In this exclusive article Clem Chambers, Forbes columnist and author of the Amazon No.1 investing bestseller 101 Ways to Pick Stock Market Winners,  discusses the five golden rulesto help you start trading successfully.

There are many more people watching share prices than investing in stocks. Most realise that investing is the way out of living from pay check to pay check, but do not know where to start.

Stocks and shares seem to be the reserve of the rich; a risky business where the novice loses their shirt. But there must be away to get started without getting burned?

Here are five rules to stock market investing success to get you started.

Rule  1 – Build a stock portfolio of 30 shares.

Take no notice of the people that say put all your eggs in one basket. A portfolio gives you a certainty that bad luck won’t hurt you and that your choices on average will deliver the return your share picking deserves. This portfolio return over the years will outperform anything a bank will offer you on deposit and will compound.

A diversified portfolio will mean you will miss out on good luck, but investing isn’t about good luck. Bad luck and good luck cancel out over time but if you have too much of your money in too few shares then bad luck can knock you out of the game.

….Rules 2 thru 5 HERE

I think all the investors should consider, what is actually the downside. Say you have a billion Dollars; under normal conditions maybe the safest is to keep everything in cash. Now because under normal conditions, say little inflation and the purchasing power of money is maintained, the banking system is down. So you keep it in cash. But under the present condition, cash could be very dangerous, say if banks had another bailout, I think that the public opinion would shift to penalizing large depositors. 

In other words, if you have 100.000 Dollars on deposit with Deutsche Bank, maybe you get your money back but if you have a billion Dollars, maybe they take the haircut of 50 percent. So in this environment you can ask yourself if you have a billion Dollars. Well, what is relatively safe? 

So I would imagine that real estate is relatively safe because it’s widely owned by a large portion of the population. It may go down in value and it may be taxed away but it’s feasibly safe. If you look at Germany in 1928, the large and the more stable companies from Siemens to whatever it is, say, BASF, they survived. And so you were better off in stocks in the long run to wars and hyperinflation than in cash and bonds. 

When you look at gold, well, gold is very safe. It often has a high return in the long run, per se based provided and this is the proviso, the governments don’t take it away. That is a big issue.

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There are a few things that every successful investor should know.

First of all, never bet against an entity that can print unlimited amounts of money.

I’ve said this many times before and explained why again in my letter, How the Government Borrows Money.  

I had a lot of success early in my career with making the right calls using my own combination of fundamental/trend/psychology analysis. But there have been a few times that no matter how strong my analyses were, I was wrong.

At the time, I couldn’t understand why.

But then I recalled what I had learned from the wisdom of some of the best traders in the world.  

I remember reading the advice of Michael Marcus, who is reputed to have turned his initial $30,000 into $80 million, and how he got his best advice from Ed Sakota – another very successful trader.

One time Ed was short silver, and the market kept going down, even while every one was bullish. Every one was talking about why silver had to go up because it was so cheap, but Ed stayed short. Michael couldn’t understand Ed’s rationale, but Ed simply said, “the trend is down, and I am going to stay short until the trend changes.”

In Jesse Livermore’s Reminiscences of a Stock Operator (recommended to me by my friend Peter in New York):

“During a bull market, most stocks will ride the primary trend up to higher prices. A rising tide lifts all boats. During a bear market, most stocks will fall in price. Even folks adept at stock picking, if they are fighting the primary trend, are not likely to achieve excellent trades. Shorting stocks in a bull market or buying stocks in a bear market, almost regardless of their individual stories, is very risky and has a high probability of failure.”

Investors should learn to never bet against a trend.  This is the most common wisdom that every major successful investor/trader shares. It is the most important aspect of investing.

The market has now soared passed 1800 – just as predicted earlier in the year.  

Yet, there’s still a lot of white noise in the media about the stock market being bubbly and frothy.

We’ve been hearing about this bubble over the last few years, but the bulls continue to march forward.  

And the bears continue to get crushed.

Has the stock market gone up too high, too fast? Maybe.

Are there fundamental and economic indicators that suggest the market should move down? Yes.

But the general trend is still up.

I have given many reasons why the market would hit 1800.

From the record of money sitting on the sidelines entering the market forcing fixed income investors to shift asset mixes toward equities (see The Monarch of Money), to the mass psychology of the retail investor (see How Leveraged is the Stock Market); it’s all playing out as expected.

The Retail Investor is Back

Last week, stock funds in the US lured in the most cash in 13 years.

Via Bloomberg:

“…Morningstar, stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, with domestic equity deposits the highest since 2004.

…The market run-up has left investors as a group with an unusually high allocation to equities, at 57 percent, said Francis Kinniry, a principal at Valley Forge, Pennsylvania-based Vanguard Group Inc., the world’s largest mutual-fund company.

Equity allocations were higher only twice in the past 20 years, Kinniry said: in the late 1990s leading up to the technology stock crash of 2000, and prior to the 2007-2009 global financial crisis. He based his calculations on the total amounts of money in mutual funds and exchange-traded funds across asset classes at U.S. firms.”

With the amount of cash entering the system, we have to be cautious of when the music will stop. When things turn, retail investors are usually the bagholders.  

Eventually, people take profits. For now, euphoria has a stranglehold on the market.

Ed Note: Equedia has a lot of recent reports on everything in Commodities and Resources from Diamonds to Gold HERE