To me, this is so obvious that it hardly merits addressing. Nevertheless, the Investor's Business Daily has rules for investing, and they seem pretty deterministic. It would be crazy to follow their nutty rules. Yet people do, and it may be possible to profit from the insane delusion that a deterministic rule could ever be true.
A deterministic rule cannot be true because investing is all about human beliefs and investment behaviour, both of which are constantly changing. Let's take a look at the IBD first and second assinine rules of investing:
1. Consider buying stocks with each of the last three years' earnings up 25%+, return on equity of 17%+ and recent earnings and sales accelerating.
2. Recent quarterly earnings and sales should be up 25% or more.
First off, how completely chicken s--t to say "consider." Hey, buddy, you're either sayin' it or your not. None of this "consider" crap, pleeeeeaaaase. So, we should buy stocks with really hot performance. Well, that is easy. But things change and times change and there was a time when GM would have been in this category and Merck and so forth and so on, and if you bought them when everything was coming up roses you would have lost your shirt when they wilted. Buying high flyers is really dangerous. Look at what happened to Calpine, one moment flying high, then... chopped down to a small fraction of its former price.
No. 3 is even worse:
3. Avoid cheap stocks. Buy higher quality stocks selling $15 a share and higher. There was a time, within the last three years, when U.S. Steel was at $11/share. If you'd bought it then you would have kiced a--. There have been a ton of stocks that went from cheap to very dear. Hey...didn't someone say, "buy cheap, sell dear." Well, half of that is buying cheap. And why$15/share. Not $14/share, Not $16/share. Are you sure you have that exactly correct, Mr IBD smarty pants???
4. Learn how to use charts to see sound bases and exact buy points.
Exact????? Nothing is exact in the investment world. Warren Buffet could have a cold that day and throw your calculations entirely off.
5. Cut every loss when it’s 8% below your cost. Make no exceptions so you can always avoid huge, damaging losses. Never average down in price.
OK. I'm going to have to stop with this one, because it is just sooooooooooo crazy that I'm gonnna get crazy if I see any more of these. Let us count the illogical nuggets of nonsense that go into this. First....your sell point is based on your personal history with that stock. So, if one guy buys at 40, he should sell at $36.80, but another guy bought at 50, so he should sell at 46. Why?????? How can the smart decision for one person be the wrong decision for another. The one guy should sell, the other hold on at 46. When person A bought the stock has zero, zed, zip, nada and nothing whatsoever to do with the future price performance. What is more, let us say that everyone followed the inane and insane IBD rules, which also include "Don't buy in a down market." Stocks would drop to a price of nothing at all, overnight. So, Mr. IBD, if your not supposed to buy in a down market, could you at least accept some stock for free? A would sell, when his 8% was reached, triggering downward movement, causing B to sell, more of the same, so C sells. It would be a stop loss cascade that would not stop until they were giving it away. All in a matter of minutes. You know, I sincerely hope that a great many fools follow the IBD rules. It will create buying opportunities for the rest of us.