RULE #1: Forget stop losses... RULE #2: DON’T diversify... RULE #3...

[Jeff Clark Trader]( Editor's Note: Please read the following message from our friends and colleagues at Bonner & Partners carefully. It contains an urgent announcement that could prove very valuable to you. --------------------------------------------------------------- Are these investment myths costing you big money? Dear Reader, Do you know the number one reason why most people lose money in the market? It’s not because they’re "bad" stock pickers. But it almost always comes down to two things... - Selling at the wrong time... - Or spreading themselves too thin... and not having enough money invested in their winners... How many times have you heard a story about someone: - Wishing they had put more money on a winning trade... - Failing to take money off the table when they had the chance... - Or hanging on too long and getting wiped out? Reading between the lines, it's easy to see the real reason most people lose money in stocks is because no one has ever taught them how to manage their investments. The thing is, this is not your fault. This is the fault of all those people out there – the brokers and financial advisors – who do nothing but recommend you buy stocks. And then do nothing more than recommend another stock and another stock, no matter whether their past recommendations have been winners or losers. Today, I'm going to give you a brief overview of some of my basic "rules" that give me an edge over others... (NOTE: I am holding a free training on this very idea starting next week. If you're interested, you can [register here]( Rule #1: Don't use stop losses I know a lot of people won't like this... Because many investors today practically rely on so-called "stop losses." This is when you sell a stock once it's fallen a certain amount. Stop losses are popular because they take a difficult decision – perhaps the most difficult in all of investing – and make it mechanical. You don't have to think about it. The stock hits your stop loss, and you are out. It should be apparent that it also limits your ability to net a big winner. As you know, I recently conducted a study of 365 stocks that returned over 100-to-1 between 1964 and 2014. And do you know what I found? If you used stop losses, you would've been stopped out of every one of the 365 stocks on my list long before they ever returned 100-to-1. Monster Beverage, for example, became a 100-bagger in 10 years. But I count at least 10 different occasions when it fell more than 25 percent during that run. In three separate months, it lost more than 40 percent of its value. Yet if you focused on the business – and not the stock price – you never would have sold. And if you put $10,000 in that stock, you would have $1 million at the end of 10 years. I have a lot of examples just like this. It's true you could get lucky and hit a double or triple by getting the timing right on something. But in that effort, you'll surely be stopped out of a lot of ideas along the way. And what is the point of going through all the research required to come up with an idea if you're going to let fluctuations in the share market dictate your sell price? Of course, investing in the buy-and-hold manner means sometimes you will be hit with a nasty loss. But that is why you own a portfolio of stocks. To me, investing in stocks is interesting only because you can make so much on a single stock. To cut into that upside because you are afraid to lose is like spending a lot of money on a car but never taking it out of the garage. I invest in stocks knowing I could lose big on any position. Overall, though, I know as long as I stick to my method, I will turn in an excellent result. The aim is to buy right, and sit tight. Rule #2: Don't diversify – reserve your capital for your best ideas Most people commonly believe that if they spread a little money over a lot of positions spanning different industries, they'll be protected by downturns. It's a common belief, based on the old adage, "Don't put all your eggs in one basket." And on the surface, it makes sense. But the fact is, it doesn't work, and never has... The best you can hope for is to match the index. And that's not what investing is all about. In a 1977 paper, Elton and Gruber showed most of the gains from diversification are enjoyed by holding between 20 and 30 securities. Most of the greatest living investors, including Seth Klarman, Warren Buffett, and Charlie Munger, agree. In fact, they recommend even fewer positions – 5 for Buffett and Munger, 10 to 15 for Klarman – all of which broadly agrees with the research that the best returns for value investors can be had with very concentrated portfolios. Munger's rationale for holding a smaller number of stocks was based on practical limits. He said: "How can one man know enough to own a flowing portfolio of 150 securities and always outperform the averages?" Buffett said: [If] you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. It's crazy to put money in your twentieth choice rather than your first choice. . . [Berkshire Vice-Chairman] Charlie [Munger] and I operated mostly with five positions. If I were running $50, $100, $200 million, I would have 80 percent in five positions, with 25 percent for the largest. Rule #3: Don't buy for dividends When a company pays a dividend, it has less capital to reinvest. Instead, you have it in your pocket – after paying taxes. That's not what I'm looking for. Ideally, you want to find a company that can reinvest those dollars at a high rate. So you wind up with a bigger pile at the end of the day and pay less in taxes. Thomas Phelps walks through an example in his great book, 100-to-1 in the Stock Market, that is worth repeating here... Assume a company has $10 per share in book value and earns 15 percent on that capital. At the end of one year, book value will be $11.50 per share, if the stock pays no dividend. At the end of the second year, it will be $13.22, and at the end of the third year $15.20. "In five years, the company's book value will have doubled," Phelps writes. "In ten years, it will have quadrupled. In 33 years, it will be up a hundredfold." If the company had paid dividends, the story would be quite different. Say it paid out one-third of its earnings. It would then take 15 years to quadruple its capital, not ten. And in 33 years, it would be up 23-fold, instead of being a 100-bagger. "Obviously," Phelps writes, "dividends are an expensive luxury for an investor seeking maximum growth. If you must have income, don't expect your financial doctor to match the capital gains that might have been obtainable without dividends. When you buy a cow to milk, don't plan to race her against your neighbor's horse." I saw this same view of dividends when I visited Chuck Akre. There is a place for dividends, though, and they have been important to the overall return of many 100-baggers. However, we should prefer a company that can reinvest all of its earnings at a high clip. If it pays a dividend, that's less capital that it has to reinvest. And that reduces the rate of return. Rule #4: Ignore stock market predictions I often hear sweeping pronouncements made about the stock market and where it's going from pundits and investors everywhere, as I'm sure you do too. I also notice how so many people take such guesses seriously. I'd advise taking all such opinions with a grain of salt. After all, how many people in March 2009 thought the market would rally 80 percent in less than two years? Not many, that's for sure. Yet, it happened. No one could have forecast the Gulf oil spill happening when it did, either. Over the course of an investing life, stuff is going to happen—both good and bad—that no one saw coming. Instead of playing the guessing game, focus on the opportunities in front of you. And there are always, in all markets, many opportunities. Yes, always! Benjamin Graham pointed out – in 1976 – there were over 5,000 publicly traded securities. (Today, there are over three times that number, especially if you consider the international markets.) Then he said, "Following a wide variety of approaches and preferences, the individual investor should at all times be able to locate at least 1% of the total list—say, thirty issues or more—that offer attractive buying opportunities." That's true. When someone tells me they can't find anything worth buying in this market, they are just not looking hard enough. With 10,000 securities today, even one-half of 1 percent is 50 names. Kind of makes you think, doesn't it? So there you have it... If you've been an investor for any length of time, I'm sure these rules will conflict with a lot of things you've heard. [But this really is the secret to getting an edge over most other investors out there]( and enjoying investing success beyond your wildest dreams. This is the real reason for my success. And it could be the new reason for yours. If you'd like more information from me that will help give you an edge, [register on this page]( for a free event I am holding next week only. And if you do nothing else, make sure you turn up Thursday to watch me via [private video link]( where, for the first time, I will share my #1 investment idea for right now. This is your only chance to watch this video. Because it will not be available to watch beyond Thursday. (And fair warning, this investment is so urgent and compelling, you may only have a 24- to 72-hour window to take part in it.) I hope you'll join me. [Register here for FREE to participate.]( Good investing, Chris Mayer Chief Investment Strategist Bonner Private Portfolio and Chris Mayer's Focus P.S. Starting tomorrow, I am going to reveal some more ideas in a series of free training videos. It will culminate in a "Skype conference" I am holding on Thursday, March 23 over a [private website link]( where I will share the most urgent and compelling investment idea I have seen since 2014. This idea is so important, I am broadcasting this event at 11am, 3pm, and 8pm ET. © Jeff Clark Trader. All Rights Reserved. 55 NE 5th Ave, Delray Beach, FL 33483 If you no longer wish to receive special offers from us, [click here to opt out.](