research, rather than succumbing to ego, stubbornness, or pride.

Learn from history. By analyzing past market winners and losers, you can develop a systematic approach that removes emotion from decision-making. This disciplined approach ensures you survive to invest another day, even after a string of small losses, which should be viewed as "tuition to Wall Street."

2. Focus on Superior Growth Stocks: The CAN SLIM Fundamentals

From our study of the most successful stocks in the past, coupled with years of experience, we found that three out of four of the biggest winners were growth stocks, companies with annual earnings per share growth rates up an average of 30% or more — for each of the past three years — before they made their biggest price gains.

Quality over quantity. To make significant money, you must buy the very best companies—those that are #1 in their fields, with unique products or superior services. Concentrate on companies demonstrating consistent earnings improvement, increased sales, strong profit margins, and high return on equity.

Key fundamental indicators:

• Earnings Per Share (EPS) Growth: Look for annual EPS growth rates of 30% or more for the past three years, and accelerating quarterly EPS increases (e.g., 50% or more for the last six quarters).
• Sales Growth: Quarterly sales should be accelerating or up 25% or more year-over-year.
• Profit Margins & ROE: Seek pre-tax profit margins of 18% or more and Return on Equity (ROE) of 17% or higher, ideally 20-50%+.
• Newness: Companies with new products, services, or management often lead market advances.

Ignore low P/E. The market is an auction; stocks sell for what they're worth. Low P/E ratios often indicate inferior past performance, while high P/Es in leading growth stocks are a reflection of superior earnings and sales growth. Don't chase "bargains" in low-priced, low-quality stocks.

3. Time Your Buys with Technical Analysis: Chart Patterns & Pivot Points

The objective is to buy at exactly the right time — the time when the chances are greatest that the stock will succeed and move up significantly.

Charts reveal facts. Technical analysis, using price and volume charts, provides a visual history of a stock's market performance, revealing supply and demand dynamics that fundamental analysis alone might miss. Charts help identify sound price patterns, or "bases," that form before a stock makes its biggest price moves.

Recognize winning patterns:

• Cup with Handle: Resembles a coffee cup, with a declining left side, a rounding bottom, a rally, and then a short, downward-drifting "handle."
• Double Bottom: Looks like a "W" shape, with two bottoms and a midpoint.
• Flat Base: A sideways price consolidation, typically after an initial advance, holding tight for at least five weeks with an 8-12% correction.

Buy at the pivot point. The optimal buy point, or "pivot point," is when a stock breaks out of a sound base pattern into new high ground. This is counter-intuitive, as it's often near the stock's highest price, but it's the point of least resistance and highest probability for significant upward movement. On breakout day, volume should increase 50% or more above average.

4. Gauge the Market's Direction: Tops, Bottoms, and Trends

The reason you need to carefully evaluate these indices is that when they top, then turn down and go into a significant decline, three out of four stocks (whether you think they’re good or bad) will follow the market’s trend and also decline in price.

Market dictates success. Understanding the general market's direction is paramount. Most stocks follow the market's trend, so even fundamentally strong stocks can suffer significant losses in a bear market. It's crucial to protect gains by recognizing market tops and re-entering at confirmed bottoms.

Spotting market tops:

• Distribution Days: Look for 4-5 days within a 2-3 week period where a major index (Dow, S&P 500, Nasdaq) closes down on increased volume, or stalls (little price change) on greater volume.
• Action: Stop all buying and consider trimming positions or selling.
• Avoid: Don't get drawn into early, false rallies after distribution.

Spotting market bottoms:

• Follow-Through Day: After a market decline, an attempted rally is confirmed by a "follow-through" day, typically on the 4th-7th day of the rally. This occurs when a major index closes up 1% or more on a jump in volume from the previous day.
• Action: This signals it's safe to re-enter the market and begin buying leading stocks.
• Caution: Be aware of false follow-throughs, which usually fizzle out quickly on large volume.

5. Leverage Institutional Activity: Volume, Sponsorship & Relative Strength

Relative price strength is one key technical indicator that shows you what value the market itself places upon a stock.

Institutions drive prices. Large institutional investors (mutual funds, pension funds) account for over 75% of buying in leading stocks. Tracking their activity through volume and sponsorship is vital. High volume indicates significant demand, while institutional sponsorship provides a "research department" for individual investors.

Key indicators for institutional activity:

• Volume Percent Change: Tracks daily volume against a 50-day average, highlighting unusual trading activity.
• Accumulation/Distribution Rating: Rates a stock's institutional buying (accumulation) or selling (distribution) over 13 weeks (A/B for buying, D/E for selling).
• Sponsorship Rating: Indicates the quality and increasing number of institutional owners. Look for top-performing mutual funds making new purchases.

Relative Price Strength (RS) is crucial. This indicator measures a stock's price performance against all other stocks over the past year. Focus on stocks with an RS Rating of 80 or higher, meaning they've outperformed 80% of the market. Avoid laggards with RS Ratings below 70.

6. Build a Focused Portfolio: Concentration Over Diversification

For the individual investor, real money is made first by buying stocks of the very best companies in their fields, and then by concentrating your portfolio on a limited number and watching them carefully.

Quality over quantity. Wide diversification and asset allocation, while seemingly safer, often dilute returns. Instead, concentrate your investments in a limited number of high-quality stocks that you know well and can monitor closely.

Portfolio size guidelines:

• $5,000 or less: 1-2 stocks
• $10,000: 2-3 stocks
• $25,000: 3-4 stocks
• $50,000: 4-5 stocks
• $100,000+: 5-6 stocks
• Discipline: If you want to buy a new stock and are at your limit, sell your least attractive holding to make room.

Pyramid your buys. Start with half your intended position in a stock. If it rises 2-3% from your initial buy point and continues to act well, add a smaller amount. If it rises another 2-3%, complete your position. This "averaging up" strategy ensures you add to winners, never losers.

7. Implement Strict Selling Rules: Protect Profits and Capital

The #1 rule is to cut your losses short to protect yourself against the possibility of much greater losses. If a stock falls 8% below your purchase price, sell it.

Selling is paramount. Investors often focus too much on buying and too little on selling. A robust set of selling rules is as critical as buying rules to lock in profits and prevent small losses from becoming catastrophic.

Key selling rules:

• Cut Losses: Sell any stock that drops 8% below your purchase price, without exception.
• Protect Profits: Once a stock has risen significantly, don't let it fall back to your cost basis; sell to avoid losing money on a prior winner.
• Don't Sell Early: If a leading stock rises 20-25% in 2-3 weeks, it's a sign of strength; hold for at least 8-10 weeks to allow for larger gains.
• Climax Top: Sell into unusually strong price action, such as a 25-50% run in 1-3 weeks, often accompanied by a gap up. This signals the final stage of a move.
• Decelerating Earnings: Sell if EPS growth shows a major deceleration for two consecutive quarters.
• Failed Breakouts: Sell if a stock breaks out on low volume or immediately drops 4-5% below its pivot point on increased volume.
• Fourth-Stage Bases: Avoid or sell stocks breaking out of their fourth base, as these are often too obvious and prone to failure.

8. Utilize Investor's Business Daily as Your Research Powerhouse

Investor’s Business Daily is really a daily computer print out and evaluation of the entire market.

Efficient research tool. Investor's Business Daily (IBD) is designed to cut down research time by providing filtered, relevant market data and proprietary ratings based on extensive historical studies of successful stocks. It acts as a filtering system to identify potential leaders from thousands of stocks.

Key IBD features:

• IBD SmartSelect Corporate Ratings: Five proprietary ratings (EPS, RS, Industry Group RS, SMR, Acc/Dist) that screen out deficient stocks and highlight market leaders. Aim for 80+ for EPS and RS, and A/B for others.
• "Where the Big Money's Flowing": Lists stocks with significant volume increases, indicating institutional buying or selling.
• "52-Week Highs & Lows": Identifies the strongest stocks and leading industry groups making new price highs.
• "The Big Picture": Provides a professional summary and analysis of the general market's condition daily.

Beyond the newspaper. IBD's sister products, like Daily Graphs Online, offer sophisticated charts and data, tapping into the same comprehensive database used by major institutional investors. This combination of curated information and powerful tools helps individual investors make smarter, more efficient decisions.

9. Embrace Continuous Learning and Self-Correction

If you don’t look at what you’re doing wrong, you’ll never become a better investor.

Investing is a skill. Like any skill, successful investing requires continuous learning, practice, and discipline. It doesn't happen overnight, and temporary setbacks are part of the process. The key is persistence and a willingness to objectively analyze your performance.

Post-analysis is vital:

• Review Trades: Annually, plot all your buy and sell points on charts.
• Separate Winners/Losers: Analyze what worked for profitable trades and what went wrong for losing ones.
• Identify Patterns: Look for common threads in your successes and consistent mistakes in your failures.
• Create New Rules: Develop new rules to correct past errors and prevent their recurrence.

Overcome ego. Intelligence and ego can be detrimental in the market. Successful investors set aside pride, admit mistakes, and are willing to change their habits and methods, even if it means going against conventional wisdom. History repeats itself because human nature and investor psychology remain constant.

10. For Passive Investors, Mutual Funds Offer Compounding Wealth

There’s only one real secret to success when you acquire a mutual fund. It’s something not everyone understands or has the patience to implement. It’s easy: You never, ever sell a domestic, diversified growth stock mutual fund. You hold it until you die, so to speak.

Best for many. Mutual funds are an excellent investment vehicle for many individuals, offering professional management, diversification, and liquidity at a relatively low cost. For those without the time or inclination to actively manage individual stocks, a diversified U.S. stock fund is the preferred choice.

Key mutual fund principles:

• Type: Stick to diversified U.S. stock funds (growth or value). Avoid bond, income, balanced, industry-specific, or foreign funds.
• Selection: Choose funds with an A or A+ rating in Investor's Business Daily's "Mutual Fund" tables, indicating top performance over a 36-month period.
• Hold Forever: The "secret" to mutual fund success is never selling a good domestic growth stock fund. The U.S. market has a long-term upward trend, and compounding will build significant wealth over decades.
• Avoid Over-Diversification: Owning too many funds (e.g., 8-10+) can dilute returns and complicate management.

The power of compounding. By continuously reinvesting profits, even a modest initial investment can grow exponentially over time. This long-term perspective, coupled with consistent contributions, can enable anyone to become a millionaire through mutual funds.

Last updated: January 15, 2026