Weekly Wins: 10 Rules for You to Be a Winner

The keys to successful investing are to develop habits that keep you on track, as well as having a framework for doing your research and for managing risk.

In a recent Filthy Rich Animal's Ask Earny column, I wrote all about one of my favorite investing frameworks, Louis Llanes' Quality, Value, Technical framework.

And at the end of this article, I'll ask that you go take a look at your portfolio and that you get into the habit of doing so monthly, if not more frequently.

The rest of this article is about managing risk. Specifically, it's about TheStreet Pro's top 10 rules for managing risk, and I thought it would be worth sharing here.

So, develop those habits, use a battle-tested framework to manage your investments, and apply the following rules, and you will be a better investor.

The Street Pro's Top 10 Rules for Investing

Rule #1: Buy best-of-breed companies

We look for high-quality products when we buy cars and other products. As investors, we often fail to think about owning quality companies in our portfolios. Perhaps we're too busy looking for bargains. Most of the time, those so-called bargain stocks are cheap for a reason.

You're better off buying stocks with great balance sheets, long histories of dividend boosts, and strong pipelines and corporate governance.

Leave the penny stocks to the speculators with money to lose. The best bet is to look for quality companies, and to buy them when they're out of favor.

Rule #2: No one ever made a dime by panicking

There’s something basic and instinctual about panic, about the desire to flee. It might work when it comes to things that threaten us physically, but it can’t make you a dime investing.

Remember these two things:

Flash crashes and big market sell-offs are inevitable.
There will always be a better time to leave the table than the one brought on by panic.

Next time there’s a panic on Wall Street, try taking the opposite side of the trade. Buy a little using limit orders at prices you’re comfortable with. Get a feel for how these routs play out.

Some of the most rewarding trades you can make are those where the decks have been cleared by panicky folks using market orders who can’t get out the exit door fast enough.

Rule #3: Don't own too many stocks

The more investments you own, the more your attention is divided. It’s hard to keep track of hundreds of positions, especially in today’s world of unlimited information.

Instead, only keep your favorites - the ones you’d love to own in good times and in bad. This way, you’ll know which positions to defend when things get tough. Pick the very best and ignore the rest.

We know this can be constraining, and you may even miss out on a few home runs. But over the long haul, your portfolio will almost undoubtedly perform better by selling mediocre companies.

Rule #4: Expect, don't fear, corrections

Corrections are like rain. We expect rain every now and then. We prepare for it by wearing a raincoat, bringing an umbrella, or just staying indoors. We aren’t scared of rain - it’s natural.

Of course, corrections usually happen at allegedly unexpected times. They’re frequently preceded by great bull runs in which we all made lots of money, and the economy is humming along.

We may not know when the next storm is coming, but we can be prepared. Your plan should include knowledge of your risk tolerance and frequent checks on your portfolio to be sure your allocation fits your goals.

And be ready to buy when the correction comes and everybody else is selling.

Rule #5: Cash is for winners

Sometimes, cash is the perfect investment!

If you don’t love where the market is at or can’t find a single sector that looks like a good buy, it’s okay to be just 90%, 80%, or even 50% long. You don’t need to have 100% exposure at all times.

Sure, cash doesn’t pay much in terms of returns. But that’s not the point. You’ll sleep better at night knowing you’ve got a defensive position in cash on the sidelines. Plus, if you’re right and a drop does come, you’ll have dry powder to load up on all your favorites.

If you don’t have a compelling reason to buy, leave some cash on the sidelines.

Rule #6: No woulda, shoulda, couldas

Investing is a process of always looking forward.

It's good practice to look back and see what you did right or wrong, but understanding the past helps you to learn those tough lessons so you don't repeat them.

Don't get hung up on the woulda, shoulda, couldas - they're wasted, damaging emotions that will never help you. Spend your time thinking about the next trade, not the last one.

Rule #7: Never subsidize losers with winners

Professionals and amateurs alike hate selling their dogs. That would mean admitting they were wrong!

Instead, they keep on hoping that a losing position will magically turn around when others see the value in it.

To fund this rationalization, investors willingly sell their good investments to subsidize the losers. They call it "averaging down."

Here's a simple piece of advice. Sell your losers and wait a day. If you still really want to own that stock, buy it back then.

Rule #8: Check hope at the door

If you've ever hoped that a stock you owned would just get back to breakeven, then you know what we're talking about.

Hope is not something you should rely on in investing. Hope is an emotion, not a strategy, and investing is not a game of emotion.

Never be afraid to cut your losses. It doesn't matter where a stock has been. Only where it's going. If you're reduced to hoping, it's time to move on.

Rule #9: Be a TV critic

Have you ever heard the term "talking your book"? That's what we say about analysts and portfolio managers when they go on TV to tout some stock that they own. They're talking their book.

Executives from the company do it, too. Have you ever heard an executive say anything negative about their company? It just doesn't happen.

These people have massive incentives to drive the stocks higher.

Anytime someone recommends something, you need to ask yourself what their incentives are. Are they talking their book? Always be a skeptic when it comes to TV, social media, radio, and any other medium.

Rule #10: Be flexible

Warren Buffett says that his favorite holding time is forever, but that doesn't mean he never sells stocks. When his analysis changes, or he sees a better opportunity, he sells.

The market is made up of companies that are rapidly changing. Sometimes, they make mistakes, and you should be prepared to sell your shares in those companies when that happens.

Applying the rules

If there's one common theme, it's that you need a plan to manage your risk. Your goal as an investor is to see your wealth grow, but you also have to make sure that your investments remain profitable. Otherwise, you have to work hard just to get back to even.

Now that you now the rules, you have to apply them.

Take the time, right now, to look at your portfolio through the lens of our 10 rules.

If you can do that at least every month, while analyzing your holdings using a framework like the one I've shared, you'll stay on the right track.