(03/21/11) 20 Hot Tips for Growth Investors

Patience is crucial, but so is a low tolerance for losses, writes Elyse Andrews, editor of Cabot Wealth Advisory.

As you know, the market has been in a major uptrend since September 1, moving almost straight up for the last six months. So it's only natural that after such an extended run the market takes a breather, shaking out the weak hands and providing stock set-ups for the next up move.

So instead of recommending a stock today, I'm going to review some basic growth investing rules.

Cut losses short. Definitely rule No. 1 for growth stock investing.
Search for strong sales and earnings growth. (Especially triple-digit sales growth.)
Search for revolutionary products with major benefits. Solar-equipment supplier First Solar (FSLR) and clog maker Crocs (CROX) filled the bill in 2007.In 2009, Green Mountain Coffee Roasters (GMCR) scored with its revolutionary Keurig single-cup brewer. And last year, we hit a home run with Chinese search engine Baidu.com (BIDU).
Heed the message of the overall market-never fight the main trend.
Never average down in growth stocks.
Be prepared for all contingencies. In other words, always have an exit plan ahead of time. This is especially important in times like these, when the market is chopping around. You'll make better and smarter decisions if you've thought out several scenarios before things get rough.
Never try to buy at the bottom or sell at the top. If you try, you'll just lose more money.
To avoid gut-wrenching volatility, stick with stocks that are liquid-at least 500,000 shares traded per day.
Only put more money to work after your past purchases are showing you a profit.
Be humble. Making money in stocks is tough, so don't kill yourself over one or two bad trades. Be thankful when you hit a big winner.
Find an investing system that works for you. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it's too late-by then, your emotions are out of control, and you're likely to do the exact opposite of what's constructive.
"Markets are never wrong; opinions are," is a quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected market speculators of all time. We agree wholeheartedly. And you should, too, if you want to become a successful growth investor.
When looking for potential purchase candidates, examine both the company's fundamentals and its stock's technical performance. When analyzing the technicals, focus on the stock's momentum and price chart, along with its volume pattern and 50-day moving average.
Find a company that has a big idea... one that has few, if any, limits on its future growth potential. It's these big ideas that create an atmosphere that can push a growth stock to dizzying heights.
Warren Buffett once said there were only two rules to follow with your investments. Rule No. 1: Don't lose money. Rule No. 2: Don't forget rule No. 1.
The goal is to be heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money. But, of course, no market moves in one direction forever. So when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases-while building up cash by selling your weakest stocks-is a good idea.
Be an optimist. In our more than four decades of publishing investment advisories, we've seen many ups and downs for both the market and our country. But after every tough event, our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because the US and our stock market will give you some dazzling opportunities.
Diversify your portfolio-to a point. A maximum of 12 stocks should provide plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
Once you've invested in a stock, be patient. Recognize that time is your friend. Frequently, stocks don't go up as fast as you might want them to. But if you develop a persistent and tolerant attitude, coupled with plenty of patience, you'll have a great advantage. We call this staying power.
Buy growth stocks with strong Relative Performance (RP) lines, comparing how a stock performs relative to the market or a sector. RP studies are a superb way to identify successful companies and to avoid problem ones. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding.