Here are some key tips to help you zero in on the best stock buying strategy for successful investors

Top-quality stocks tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

In a sudden and deep stock-market drop, it’s all too easy to respond impulsively or go to extremes when trying to use the best stock buying strategy. You may feel a temptation to sell all your stocks and “wait for things to settle down” before going back in the market. Or you may feel an urge to “average down”: buy more of your biggest losers. That way you lower their average cost, even if you have to borrow.

When you’re tempted to do something like that, it’s best to get reacquainted with the first principles of investing. Here’s what we mean:

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Like a lot of great thinking, the first-principles idea goes back to Aristotle, the pioneering Greek philosopher of the 4th century BC.

Many people find this first-principles idea inherently sensible and appealing. To profit from it in your investments, you need to define for yourself what qualifies as a first principle, and what doesn’t. As you gain experience as an investor, you’ll find a lot of disagreement in that area.

Focusing on the right First Principles is part of the best stock buying strategy for investors

First principles have come up a lot in talks I’ve had with our clients and friends.

Several investors asked if they should sell their stocks because they worry that the sharp drop the market saw in March may be an omen of a deeper decline. Our advice is that if your stock holdings made sense for you before the drop, in light of your investment goals, financial circumstances and temperament, then you should hang on to them.

Note—most sharp market downturns are temporary. They are much more common than the deeper, longer-lasting declines, like the one that occurred during the financial crisis in 2008/2009.

Some investors have become bolder in response to the drop. They take the common sense view that the market is cheaper now than it was, so it’s probably a better buy. Instead of taking that for granted, you need to remember two of our first principles: there’s a large random element in stock-price changes, and no one can predict the future.

For instance, one long-time client is now semi-retired and regularly withdraws funds from his investment portfolio to supplement his income. He asked our opinion on halting withdrawals from his investment accounts for now, and covering any cash-flow shortage by borrowing money from a line of credit. He assumes he can wait till the market bounces back from the downturn, then sell stocks from his investment account to pay off the balance on his line of credit.

We advised against it. When our retired clients need cash, we prefer to “cull” their investment portfolios for them—select issues to sell from their less desirable or riskier holdings. Retired investors can do the same thing for themselves. That way, when you need cash, you’ll continually raise the investment quality and safety of your portfolio.

Halting sales from your portfolio when the market goes down, and instead tapping into a line of credit, would reverse the advantage of culling your portfolio when you need cash. In fact, it would be akin to investing on margin.

This plan goes against several of our first principles on margin investing:

Only contemplate margin investing when you are in the top tax bracket and expect to stay in it for the foreseeable future. Follow our conservative three-part investing approach with the borrowed funds. If you want to invest on margin, do it consistently over a number of years. Resist the temptation to increase your margin borrowing when stocks have risen, or reduce it when prices have dropped.

Take a conservative approach as part of the best stock buying strategy for maximum portfolio returns

Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other low-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time. The number of stocks in your portfolio will depend on where you are in your investing career.

As an aside, there is no simple formula for deciding when to sell a weak performer, regardless of whether you follow an aggressive or a conservative investing strategy. But there are some helpful guidelines.

First, you’re never going to sell at the top or buy at the bottom. That’s why we’re so selective about the stocks we recommend in our newsletters. The better the quality of the investments you buy, the less you have to lose by failing to sell.

In fact, regardless of whether you practice aggressive or conservative investing, the quality of your investments matters much more than your skill at selling.

Second, you should be quicker to sell aggressive stocks than conservative investing picks. With stocks we rate as “Speculative” or “Start-up,” it pays to apply our sell-half rule. That’s when you sell half of a stock that doubles in price.

How much stock selling have you done during this COVID-19 economic downturn? Are you already second thinking some of those sell-offs?