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3 Simple Guidelines to Invest in Stocks that Outperform

By Bill Spetrino   |   Friday, 05 Oct 2012 07:41 AM

There is no such thing as perfect investing.

However, those investors who follow three important rules will outperform those who don't follow these simple, but important, guidelines.

The first rule is to find someone who has actually become financially independent solely from safe investing. How do you know for sure?

Editor's Note:
Small-Town Ohio Accountant Uses Simple Forgotten Secret to Help Investors Pocket Millions

You need to ask the prospective financial adviser how much their annual dividend income is and their age. Someone 75 years old with only $15,000 of annual dividend income isn’t better than someone who has $85,000 of dividend income and is 45 years old.

Recently, I met a person who has given seminars and has been well-known in financial circles for years.

This person had less than $1,500 in dividend income and was almost 50 years old. This person’s income was impressive, but, like Suze Orman, this person made money "talking" about finances, obviously not through investing.

Dividends are the first sign of safe investing.

After 2008 financial crisis, Jim Cramer finally embraced dividend stocks. I have been doing that for 15 years now.

The second rule in safe investing is to find companies that are either focused on consumer goods or are big pharmaceutical companies. From 1957 to 2003, 18 of the top 20 companies in the Standard & Poor’s 500 Index were either big pharma or consumer goods companies, when reinvested dividends were taken into consideration.

Cyclicals, small caps and large capital-intensive businesses might sound great and might do great, but they are generally not appropriate investments for those who want to practice safe investing.

The third rule is to choose companies that are easy to understand, given your expertise and background.

Physicians should be buying pharma companies, not oil stocks. If you are a novice investor, stocks of easy-to-understand companies (such as Wal-Mart, Pepsi, Coca-Cola and McDonald’s) are much easier to comprehend than are financial firms or software companies. And they have performed better in this latest market malaise than most stocks have.

Also, each investment should be for a minimum of three to five years, so choose companies you feel comfortable with and give your selections a chance to work out.

Apple was $130 in September 2008 and dropped to $79 two months later. The patient investor today has been rewarded, as Apple is almost $700 a share four years later.

Editor's Note:
Small-Town Ohio Accountant Uses Simple Forgotten Secret to Help Investors Pocket Millions

No one can predict the future 100 percent of the time. Investing is 50 percent art (instinct) and 50 percent science (numbers).

Many highly educated people, much smarter than me, are great with numbers, but lack instinct.

Want proof?

Compare Wharton Business Professor Jeremy Siegel's record in his WisdomTree Equity Income Fund exchange-traded fund with my record at The Dividend Machine.

The fact is, my record is significantly better.

But the key to improving your odds is to combine safety, growth and income with getting the right entry price, which is an inexact science.

About the Author: Bill Spetrino Bill Spetrino is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the Dividend Machine. Discover more by Clicking Here Now.

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