Beating Wall Street with Common Sense: How I Achieved a 400% Return from my Dorm Room

by Wayne Duggan

My dad always said it was important to always have a plan. “Always have a direction in life. You may not get where you are going, but at least you will get SOMEWHERE.”

Common sense rule #1: Don’t believe the claims made in advertisements!

Common sense rule #2: If it seems too good to be true, it probably is!

A cash account means that the only funds that you have available with which to buy stocks are funds that you first deposit in the account. Cash accounts are like checking accounts. Unless you have funds in the account, you cannot buy stocks. A margin account allows the investor to borrow a certain amount of cash from the brokerage. Typically, investors pay an interest rate on the money they borrow. Margin accounts are similar to credit card accounts: you can spend money you don’t have, but you must pay interest on your outstanding balance. I was raised to only spend what I have and to avoid borrowing money unless it is absolutely necessary, so I chose a cash account.

The smaller of these numbers, the bid, is the highest current price at which a buyer is willing to

The larger of the numbers, the ask, is the lowest current price at which a seller is willing to sell shares. The difference between the bid and the ask is called the spread. There will almost always be a spread that is greater than zero because if a buyer and a seller meet in the middle at a particular price, the trade is executed. The other important metric that is usually included on the quote page is volume. Volume is the total number of shares of a stock that have been traded in the market that day.

placing. A market order is an order that is executed instantly at whatever the best available price is (the market price).

The benefit of placing a market order is that the order typically gets executed immediately.

A limit buy order is an order to buy a stock with an upward limit on how much you will pay for it.

stop order. Stop orders seem to be more commonly used for selling rather than buying, but are an option in either case.

When it comes time to sell your stock, you have several order options available as well.

A market sell, like a market buy, is an order that gets executed immediately at the best available price, usually at or slightly below the ask price.

When you place a limit sell order, you are establishing a price (the limit price) that is the lowest price at which you are willing to sell. Your order will only get executed at or above your limit price. A stop sell establishes a price lower than the current market price at which your order will be executed at market price. Stop sell orders are often referred to as stop loss or...

The use of stop loss orders is a very common tool used by traders to manage risk.

When stocks open at a price much higher or much lower than the previous day’s close, it is called gapping because this phenomenon creates a gap in the chart of a stock’s price.

The normal market hours for the major American stock exchanges

9:30 AM to 4:30 PM eastern time.

extended hours trading, and it begins every day at 7:00 AM and ends at 8:00 PM eastern time.

I would not recommend making any trades during extended hours. In addition to the unpredictability of extended hours, many brokerages charge extra fees for extended-hours trading.

Common sense rule #8: The worst-case scenario is always a possibility, so make sure you are mentally prepared for it before you buy!

Common sense rule #9: Companies with a successful past are more likely to have a successful future!

Common sense rule #11: Never put all your eggs in one basket!

Common sense rule #12: No company is completely risk-free!

As a trader, you never want to be in a position where one disaster can totally wipe out your account. One of the best tools for avoiding this scenario is diversification.

Diversity has both advantages and disadvantages. As I mentioned before, diversifying your portfolio eliminates the risk of a single stock or a single sector tanking and completely wrecking your portfolio.

Common sense rule #13: The higher the risk, the higher the potential reward, and vice-versa!

Common sense rule #14: If the apocalypse ever actually comes, you will be more concerned with your canned peaches than your stock portfolio. Don’t fear the collapse of the economy!

Common sense rule #15: Timing is everything!

As a side note, if you have trouble remembering which is which, remember that a bull strikes its opponent with an upward thrust of its horns, while a bear strikes its opponent with a downward swipe of its paw.

Common sense rule #16: Be patient and wait for buying opportunities! Even the best stocks get dragged down during a bear market.

The idea of lowering the average cost per share by adding to a position at a lower price is called averaging down.

Having the discipline to follow a plan or investment strategy is of the utmost importance. Unless you follow your own rules, you will end up

running around making impulsive, emotional, and unwise decisions.

The problem with emotions is that they typically point you in the wrong direction or, at the very least, cloud your judgment.

Trading decisions need to be thoughtfully considered, well-reasoned, and thoroughly researched. These types of decisions tend not to be the decisions that people make when they are excited, rushed, panicked, and/or terrified.

Common sense rule #18: Trade with your head, not with your heart!

Common sense rule #19: Plans change! You need to be able to make adjustments to adapt your strategy to changes in circumstances.

Common sense rule #20: Stay informed!

“Why do I own this stock?” Hopefully this is a question you ask yourself before you ever buy shares of a company to begin with. If you can easily come up with several good reasons to own the stock and at least most of the reasons you bought it in the first place are still valid, you should keep holding it.

Common sense rule #21: If you are wrong about a stock, admit that you are wrong and sell!

Common sense rule #22: Unless you have lost 100% of your investment, you can ALWAYS lose more!

Common sense rule #23: Profits are only profits once you have closed your position for good!

Secondly, “durable” means that the company provides a product or a service that will be in demand in the distant future.

It is very important for a value investor to buy good companies, but the “value” part of value investing requires the price to be right.

Common sense rule #25: Price does not equal value!

The number of shares is called the share count or the outstanding shares (abbreviated “OS”).

The higher the share count, the less of a percentage of the company is represented by a single share. Manipulation of share count is one of the methods some companies use to take advantage of ignorant investors, and I will talk more about the concept of share dilution in a later chapter.

In fact, if you take the share price and multiply it by the OS, you end up with a number called the market capitalizat...

The market cap is literally the value that the market has ass...

While market cap is a useful tool in determining the approximate size of a company, the “value” that market cap represents is always wrong. What do I mean by that? Every uptick and downtick of share price changes the market cap of a company slightly, so the market cap of a large company like AAPL changes thousands of times every day! In fact, an investor needs the market cap to be “wrong” or he will never make any money. When you make a bet that a company’s share price will rise, you are also making a bet that the current market cap is too low. This is an extremely important point, and I would not recommend buying a single share until you understand this idea.