Investing Lessons that HURT

I've always had an interest in business, finance, and economics. I was an economic major at UGA, I've interned at Morgan Stanley/Merrill Lynch, and my dad has been a financial advisor for almost thirty years. Needless to say I've already "learned" a lot about the subject; however, I'd say that my real learning started happening when I started using my own money to invest.

I saved up a lot of money from my sales job at Mattress Firm and since I benefited from a nearly zero fee account with my dad, I began investing. Well those "lessons" were paid for with my own money. Sometimes I'd make huge profits. Sometimes I'd make HUGE losses. I'd make plenty of dumb mistakes that could only be learned from actual experience. I decided that since these lessons were expensive (some of them too expensive in my opinion...) I should write them all down so that I wouldn't forget them. All of them I can honestly say that I've either learned after prayer (from God), or from mistakes (from me). So this post is really for myself, however I do hope that these may be of some benefit to anyone who invests. Hopefully you can avoid some of the dumb mistakes I've made.
Disclaimer: This list will probably be continually updated as I am always continuing my investment education. Now in no particular order:

1. ONLY use OOM calls with a clear catalyst trade. Out-of-the-Money and At-the-Money Covered Calls are made up of a huge % premium. These then lose their value everyday as the call approaches expiration. I've lost WAY to much money with these, being right on my prediction, wrong on timing. ONLY use these for a catalyst and only right before (1 day max) the catalyst; so that the premium time problem doesn't affect the trade.
   
   However, if playing a good catalyst like Earnings Announcment, its much better to use these than Deep-in-the-money, because they give more bang for your buck. You can have less exposure with more potential upside. Because a catalyst trade is a bit of a win/lose trade. In past experiences I've found that even with ITM calls I pretty much lose all if I'm wrong, so with that in mind, I might as well leverage the potential upside with an OOM call (not too much). That way on a win I'm leveraged much better.
   
   
2. Instead of buying stocks, buy a deep In-The-Money call options. This gives much more leverage, you get 3 to 1 and sometimes up to 5 to 1 leverage because each call represents 100 shares of stock. Buying deep in the money makes it so almost the entire price of the call is made up of intrinsic value- so the option trades 1 to 1 with the stock. The premium can't eat up the option over time, so its basically a stock replacement system (thanks Jim Cramer).You buy these one month out (lowest premium..remember premium = bad) and deep enough in the money that there's not much danger of being stopped out to zero. Remember this is a replacement for stocks, not a speculative bet. If stock A is currently at 100, and I buy the 70 calls, I get stopped out at 70. To zero. So make sure to go deep enough, don't get greedy and confuse this strategy with speculation.
   
3. Getting back to Even doesn't work. There have been many times when I made a bad trade and my security went down. The worst thing to do here is to hold onto that security and wait until it "goes back up" to break even. First off the market doesn't understand or care about you breaking even. It might never go up; and holding onto it hoping it does it more an emotional denial to accept the loss. The reality is that when you're security drops in value the loss has already occured. You aren't "holding it off" by keeping the security. In fact there have been many times I could have made it back by switching the funds into a different security. Here is the rule: At all times, make sure to own investments which should grow the fastest in the near term and forget the emotional ties to "getting back to even" from previous mistakes.
   
   Example: I'm watching security A, B, and C. I buy security A before a catalyst. It drops significantly. Afterwards I need to start over mentally and think, at this point in time is security A, B or C more likely to grow quicker? Many times the answer is B or C, in which case I need to sell the remaining A and shift to one of them. Always be on the fastest train. (self note: remember bidu at 65)
   
4. BUYING and SELLING should almost always be done with emotion. How does this make sense? Well when I feel ECSTATIC about a huge rally I should be selling. When I feel SCARED about the depth of a pullback and my sentiment is reflected in mainstream thought...I should be buying. When I look back at every trade I've made. I always see that when the market or stock topped out was when I felt the best (think bidu after split). When I could have made the best buys were when I was super scared, not just worried, and the talking heads on CNBC were even more scared than I was (think flash crash or S&P 1010 in july). At that point it's so hard to buy because I'm scared to death that the market will fall even more...so is everyone else... I remember at S&P 1010 I heard the talking heads saying how we'd probably fall down to 900 at this rate and head to a double dip. It was a bottom. While I'm not a bottom fisher, I do think its wise to buy STRONG trend-stocks when the market is down here. Rule of thumb: When No one is buying, I should buy. When no one is selling, I should sell.
   
5. Diversify with at least 7 securities. AT LEAST. Far too many times I've lost money putting all my eggs in one basket. Painful note to self: Netflix back in July earnings....ACK. But diversifying to seven puts the odds in my favor since I only use great stocks. Putting too much % in any one stocks is GREEDY. And pigs get slaughtered right?
   
   
6. Only use the best stocks. I've made the most money using HOT stocks instead of bottom fishing for possible reversals. The market is never logical in my experience, so why vote against it? Why try to bottom fish a stock that represents a good company thats been hammered by the market because I think it should go higher? Instead, I need to find stocks that represent AWESOME companies that the market LOVES with strong charts!
   Then I have not only good fundamentals, but a great strong trend behind me! Forget trying to predict bottoms (or tops for that matter) because I'm not very good. However I am great at finding trends and hot stocks.
   
   
7. PEG. This ratio has really helped me see when a stock has become too expensive. What is a stock? Actually I've found that the stock price more represents Earnings per Share and Percieved Growth than the actual company. Well EPS can easily be measured, but I've found the traditional P/E ratio to be useless because it fails to account for growth. People pay LOTS for growth! So we have to divide the P/E by the Growth to get the true valuation. Logically a perfect PEG should be 1. I've found in reality that hot stocks can (and do) go up to a PEG of 2 before the market really pulls back on it. Thats paying a P/E multiple of twice the growth rate. The sweet spot here really seems to be between 1 and 2 for some reason though. I originally thought it would be below 1 because it means the growth is undervalued, but I've found that stocks with PEG between 1 and 2 are usually the winners. I theorize this is because these stocks are usually more popular and have a broader market exposure after passing 1.
   
   
8. EARNINGS...I've been burned bad holding an option through earnings, I've also made a huge profit. If you plan to hold an option through earnings conference call, know that you're making a speculative play that could shoot you in the foot even if the call is good. Sometimes I've seen great stocks fall off a cliff after a GREAT conference call. This is a good buying opportunity but a danger of holding thru earnings. Its best to diversify among different company earnings (7 at least) not all on one. Also consider, after earnings announcement you're in a MUCH more knowledgeable position about the health of the stock. If guidance is good, estimates are beat, and the stock rallies then I know the stock is still a good buy. Repeat situation with a stock sell off, EVEN BETTER BUY! But bad earnings and/or poor guidance and I put the stock in "time-out" until maybe next quarter.