My 4 Rules For Buying A Stock

Disclaimer: I am not a stock guru. I’m just a guy who has learned some lessons the hard way and wants to share them with others. For “real” financial advice talk to a professional and understand everything before you invest any money.

I have been purchasing individual stocks since 2021 began. The sole purpose of this investing is to put some of my money to work rather than sitting in a savings account earning relatively nothing.

For the record, I have a 401k for long-term retirement investing. This money is for the short-term.

In the roughly 10 months I have been buying stocks and watching the market, I have learned 4 important lessons.

With each of the lessons came a rule. These are the rules I use to keep myself from making the same mistakes over and over.

1. Don’t Lose Money

This is a rule I learned from Warren Buffett.

When I was starting out buying stocks, I thought this was a cute saying, but really impossible. Stock prices go down all the time. The market is unpredictable and people lose money every single day.

Then I figured out what he was really saying.

Buffett means you should make good choices and you won’t lose money.

When you research and make a good pick it will be nearly impossible to lose money.

Now, as I have mentioned, I am not a stock or investing guru. So I rely heavily on the experts.

When I see a stock that is interesting I read every analysis I can find by people who do this for a living.

On that note, if 1 analyst is saying XYZ stock is a phenomenal buy, I pass. I want a consensus. If multiple (like 4-12 analysts) see an upside coming for a stock then I feel comfortable.

After that, I decide what price I am comfortable with buying it.

Obviously if a stock is near it’s all-time high and you buy it, you’re putting yourself in a risky position. It most likely will correct itself by going lower very soon. Sure it may go up more, but that might not happen for a while. Meanwhile, you’re stuck with shares that aren’t worth what you paid for them. That’s not a good spot.

Therefore, my rule is to buy the right stock at the right price and not lose money.

2. Stay Away From The Hype

Earlier this year, there were stocks like AMC that were soaring in price. Everybody and their dog was investing some cash into them and were seeing a nice return.

While it can be fun and profitable to take part in these hype stocks, it is also very risky.

Every day of trading, I see the “stock of the day” that the day traders are buying and selling. They load up on the stock when the price dips and they sell off when the price goes up. Some of them make pretty good money this way. Some of them also lose a pretty decent sum of money.

In my estimation, this is no different than betting. The timing of your buys and sells has to be right and lighting fast on stocks like this or you will be left holding a stock that is worth less than what you paid for it.

Trust me. This happens every day to people who day trade. More often than not, they lose.

I’m not looking for that type of risk.

Remember rule number 1: Don’t lose money.

When I buy a stock I want it to make a nice profit for me in a few days of trading. I don’t want a stock that is going to ping pong up and down in value every 30 minutes. I want a price that is going to slightly rise, correct a little bit, and rise some more.

I also stay away from any place people are talking about the stock. Investing forums and social media sites like Stocktwits are filled with people spouting their opinions.

Some of them will go on and on about how this stock is a dog and will only lose money. Others will post wildly illogical comments about how this stock is going “to the moon” tomorrow.

All of this is a waste of time and a distraction.

You should buy a stock because your research tells you it is a good investment. Period. It is YOUR money. Don’t let somebody else tell you how to invest it.

3. Be Patient

I think the hardest part of buying an individual stock is the waiting.

Once you have bought your shares, you’re in the game for real and you’re watching money come and go.

Individual stocks gain and lose value throughout the day every day.

As I am writing this post, my current investment is down 4% but I’m not concerned.

I have learned to accept that the value of my stocks will fluctuate. The stock is down a little bit right now, but my research and my buy-in price makes me comfortable that in a day or a few days I will sell my shares for a nice profit.

You have to be patient.

I have made the mistake of losing my nerve and selling when the price was down only to see it up a lot the very next day. So while I sold and lost money on one day, I could have held it for one more day and made money. The only difference between making money and losing money was patience.

If you have done your research and bought at a good price, you have to be patient.

4. Run Your Own Race

The last rule of investing is about staying in my own lane.

People who are stock gurus would absolutely laugh themselves silly at the amounts I am currently investing.

The fact is I don’t have a large amount of money to invest. I buy very inexpensive stocks and I can’t afford many shares of them. All of this means that my profits are also small.

There have been times this has bothered me. I start to think of ways I can get my hands on bigger money and in turn make some “real” profits.

Then I’m reminded of rule number 3: Be Patient.

When I’m stuck in this toxic thinking, I start to visualize the future. I think about how much more rewarding and satisfying it will be to build my investing dollars from a small insignificant amount to something much bigger.

I’ve always liked a good underdog story. The people who start from nothing and overcome the odds to make something lasting.

That is my goal here.

I don’t currently have a lot of money to invest and that’s okay. With time, good choices, and patience, I will. And in the end that will make it even sweeter.

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