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TheStreet Open House

Five Rules for Buying Stocks

Stocks in this article: AMZN BRK WFC

1 - Buy What You Know

Each investor forms his or her own trading strategies and rules for buying stocks based on personal goals and risk tolerance. And similarly, each investor buys and sells stocks and mutual funds based on what makes sense to them, right?

Not necessarily. The problem is that many investors fall victim to the latest fads on Wall Street and are eager to buy the stocks everyone else is talking about. This is how traders got taken for a ride by the tech bubble, as folks piled into stocks that hadn't yet turned a profit and with no realistic way to make money.

Remember Flooz.com, which pitched a kind of online currency that would serve as an alternative to credit cards? It sounds like a crazy concept, but somehow the company raised somewhere between $35 million and $50 million from investors and enlisted a few retail giants such as Barnes & Noble (BKS) to join in.

But at its core, Flooz was a glorified gift card company with limited partners. Three years after going public, Flooz was bankrupt -- which shouldn't have surprised anyone who took a hard look at the company's business model.

On the other side of the coin, take Amazon.com (AMZN - Get Report) and its Kindle e-reader -- heralded by early adopters as a revolution in book publishing.

They were right. AMZN stock is up 130% since Jan. 1, 2009 -- compared to a mere 15% in the broader market. If you know anyone who bought a Kindle during the last two years and listened to them rave about it, chances are the success of AMZN stock is no surprise to you.

Never under estimate the power of your personal experience. If you notice consumer trends or new product with big potential, chances are other folks will too. This will help you anticipate investment trends and profit from them, instead of chasing other people's stock picks.

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