128How to profit from a proven strategy or subscription
This chapter illustrates how to
use a subscription (Chapter 6-7) and make it work better. We use AAII’s shadow
screen as an example but it will apply to most other subscription services.
Does it perform?
From the AAII’s website, the
shadow strategy performs quite well. It uses cash, so there is no cheating.
However, you have to concern yourself with the following.
·
Check out the performance of the last 10 years
only, not its long history. The market changes a lot in the last 10 years.
Hence any performance data over 10 years ago would not predict better than the
recent data.
·
Can you simulate the same performance? You
cannot if the selection of stocks is distributed to others before you. I treat
it as a general alarm and not specific to AAII.
First, ensure that the insiders of the subscription
service do not have this selection and act on them first; some subscription
services enforce it. Second, check whether you have to pay extra to be the
first group to receive the selection list than other members.
·
In general, I prefer they give me the tool to
select stocks myself as there are too many pitfalls especially on low-volume
stocks. However, this requires less effort.
·
Actually they provide the database and the screens
at extra cost. It may worth it as you will be ahead of the general subscribers.
The large number of subscribers would drive up the prices of the recommended
stocks initially.
The better way is to modify the screens so they will not
produce the identical lists of screened stocks.
Once you get the selection list,
analyze the stocks and perform paper testing. If the performances during up
market and down market both beat the general market, then the service performs
well.
Improve the
performance
We would improve the performance from what we learn in this
book:
·
Market timing by cycle (Chapter 48).
Close all stock positions before and during the market
plunge. Hopefully market plunge can be detected and act accordingly (Chapter 50).
·
Market by calendar (Chapter 56).
For example, select the holding period of a stock from
Nov. 1 to May 1 next year for non-taxable accounts.
·
Diversification (Chapter 81). In general, do not
have more than 25% of your portfolio in the same sector.
·
Skip the sectors (Chapter 67) that require
expertise.
·
Common criteria that may not be included in this
strategy (Chapter 109). Adjust them as this strategy favors small cap only.
·
Modify the strategy. The purpose is not to trade
the same stocks as everyone is doing. When you do, the herd theory would apply
– the leaders of the investors on the same stock would profit more than the
rest.
This strategy suggests you to sell all the stocks that do
not meet the filter criteria. The following may not apply to this strategy. However,
you want to be ahead of the herd by selling most of them earlier than most by
setting more criteria to sell such as reaching a price objective and close to a
fixed holding period.
1. Try
to sell before the herd. If the strategy asks you to review the stock positions
in 6 months, do it in 5 months.
2. Using
the above such as Skip the Sectors, you may already have different set of
stocks as the herd.
3.
Modify the selection criteria. If it asks you to
have market cap less than 150, try the market cap between 100 and 300 – just
for illustration.
·
Analyze the stock (Chapter 69-73).
·
Second opinions:
1.
Use the Scoring System from my book Scoring Stocks (from
amazon.com). Only select stocks with passing grades.
2. Use
Blue
Chip Growth. Only select stocks with grade A in Fundamental Grade and / or
Overall Grade.
3.
From any other subscription services and / or
free websites in evaluating stocks. For illustration, this strategy is for a
holding period of about 6 months. Hence, use a subscription service on fundamentals
and those services for momentum and day trading will not be relevant here.
·
Buy the stock (Chapter 78).
·
Sell the stock (Chapter 75-77).
Links
Scoring Stocks. http://www.amazon.com/dp/B00CX3F3CC
Blue Chip Growth.
129 Monitor my big gainers
This chapter checks on the
characteristics of my big winners and the next chapter is on my big losers. The
purpose of these two chapters is to demonstrate how to check out the common
characteristics of the winners and losers in addition to what strategy works
and what does not work in the recent market. You may want to perform a similar
task on your own portfolio.
Once the common characteristics
of our big winners have been identified, search stocks with the same
characteristics. It does not always guarantee the same result. However,
following the results of the evaluation would have a better chance of achieving
similar appreciation than without. The market conditions change, so you need to
perform the same evaluation periodically (say 6 months).
In my system in evaluating
stocks, it consists of two major parts:
1.
Screen for stocks (same as search).
2.
Analyze the screened stocks.
The database
The following data accounts for
all the portfolio holdings and the stocks I sold this year in my largest
taxable account as of 6/1/2013. My trading strategy keeps track of a lot of
stocks, about 50 in this account.
This monitor includes 21 stocks (CSCO bought two times), which had a
greater than 25% return. The result is too small to draw a concrete conclusion.
However, the result of this monitor is quite compatible with the results of the
previous monitors.
Adjust this threshold according to the size of
your database.
If you want to monitor your big
gains and most likely do not have that large number of stocks, consider the
following:
·
Include the stocks that you have evaluated even if
they have not been bought. Highly recommended.
·
Include the entire year of sold stocks not only
YTD.
·
Relax your threshold of the big gainers (use 20%
instead of 25%).
·
Include all accounts. I skip some accounts as
they serve different purposes such as one for momentum strategy.
·
Use annualized return that would give you more
stocks in both extremes.
The results
The results are summarized by the
following four tables:
The tables may not look good on
small screens. Paste the following link to your PC.
Performance
It is a rising market. It should
be compared to a market index.
Table 1: Performance Summary.
No.
|
Avg. Return
|
Avg. Annualized
|
Avg. Holding Period
|
21
|
50%
|
111%
|
211 days
|
Source
Table 2: Source of the stocks:
Sources
|
Web & media
|
Deeply valued
|
Acquire candidate
|
Misc. screens
|
Short squez.
|
No.
|
4
|
3
|
3
|
10
|
1
|
Annual. Return
|
75%
|
53%
|
204%
|
115%
|
164%
|
Stocks
|
ADM,
BSX, C, EMN
|
CSCO, CSCO, MSFT
|
CAMP, FFCH, ADES
|
ACAT,BIIB
CUZ,DGI,NSIT,
STRZA,
USNA,
OMX,
DLTR
|
DECK
|
The returns are annualized for
better comparison.
Web and Publication.
There are four (from a total of 21)
stocks are selected from articles off from the web, magazines and newspaper.
When I was convinced that there was great appreciation, I bought that stock
without further evaluation (not recommended). I was lazy but you should do some
evaluation. Need to distinguish whether the authors are pumping-and-dumping the
stocks they recommended.
Deeply-valued stocks.
Three of the stocks were quite
deeply valued. I placed an order with prices about 5% lower than the market
prices betting they are still on its way down a little. About three out of six
orders were successfully executed. If I have the time machine, I should place
market orders on all six as the market is rising.
I doubled my normal bet on most
of these stocks (CSCO about 4 times) and the stocks with high fundamental
metrics. As of 5/2013, these deeply-valued stocks have not realized its
potential values and they’re the under-performers in the group. However, the
average 53% annualized return is nothing to ignore!
Candidates to be acquired.
There are quite a few candidates
that would be acquired by other (usually larger) companies in the early
recovery of the market cycle (a phase defined by me). However, with plenty of
easy money around due to low interest rates and the high corporate cash
reserves, it extends the acquisition craze to 2013. This phase will end when
the Fed begins to tighten the money supply. These stocks represent the better
return from the group and I should have doubled bet on all of them even they
normally are smaller and unknown companies.
The potential candidates to be
acquired are usually smaller companies with a technological edge and/or having
a valuable customer base.
Miscellaneous screens.
A screen consists of criteria in
searching stocks such as P/E < 20. There are 10 stocks from miscellaneous
screens (same as searches). The performance of each screen is further
analyzed. It is better to use the
screens that had better performances most recently. My screens are different
from yours and some require subscription services, so they will not be
disclosed here.
Short squeeze.
The short squeeze happens
when the stocks that have been over-sold by the shorters (Chapter 69: Fundamental
Metrics and Chapter 80: Selling Short). When the stock is over-sold (Chapter
115), those seeking a short position cannot find the extra shares lent to be
shorted and sometimes the shorters are forced to cover their shorts due to the
high expenses of shorting that stock (interests and dividends).
If the company is not heading
towards bankruptcy, any good news would also boost the stock price. This is the
typical situation, but it does not work all of the time with TSLA as recent
example as of 5/2013. However, I bet TSLA will fall again from its unjustified
high price of over $170 per share. Only time can tell.
Increase bets on stocks which have better appreciation potential
The confidence in my predictions for CSCO's future is so secure that I
have set aside four times my typical investment, and then 2 times for BSX and
STRZA. All scored high in my scoring system described in my other book Scoring
Stocks. I would never set aside more money for potential laggards!
Table 3: Score (using the score system in my book Scoring Stocks:
Avg. Score
|
Foreign Country
|
Insider Purchase
|
3.00
|
0
|
1
|
The average score of 9 stocks is
3 and it is the passing grade in my score system. Some of the stocks have not
been analyzed and hence they have not been scored as described before. The
stocks that have not been scored usually have good appreciation potential,
deeply-valued from first impression, and / or recommended by convincing
articles. The scoring system is a guide line and we do not have to follow it
religiously. The scoring system is based on my book Scoring Stocks (from
amazon.com).
There is not a single foreign
stock in this group. I usually do not trust the financial statements of the
smaller, foreign countries. The next chapter may convince you to skip most of
them at least for now or until it is proven otherwise.
Only one stock has meaningful insiders’
purchases (Chapter 69 and 73) out of 21. The data base is too small for any
conclusion. From my past data, Insiders’ Purchases with purchase prices close
to the market prices is a good predictor.
By Sectors
Table 4: Sectors:
Sector
|
Tech
|
Health Care, equip & drug
|
Consum goods
|
Finance
|
Retail
|
Misc.
|
No.
|
6
|
4
|
3
|
3
|
2
|
3
|
Ann.
|
77%
|
230%
|
102%
|
60%
|
57%
|
78%
|
Stock
|
CAMP CSCO,
CSCO, DGI,
MSFT
NSIT
|
BIIB,
BSX,
USNA,
ADES
|
ACAT,
ADM
DECK
|
C,FFCH,
BANR
|
OMX,
DLTR
|
CUZ,
STRZA,
EMN
|
Tech.
Technology companies are doing
fine but they are also included in the worst performers described in the next
chapter. I rate it a neutral. Just buy the tech companies with high scores and
good outlooks of the company and its sector.
Miners.
Miners are not doing well in this
period as described in the next chapter. Monitor this sector as they will
rotate back in when the economy improves with higher demands for industrial
ores. There is no miner in the winners’ circle. However, I have a few of good
performers in miners after this monitor (Chapter 34).
Health care, medical equipment
and drugs.
With the aging population, the
companies in health care, drugs (generic preferred), and medical equipment
should be doing great. It is the best performing sector.
The last 90-day performances of
ETFs (Chapter 85) are better predictors for the sectors.
Conclusion
The data base of 50 stocks is too
small to make any conclusion. However, this result is pretty compatible to the
previous monitor about 6 months ago and a large database (with about 200
stocks) that includes stocks that have been evaluated but not bought for a
year.
Personal performance monitor
I have more sophisticated ways
and better tools to monitor performance. Most of them require subscriptions
(though most of them are low cost), so it will not do the average reader any
good to describe them here.
1. Searches.
I have the name of the screens with their average returns. Currently I have
about 20 screens I use to search for stocks.
2. Evaluate
stocks. Each screened stock should be scored and the performance after 3 months
should be compared to S&P500 or its corresponding index such as tech stocks
to QQQ. The prediction accuracy of each fundamental metric is also checked
periodically.
In addition, I divide the data
base into short term (about 6 months) and long term (about 12 months). For
taxable accounts, you may want to use the results for buying stocks for the long
term to take advantage of the lower capital tax on long-term gains – check
current tax law.
Afterthoughts
·
Good sectors: My market prediction for 2013
(Chapter 53).
·
Health care sector. Click here
for a SA article.
·
We need to check how the portfolio performs when
the market goes down. The best performance is it beats the market in both
market directions. One day the market went down by .3% and my portfolio went up
by .7%. This is a very favorable outcome. However, it is better to compare it
monthly rather than daily.
Links
Selling short:
Short squeeze:
Over-sold:
130Monitor my big losses
This chapter is a repeat of the
last chapter except with my big losers. It is more important to learn from big
losers so we will not buy the potential losers if they fit into a certain
pattern. You may benefit more from my mistakes or what are identified to be not
working in the current market conditions.
The database
The database is smaller due to
the current rising market. Partly, it is due to my avoiding the potential
losers from previous monitors.
I delete the stocks which have
less than 25% loss. It only has 11 stocks from a total of about 50. A database
of 11 stocks is too small to draw any conclusion. However, the results are
compatible with previous results. In another words, they follow similar
patterns.
The results
As in the last chapter, the
results are summarized by the following four tables:
If the tables do not look good on
small screens, past the following link to your PC.
Table 1: Performance Summary.
No.
|
Avg. Return
|
Avg. Annualized
|
Avg. Holding period
|
11
|
-43%
|
-163%
|
223 days
|
From here on, annualized returns
will be used.
Table 2: Source of
the stocks:
Sources
|
Deeply
valued
|
Acquire candidates
|
Misc. screens
|
Short squeezed
|
No.
|
0
|
0
|
11
|
0
|
Annualized Return
|
-163%
|
|||
Stocks
|
BPI,NTE,
SIGA,SIM,
VELT,STEC,
IAG,
END,DEER,
CRUS,HXM
|
All the stocks here were from my
screens. It is time to evaluate the performances of the screens. I still find
the screens with better recent performances still perform better than the
average.
There is not a single stock from
the categories of web & publication, deeply-valued list, being acquired or
being short squeezed that we find in the last chapter. Table 3: Score (using the score system in my book Scoring Stocks):
Avg. Score
|
Foreign Country
|
Insider’s Purchase
|
1.86
|
6
|
0
|
Annualized
|
-216%
|
The average score is 1.86 (3 is a
passing grade defined in my book Scoring Stocks). Four (out of 11) stocks have
not been scored.
There is not a single stock with
meaningful insider purchase. I have encountered that the lowly-scored stocks
with meaningful insider purchase appreciate more than the average.
Unfortunately there is no such proof in this monitor.
There are too many foreign stocks
in this group (not a single foreign stock among the best performers as
described in the last chapter). I usually do not trust the financial statements
of the smaller, emerging countries. If I skipped these six stocks, I would have
saved a bundle. We cannot go back in time, but it is a strong guide for the
future. I do not know why I still bought foreign stocks as they did not perform
well in the last monitor.
Luckily I did not place double
bet on any of these losers.
Table 4: Sectors:
Sector
|
Tech
|
Miner
|
Health care,
equip and drug
|
Misc.
|
No.
|
4
|
3
|
1
|
2
|
Annual. Return
|
-128%
|
-131%
|
-34%
|
-734%
|
Stocks
|
NTE,VELT,
STEC,CRUS
|
SIM,IAG
END
|
SIGA
|
BPI,HXM
|
Miners are not doing well in this
period. Watch out for this sector as it
flows with the global economy. Most miners are foreign companies. I do trust
the financial data from Canada and Australia.
Technology companies are not doing
well. However, we have some technology companies included as the top performers
as described in the last chapter. The only difference is most of the losers are
smaller companies and some are foreign companies. I rate Tech a neutral. Buy
those tech companies with high scores and good outlooks.
Performance
The combined annualized return of
my big losers and big losers is 73%. It should be far higher as I placed
multiple bets on many winners (four times on CSCO and two times on BSX, DGI and
STRZA) and none for the losers.
The performance comparison should
be more meaningful if each individual annualized return is compared to that of
SPY or any market index for the same period.
Conclusion
The data base of 11 stocks is too
small to draw a conclusion. However, the conclusion of this monitor is very
similar to the one I did with the larger database of about 200 stocks (vs. 50
stocks this time) 6 months ago.
Combine the results of the two
chapters. My conclusions are:
1. The
stocks with high scores perform better than those with low scores on the
average. The scoring system described in my book Scoring Stocks works here.
2. Screens
(searches) are monitored separately with about a total of 200 stocks and from
about 20 screens. Buying candidates for being acquired has been profitable for
this year and 2003 (from my memory on 2003).
3. From
this monitor and previous, foreign companies including those companies listed
in the U.S. exchanges under perform the USA market. A lot of miners are foreign
companies and hence I do not want to skip foreign miners when the economy
returns.
4. Miners
do not perform this time. It could be due to the so-called sector rotation.
When the economy improves or this sector is recognized as being over-sold, most
industrial metals will return to the former prices.
5. The
better performances from sector health care, medical equipment, drugs… are
responding to the aging population.
6. My
previous monitors had identified that foreign companies did not perform on the
average. I still have several foreign companies this time. If I had omitted
them, the return of this portfolio should be far better. I need to follow my
recent results.
7. I
bet less on the risky companies (most were small companies and /or had low
scores) and bet more on better companies. It is profitable to bet on stocks
that have higher potential returns.
131 My predictions
Recently I read several books on
how several authors claiming their correct predictions on the housing bubble in
2007. I do not know whether it is before the fact or after the fact. At least
two from these authors made similar predictions on the bubbles of the stock
market after 2008.
So far they have either not
materialized or have been just wrong. If you followed them to move all the
stocks into cash, you have missed the biggest recovery of the stock market from
2009 to today (8-2013). The excessive printing of money boosts the stock market
as described in Non-Correction of the Market and the Economy (Chapter 51).
It taught us:
·
The correct prediction of one major event does
not mean his/her future predictions will be correct even with good arguments.
·
Even authors of best-seller books could be just
a one-trick pony. I was amused that at least two authors blamed other authors
of being one-trick pony. Tasting the same dose of medicine?
I had the best performance in
2009 and recovered most if not all of my loss in 2007. I was too conservative
after 2009. As of 7/2013, I would like to review which of my predictions are
right.
This chapter is for information
and education purposes. I have not spent enough time to evaluate every one of
my predictions. The primary purpose is:
·
With educated guesses, we should have more
rights than wrongs. A win percent of over 50% can make you a lot of money in
black jack.
·
Buying stocks or any investment is a prediction
for better profit potential. Hence, there is risk that the prediction will not
materialize.
·
Learn from good experiences and bad experiences.
However, ensure the lesson is not due to irrational market, luck and conditions
you cannot control.
·
Even with the best arguments, the prediction may
never materialize. Do not bet the farm on it.
·
Your action on prediction depends on your risk
tolerance.
Correct or close to
correct predictions
·
2000 market plunge.
Moved most my high tech sectors to traditional industries. Could be better to
move them to cash or contra ETFs (I believe they were not available in 2000).
·
2003. Moved back to
stocks for better profit in Early Recovery.
·
2009. Moved back to
stocks in Early Recovery. I had my best return in my largest taxable account by
dipping into my credit line (not recommended). Chapter 63.
·
2011. Predicted the
market close by end of year. Better than most predictions for that year.
Chapter 53.
·
2012. Predicted the
market close by end of year. Better than most predictions for that year. Chapter
53.
·
April, 2012
Correction. Chapter 60.
·
June, 2013
Correction. 6%, not the predicted 10%. Chapter 1 and 62.
·
Some stock winners
(more winners due to rising market and scoring system). Chapter 128.
·
Scoring System works
by beating the market for the test period. Chapter 128 and 129.
·
Abandon long term
bond and buy contra ETF to 20-year Treasury. Chapter 1.
Incorrect
predictions
·
2008 market plunge.
It was due to the false security
on huge profits from energy stocks. When the economy continued heading south in
2008, everything including my energy stocks plunged. The simple chart from the
chapter on Spotting Big Plunges should help. I did not use it as I had not
discovered and refined this simple technique. Chapter 49-50.
·
Correction on Q1
2013.
It could be due to the pumping of too
much money in the market by the government. As of 8/2013, my stocks perform
quite well. However, I’ve been keeping too much cash expecting a serious
correction. It is a case of winning the battles but losing a war.
·
Some stocks losers
(Chapter 130). They are quite mild compared to the number of my big gainers
(Chapter 129). I have not learned from my previous findings to avoid these
stocks.
Predictions
not determined now
.
·
2013 Market. Chapter 53.
·
Secular bull market
will start between 2017 and 2020. Chapter 47.
·
2013 Correction from
now (8/2013) to Nov. 1, 2013.
·
Interest rate
continues to rise at least to 1-2016.
·
Dividend stocks will
lose 10% from its peak by 6-2014. Chapter 96.
·
Recovery of commodities
by Nov. 2013. So far so good even before Nov. Chapter 34.
·
Secular bull market
will start between 2017 and 2010. Chapter 47.
·
TSLA will lose half
of the peak value in 2013 by the end of 2014. Same for ALU.
·
Recommended Apple at
390.50 on 5-2013 (Chapter 74).
The
prediction for all predictions
The chart in
Chapter 50 and 49 shows you how to follow the moving average to exit the market
and reenter the market. It works splendidly in the last two market plunges
(2000 and 2007). It will work for the future plunges. However, the charts may
not provide plenty of time to react as the last two; only time can tell. This
chart will pay back the cost of this book many, many times. However, if you do
not practice it and check the market periodically, it will not help you. At
least run the chart once a month and when the market is closer to a plunge, run
it every week.
Summary
It is not
important on how many times we have predicted right, but what we learn from our
good and bad predictions. Learn from our experience that would help us to make
better future predictions.
All our stock
trade decisions are based on predictions. Some will materialize and some will
not. Diversify your portfolio.
When someone
asks me to predict the market next month, my favorable answer is: Your crystal
ball is as good as mine.
132 Reviews
This
chapter reviews and summarizes important concepts in this book. I am a reader
too to remind me on the lessons. This book allows me to write down my ideas and
experiences. I review them and monitor
how many mistakes I still repeat in investing.
1. A mistake may not be a mistake, or a win may
not be a win.
Mistakes are repeated over and over again due
to not staying consistently with a solid strategy and letting our emotions to
influence our trading.
However, some ‘mistakes’ are not mistakes. I
have evaluated my past trading record to determine whether my money losing
episodes are real mistakes, just bad luck on uncontrollable circumstances or
bad financial data.
If it is a real mistake, write it down to
avoid repeating the same mistake. Often a trading mistake is worth more in
future successes than experiencing a one-time windfall. To illustrate, I bought
a small Chinese company that had excellent financial metrics, but it was all
fraud and I lost most of my money in the stock. After a while, I made the same
mistake again.
Cheat me once, shame on you. Cheat me twice, shame on me. I had that
shame.
It is the same for a win, but in reverse sense.
For those readers not having the large number (about 100 to 150) of
stocks as I do, draw your lessons by including stocks that have been evaluated
even they have not been bought.
Overnight my MOS turned from profit into loss
due to the collapse of the cartel in potash industry. It is an event we cannot
control, expect or will be repeated, so this loss is not a lesson to be
learned.
I read many analyst reports on companies.
First I have to ensure whether they’re written with hidden agenda. Second, I
check out whether they make sense. Some companies fell even after good analyst
reports. I reviewed them and sometimes I found their arguments were right.
Several times I bought more shares and they turned out to beat the market by a
good margin as a group. So it is only wrong timing initially.
We are human and we all make mistakes. We
should learn from our mistakes and reduce the chance to repeat them.
I am guilty of repeating same mistakes such as
buying foreign stocks that have been proven not profitable recently.
2. Spotting big plunges.
Market timing
does not always work. However, when it works more times than it does not, we
can benefit a lot in the long run. Chapter 50 provides a lot of hints to detect
big market plunges avoiding huge losses. Play defensive when the market is
risky. Monitor how risky is the market routinely and act accordingly. Set up a
schedule when to review market risk. In addition, understand market cycles
(Chapter 48).
Unless the
same strategy is over-used, the chart should work. It may not give us ample
time to react as the last two. Again, it depends on the data (the stock price),
so it will not detect the bottom and the peak precisely, but it will spare you
further losses and return in time when the long-term trend of the market is up.
3. Trade plan (Chapter 88).
First, identify your objective in
investing. Next, set up a simple trade plan to start, and then set up a
schedule, e.g. when to review market risk and when to trade. For casual
investors, it could be a quarterly task. Excessive (such as everyday) checking
our portfolios is a waste of time for most.
Following a trade plan consistently
forces you to be disciplined in investing. You should stick with the strategies
that have been proven and avoid the bad human nature such as greed, fears and
ignorance.
This book could be part of a trade plan
as a source for reference.
4. Match the ideas of this book to the current
market conditions and your personal objectives and risk tolerance.
The market
changes often and it is not always rational. Every one’s investing objective is
different. Even couch potatoes can benefit from this book by reading the
chapters selected in Introduction.
5. Risk
tolerance.
My objective is to make a decent
return at the least risk and conserving of what I have is more important. Be a
turtle investor who makes small but consistent profits. Many including many
smartest people make millions but lose it all. Avoid options, leverages and
margins. The exception is for well-off investors and / or during early
recovery.
Customize your investing strategy
depending on your risk tolerance. I describe mine here.
I am a retiree with enough money
to have a comfortable living and hopefully it will stay this way. My strategy
is conservative. However, life will be no fun if I just buy CDs and treasury
bills (so is losing money in reckless investing). I do not want to take any
risk for the sake of selling books or boosting my personal prestige. Here are
my three major accounts.
- Ultra conservative. I keep more cash in this account than the other two accounts. I do practice the strategy of ‘all in’ only in the Early Recovery stage of the market cycle. Most other time, I have cash, stocks with high values or sometimes some contra ETFs to lower my market risk.
- Swing accounts. Buy deeply-valued stocks, and replace them with growth stocks during the Up and Peak stages of the market cycle. I am conservative in the Peak stage of the market cycle with stop loss. The average holding period is 6 months and longer for consideration on long-term capital gain tax.
- Momentum accounts (most in Roth IRAs). See Chapter 106. However, switch at least some stocks to contra ETFs when the market is risky (temporary dips or the Bottom phase of the market cycle). The average holding period is one month.
6. Investing advice.
This is
described in Chapter 6-7 and19-20. Select the ones that are appropriate to your
needs.
7. Evaluate your requirements and apply what makes
sense.
Every one’s requirements are different and my investing
style may be different from yours. Write down your risk tolerance, your time available
for investing and your general knowledge (and your desire to learn investing).
Only apply those ideas that make sense and fit your requirements.
If you are a beginner in investing, learn from this book
and other basic books. Trade on paper. Buy stocks starting small. Believe in due
diligence. Luck in investing only works short term.
For the +intermediate investors, it is better to invest on
mutual funds and ETFs. Master market timing before selecting individual stocks.
8. Be politically neutral in making investment
decisions.
A political statement often offends a lot of folks. Do not
let political bias distort your investment decisions. When I made political
remarks on any party, I could be 100% right or 100% wrong to you according to
which party you belong to as elaborated in Chapter 41.
You do not have to be politically correct in making
investment decisions. In this book, I have reported my dislikes to both parties
and may offend many unintentionally such as politicians in both parties, union
members, investment professionals… They are not always right and you have to
decide what is right in making investment decisions.
Also do not let your bias cover your eyes in investing
except to be socially responsible. To illustrate, do not let your religious
belief to bar you from investing in stem cell technology. Do not buy your
company’s stock solely because you work there. Do not be overconfident as the
market is not always rational.
9. Trade effectively and monitor your trades.
Section 7 and 8 describe the basic trade issues. Use
Chapter 129 and 130 as examples to monitor your trade performance.
Do not commit the same mistake again. Do not buy any stock
without doing a thorough analysis. Be careful on hot tips and hot stocks from
the media.
10. Investing is multi discipline.
Investing requires knowledge in finance, accounting, economy,
psychology, probability, statistics, PC skills, politics and government… This
book touches many areas in basic terms.
11. Best
strategy.
The best strategy is not to lose big money. Refer to Chapter
50 on Spotting Big Plunges. Try to identify Early Recovery phase of the market
cycle (Chapter 48 and 63) and invest more aggressively in this phase.
In other phases of the market cycle, choose one of the
following strategies depending on your skill, time and risk tolerance.
1.
Conservative strategy. Remain more in cash all
the time except during Early Recovery phase.
2.
Less conservative. Buy Low and Sell High.
3.
More aggressive. Besides ‘Buy Low and Sell High’, add ‘Buy
High and Sell Higher’ to a small extend.
In any case, do not gamble the money you cannot afford to
lose and check how risky is the current market. Do not bet your farm in any
prediction even if you have a good record in predictions. One bad one could
wipe out your entire savings.
This book provides you with a lot of knowledge in
investing. However, you have to apply the ideas to the current market
conditions and practice them.
When
one strategy works consistently, stick with it. Limit your investing strategies
to a few (one is fine) depending on your time and your objective.
12. Be socially responsible.
This
book is my contribution to the marvelous country that allowed me to prosper and
lead a comfortable life (Chapter 17 and Chapter 5). Avoid defense companies,
tobacco companies, etc.
133 Chronology of a trade
This is a summary of the life of a trade as described
throughout the book. In a word, do your due diligence (same as do your
homework). It is a general summary. Modify the plan to fit your personal
requirements and risk tolerance.
·
Is the market favorable to buy?
o
Market timing. Early Recovery is the best time.
Chapter 48-50 and 55-56.
o
Even in a bear market, there are valued stocks
to buy.
·
Screen stocks to buy. Section IX and Chapter 104,
106 and 108.
o
Use screens and strategies that are successful
recently.
·
ETFs (Chapter 85). If you trade ETFs only, skip “Scoring
a stock” in the next step.
·
Analyze Stocks.
o
Sectors to avoid. Chapter 67.
o
Sector/Industry1 risk:
§
Rank sector (many subscription services have a current
rank for the sector/industry).
§
Sector metrics (e.g., average for debt/equity,
average P/E…).
§
Sector outlook.
o
Scoring a stock. Chapter 68-71, 82 and 114-116.
Refer to my other book Scoring Stocks.
o
Qualitative analysis. Chapter 72.
·
Buy a stock. Chapter 78.
·
Sell most stocks when the market is going to
plunge. Chapter 50 and 55-56.
·
Sell a stock. Chapter 75-79 and 87.
1 Companies are categorized into
sectors and sectors are further sub categorized into industries. For example,
bank is a sector and regional bank is an industry.
134 Good hints from a popular book?
I read a popular book on how to
make money. It works for the author, but most likely it will not work for you.
I have provided all the reasons here. It is similar to many books. A good book
should provide useful hints that you can use to cover your investment (your
time). Let me know (pow_tony@yahoo.com) how many hints you can find in my book.
·
The book has been read by tens of thousands.
From my book, when the strategy is over-used, it will not be effective. No
exception.
When you follow the same strategy to find stocks, most
likely you end up finding the same stocks as tens of thousands of his readers.
·
If you do not consider market timing (Chapter 48
and 50), you could lose half of your portfolio in a market crash.
·
Always diversify (Chapter 81). The stock market
is not always rational. Even a good stock could lose half of its value without
warning. If you have $50,000 or less, stay with 3 stocks in 3 different
sectors. Preferably, one stock is an ETF.
·
Basically it uses Buffett’s philosophy to pick
stocks. Some work, some do not work, and some are not available to the retail
investor (Chapter 2 and 3).
·
Today stocks are screened every day by many. I
bet you do not find stocks selling at 50% discount in an up market. If you do,
watch out. There could be reasons why they’re selling at these steep discounts.
We usually only find these discounts in the Early Recovery of a market cycle.
·
When you find value stocks with a huge margin of
safety, most likely they will not increase in value in a hurry. There is no free lunch in life.
I enjoyed reading that book. I did
find one or two good pointers and had included them in this book. There are
many similar books that will make the author wealthy but you. Again, use common
sense and read any book including mine with an open mind (Chapter 14).
I have similar experience reading
another book using technical analysis and rules from a popular subscription
service. Check out their portfolio of their top 50 stocks. It did not work for
a long while. However, as of this writing, it is working again.
The author of another book made
millions in a short time. However, he lost most of them. I practice the art of
a turtle investor. I included his valid points in investing in this book.
However, I have to stress on safety by using market timing and diversification.
There are many classic books that
may not work in today’s market conditions. I included most of their fine
teachings in this book. The problem of many classic books is they have one
theme and sometimes it is not worth it to spend days in reading a book to find
the few helpful hints.
135 A guru’s misadventure
The following happened to a guru
but most likely it happened to any investor. Bought a stock after a lot of
research and watched it plunging. Sold it and watched it soaring. It is an example
of worst market timing. I include it here to see whether this book has outlined
some hints. I review it as a good lesson to learn. The name and the dates were
not revealed to protect the innocent.
·
The stock is Bed and Bath.
I have mentioned retail (together with restaurant
sector) appeared to be easy businesses but actually very tough businesses. If
you kept track of the last 10 top retailers, you should find a very few still
standing. The rest are bankrupted, merged or acquired.
Actually Macy’s, the best of them, was rescued from
bankruptcy by the late R.R. Shaw (Hong Kong) when the two families are related
via a marriage. You’re better off to avoid this sector unless you have a good
reason such as Best Buy after its big plunge in 1/2014.
·
I do not agree with Peter Lynch’s method in finding
gems in a mall. Following Peter’s rule (the guru read the wrong book), the guru
shopped with his daughter and found it was a great business. Do not be confused
with a good place to shop and a good place to invest. If the shop gives stuffs
free, it may not be good for a potential investment.
·
Give one point for the guru in evaluating the
company thoroughly. I bet he did not evaluate the entry point via technical
analysis.
·
Before you buy a stock, you need to have an exit
strategy (unless you’re Bush in sending soldiers to Middle East): How much you
want to gain and how much you can afford to lose.
·
The stock is controlled by institution
investors. Sometimes they are not rational. When they exit at the same time
(indicated by the volume in the chart), you need to follow them (better to be
ahead of them but not quite possible). Without the above two actions, your loss
could turn into bigger and bigger loss.
·
The guru sold the stock when it rose a little
after many nights of lost sleep and his reputation was almost ruined. It was
controlled by his emotion, not by his reason to sell the stock.
·
The stock rose in prices and made big gains
recovering all his losses and eventually even more than he paid for. When the
P/E looks improving, you do not want to sell. When the ‘P’ is lower and the ‘E’
is the same, then the stock becomes higher valued.
In addition, one reason the stock was plunging was
Amazon.com. Bed and Bath does not compete with Amazon.com directly: Most of their
products are low-priced and you do not save much. Many are bulky to ship (such
as chairs and tables).
·
The other lesson is ‘Buy Low and Sell High’ is
better than ‘Buy High and Sell Higher’. The latter strategy is second best if
you follow the exit plan.
I learn a lot from this guru. It is a great real-life
example so I included it in this book. Give him credit so we learn and will not
repeat this common mistake hopefully.
Personally I do not have this kind of problem often. First
I diversify, so one bad loss will not cause me any sleep. Second, when I lose a
lot, I sold it and never looked back (except in Chapter 130).
On 1/16/2014, Best Buy was down
28% in one day after 160% gain in a year. It demonstrates:
·
Newton’s Law of Gravity or what goes up must
come down.
·
It is better to ‘Buy Low and Sell High’ than
‘Buy High and Sell Higher’.
·
Once more, retail is a tough business.
·
The virtue of diversification.
136 Our window to the investing world
This is a summary of the web sites described in this book
and the web sites you may want to refer to. Click on the sites and a brief
comment may be included. The paperback version of this chapter can be found in
the following link.
·
This book
and other sources of info
The books are very low priced compared to the values
you will receive. Do not be penny smart and pound foolish. Scoring Book and
Insider Trading should be your next books.
Use Wikipedia and Investopia to have more info on a specific topic such
as Covered Calls.
·
General
Understanding the news is fine but most likely you
will not profit directly from the news. Read the chapter on Headlines to
interpret the news and profit from it.
·
Evaluate
stocks
·
Charts
·
Screens
·
Besides
stocks
·
Vendors
Fidelity has extensive research and I feel they have
excellent executions in trades. Interactive Brokers is least expensive to trade
options and their interest rates are low. Merrill Lynch provides 30-commission
free trades per month for a deposit requirement in the bank; check their
current offer.
·
Economy.
·
Misc.
I prefer to use a spreadsheet to maintain my portfolio
instead of using Wikinvest or one of the many web sites that have this function.
My broker has done a good job in tracking the profit/loss and performance. I
use Yahoo!Finance to update the stock prices in my portfolio. This also helps
me to monitor the performances of individual fundamental metrics and the
screens I use. AARP is a good site for retirees. However, they are more
interested to sell you Medicare supplement insurance.
