Saturday, January 25, 2014

CV: Review




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

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.

  1. 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.

  1. 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.

  1. 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.



Nolo (estate planning) / AARP /

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.

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