How to Make Money in Stocks

"To succeed in the stock market, it’s not luck but a disciplined, informed approach that wins. Do you know how to spot a ‘cup with handle’?”

The Power of Stock Chart Patterns

Reading stock chart patterns can help you predict future movements. Specifically, a pattern called the "Cup with Handle" often signals when to buy stocks. Like a rounded cup, a stock's price drops, forms a base, rises again, and dips slightly to create the "handle." This behavior shows investor confidence and a strong foundation for future growth. Recognizing such patterns saves you from relying solely on intuition.

Decades of data confirm this. Stocks like Apple in the early 2000s and Sea Containers in the 1970s displayed the "Cup with Handle" pattern before rocketing upward in value. Historical trends across industries show that this pattern repeats, providing a reliable signal for buying.

Learning this pattern empowers you to enter the market at the right time, minimizing risk and maximizing profit. Understanding historical success stories adds confidence to your trades, making the market less of a gamble and more of a strategy.

Examples

• Apple used the “Cup with Handle” launchpad before its surge in the 2000s.
• Sea Containers followed this pattern in the 1970s, rewarding patient investors.
• Many historical winners from different decades display this pattern.

Growing Earnings Drive Stock Success

Earnings growth is the clearest signal of a stock’s potential. Profitability is the backbone of any business, and it correlates strongly with stock price increases. Stocks with significant earnings growth tend to attract buyers, pushing prices higher.

Apple skyrocketed from $12 to $202 per share after its earnings jumped by 350% in a single quarter. Google similarly experienced gains of 112% and 123% in consecutive quarters before its stock surged. These examples prove that earnings spikes often precede major stock price rallies.

Be wary of hype. In the late '90s, many internet companies crashed despite soaring rumors because they lacked growing earnings. Focus on the earnings-per-share (EPS) metric to ensure the companies you choose have consistent and meaningful growth.

Examples

• Apple’s 350% earnings boost preceded its staggering stock growth.
• Google’s impressive quarterly gains aligned with its price surge.
• Dotcom companies like AOL fared better than speculative stocks during the bust.

Innovative Companies Win Big

Innovation is a driver of stock prices. Companies introducing disruptive products or services tend to outperform, but timing your investment is key. Many of history’s most successful stocks stem from innovation that reshaped their industries.

Investors who backed Cisco Systems as it pioneered networking equipment reaped gains of 75,000% over a decade. General Motors surged by 1,368% when it revolutionized the auto industry in the early 1900s. Even older stories like Northern Pacific Railway show the link between groundbreaking innovation and stock market success.

Rather than fearing high stock prices, invest in innovative leaders early, even at their current peak. Companies reshaping their industries tend to surpass expectations repeatedly.

Examples

• Cisco Systems grew by 75,000% in the 1990s due to networking innovation.
• General Motors sparked a stock frenzy by introducing modern autos in 1913.
• The Northern Pacific Railway surged 4,000% after uniting America via rail.

Supply and Demand Drive Stock Behavior

The basic rule of supply and demand significantly affects the stock market. Stocks with fewer shares available can rise sharply when demand spikes, but they also face steeper declines during sell-offs.

A small-cap company with only 50 million shares can rise faster than a giant with 5 billion shares due to limited supply. On the flip side, large companies are less risk-prone, as their size insulates them from extreme volatility.

Investor ownership is another vital factor. Stocks do better when top management owns a significant share since they’re heavily vested in the company. Companies also show promise when they buy back their own stock, signaling confidence in their future earnings.

Examples

• Small companies with few shares, like hot tech startups, see faster price swings.
• Bigger firms with vast share supply, like Coca-Cola, show steadier price movements.
• Executives owning shares or companies initiating buybacks often see stock hikes.

Industry Leaders Are the Best Bets

Always invest in the leader of an industry, not the runner-up. Market leaders tend to dominate because of superior products, sales, and competitive strategies. Their success often far outpaces the competition.

During the 1980 bull market, innovative leaders like Wang Labs and Tandy surged six to seven times in value, while second-place players struggled. Similarly, top innovators like eBay or Apple, dominating their sectors, reward investors far more than recognizable but less dynamic brands.

Sentiment often leads people to invest in second-best companies hoping for spillover success. However, history has proven that playing it safe with the leader is more rewarding.

Examples

• Wang Labs outperformed traditional names like IBM during the 1980 bull market.
• Apple dominated and became a top pick during various market cycles.
• Andrew Carnegie’s famous “first man gets the oyster” rule applies to market leaders.

Institutional Sponsorship Boosts Stock Prices

Institutions like mutual funds and investment firms drive the bulk of market activity. Stocks purchased by these big players tend to rise in value as institutional buying surges.

For instance, mutual funds covering hot stocks like Cisco or early Amazon played a major role in their surging prices. Top funds choose stocks carefully, and their preferences can guide individual investors to strong opportunities.

However, overly popular stocks can suffer. Xerox, once adored by institutions in the ’70s, declined when its flaws became apparent. Always add your research to supplement what experts are doing.

Examples

• Cisco’s meteoric rise matched strong institutional sponsorship.
• Mutual funds spotlighted Amazon before its mainstream success.
• Xerox’s decline showed the risks of blind trust in institutional favorites.

The Market Direction Shapes Individual Stock Performance

No stock moves independently of the market’s overall trends. Even excellent companies lose value if the general market is in decline, so keeping tabs on market sentiment is essential.

In 2008, nearly all stocks fell thanks to the market crash, regardless of their other merits. Conversely, in rising markets, even average stocks gain alongside strong ones. Observing trends in indices like the S&P 500, Nasdaq, and Dow Jones gives you critical clues.

Rather than relying on endless opinions from experts, observe indicators like buying or selling trends in major indices yourself. This approach ensures you recognize market momentum before it affects your investments.

Examples

• The 2008 crash showed how a downward market pulls all stocks lower.
• Bullish market periods lift even mediocre-performing companies.
• Indicators like buying spikes in major indices reveal market direction.

Avoid Second-Rate Companies

While stock investing may tempt you into diversifying widely, sticking to leading companies in their fields often yields better returns. The game isn’t about spreading risk across too many options; it’s about being selective.

For instance, during the rise of tech, companies like Microsoft and Cisco thrived over their weaker competitors, creating immense profits for those who avoided the lesser-known names. Focusing reduces the risk of betting on stock market underdogs.

Less competition and better market positioning make certain companies safer bets—provided their technological or business advantages are clear.

Examples

• Microsoft dominated over smaller competitors in the software boom.
• Cisco stayed ahead of its imitators during the networking revolution.
• Small tech copycats failed while companies like Google soared.

Learn from the Experts, But Do Your Homework

Big fund managers often have unparalleled access to financial insights and resources. Pay attention to their movements, but perform your own due diligence. Blindly following them can occasionally lead you astray.

Investor’s Business Daily and Morningstar.com help you analyze institutional sponsorship. Learning from an institution’s prospectus explains their stock-picking methods. By combining this information with your observations, you’ll make better decisions.

Remember, expert opinions can conflict, and market conditions constantly shift. A mix of expert strategies and your analysis ensures fewer regrets.

Examples

• Morningstar tracks fund portfolios to reveal promising stocks.
• Researching institutions’ techniques improves your learning curve.
• Combining observation with expert trends beats relying on one approach.

Takeaways

1. Study stock charts closely, focusing on patterns like “Cup with Handle” to time your investments.
2. Look for companies with record earnings growth and strong innovation, avoiding lesser players or hype-driven stocks.
3. Monitor the general market daily and act fast in response to sell-offs or rallies.