For starters, just trade ETFs such as SPY (an
ETF simulating the market), and you can skip the rest of the book. It only
takes a few minutes every month. When the market is not plunging, buy or keep
SPY (or any ETF that stimulates the market); otherwise sell it. Do the opposite
when the market is recovering.
If you have less than $50,000 to invest, just
buy ETFs. Improve your investing skills by reading investment articles from
this book and your broker’s website. For example, Fidelity has a lot of
information for investors.
Subscription to AAII is recommended. When
your portfolio grows more than $50,000, invest on a subscription such as Value
Line, GuruFocus, Zacks or IBD (more for momentum traders). Initially, use the
information for paper trading on value stocks, which is usually available from
brokers.
For the long term, knowledge is most
important in your investing life and experience comes next. Retail investors
have a lot of advantages over fund managers. However, I advise you NOT to be a
trader. Hence, you should ignore the ‘fabulous’ trade systems that claim to be
very profitable. Statistically most amateur traders lose money as they cannot
compete with experienced, disciplined traders.
I recommend trading ETFs first and when the
market is not risky. The very basic terms such as ETF
are not fully explained here; try Investopedia for terms you need to know. Otherwise, this
book would be doubled in size and it would bore most readers. Investopedia,
your broker’s website (especially Fidelity) and AAII (requiring subscription)
provide many excellent articles. Alternatively, buy a book for beginners. Here
are some freebies:
Click here for
Morningstar classroom.
http://morningstar.com/cover/classroom.html
Click here for Vanguard.
https://investor.vanguard.com/investing/investor-education
Click here for Investopedia’s Tutorials.
http://www.investopedia.com/university/
Click here for Yahoo!
http://finance.yahoo.com/education/begin_investing
Click here for Fidelity
basic in investing.
https://www.fidelity.com/investment-guidance/investing-basics
1 Simplest
market timing
Why market timing
Before
2000, market timing was a waste of time. However, after that, we have had two
market plunges with the average loss of about 45%. It sounds harder to time the
market than it actually is. We have a simple technique to detect market plunges
and when to reenter the market. Our objective is reducing the loss to 25%.
Market
timing depends on charts; the following describes how to use chart information
without creating charts. Most charts will not identify the peaks and bottoms of
the market as they depend on data (i.e., the stock prices). However, it would
reduce further losses. It is simpler than it sounds. Just follow the procedure
below.
The first part of this
technique detects potential market plunges, and the second part advises you
when to start reentering the market. It applies to individual stocks too. It
also works to detect the trend of a sector (entering an ETF for the specific
sector instead of SPY) and a specific stock.
Step-by-step procedure
When the market timer
indicator (Death Cross) described next tells you to exit the market, sell SPY
(an ETF simulating S&P 500). Do not forget to buy back SPY or similar ETF
such as RSP, when the indicator (Golden Cross) tells you to return.
My experiences in
2000s
Basically I did the same
as the above with some adaptations. I worked for a mutual fund company and they
did not allow me to trade stocks effectively. However, I was allowed to trade
sector funds offered by the company. Every two months, I switched to the sectors
with the best performances for the last month. When most sectors were down for
the last month, I rotated them to the money market fund. In March or April,
2000, I switched to traditional sectors from high-tech sectors (better to
switch to market money funds). During that time, I bought stocks that had enough
cash to last more than two years judging by their burn rates. The indicators
should do a better job.
How
to detect market plunges without charts (similar to Death Cross)
1.
Bring up Finviz.com.
2.
Enter SPY (or any ETF that simulates the market)
or RSP, equally-weighted SPY.
3.
If SMA-200% is positive, it indicates that the
market plunge has not been detected and you can skip the following steps.
4.
The market is plunging if SMA-50% is more
negative than SMA-200%. To illustrate this condition, SMA-200% is -2% and
SMA-50% is -5%.
5.
Conservative investors should sell most stocks
starting with the riskiest ones first such as the ones with negative earnings,
high P/Es and/or high Debt/Equity. Obtain this info from Finviz.com by entering
the symbol of the stock you own.
6.
Aggressive investors should sell all stocks.
Extremely aggressive investors should sell all stocks, buy contra ETFs, and
even short stocks. I do not recommend beginners to be aggressive.
Example
As of 2/12/2022, the following are from Finviz.com.
|
ETF
|
SMA-200
|
SMA-50
|
SMA-20
|
Death Cross?
|
|
SPY
|
-0.8%
|
-4.2%
|
-1.7%
|
Yes (Step #4)
|
|
RSP
|
-0.5%
|
-1.9%
|
0.4%
|
Yes (Step #4)
|
Both ETFs indicate the market is a confirmed crash from my indications
using a technique similar to Death Cross. However, they are quite close, and we
should keep an eye on these numbers. In this case, SMA-20 has not been used. If
it is a false alarm, the Golden Cross would indicate it and you should return
to equity; it could be quite common in volatile markets. The futures indicate
that on Monday (2/14/22) the market would plunge further.
Another test is using SMA-350: When the current price is below SMA-300,
it is a crash. SMA-20 has to be more negative than SMA-50 and it has not been
used here.
When to return to the market (similar to Golden Cross)
Use
the above in a reversed sense to detect whether the market has been recovering.
However, when the SMA-200% turns positive, I would start buying value stocks
(low P/E but the ‘E’ has to be positive, and/or low Debt/Equity).
1.
Bring up Finviz.com.
2. Enter SPY (or any ETF that simulates the market).
3. If SMA-200% is negative, the market is not recovering,
and you can skip the following steps.
4. Sell all contra ETFs and close all shorts if you have
any.
5.
Market recovery
is confirmed when SMA-50% is more positive than SMA-200%. To illustrate this
condition, SMA-200% is 2% and SMA-50% is 5%. Commit a large percent of cash (or
all cash for aggressive investors) to stocks. If you do not know what to buy,
buy SPY or an ETF that simulates the market.
How often should
you check the market timing indicators?
Do the above once a month. When the SPY price is
closer to SMA actions percentage, perform the above once a week. The charts and
data for market timing described in this book are based on SMA-350 (Simple
Moving Average) that is more preferable than this simple procedure, but it
requires some simple charting.
Nothing is perfect
If the market timing is perfect, there would be no
poor folks. The major ‘defects’ are:
·
It does not
detect the peak / bottom as it depends on past data. However, it would save you
a lot during the crash.
·
It is hard to
determine whether it is a correction or a crash.
·
From 2000 to
2010, there was only one false signal. The indicator tells you to exit and then
tells you to reenter the market shortly. In most cases, you do not lose a lot.
After 2010, we have more false signals.
·
The market may
not be rational or may be influenced due to specific conditions such as
excessive printing of USD. If you do not mind charting, use SMA 350 (or 400)
using SPY. Buy when the price is above SMA-350 (or SMA-400), and sell
otherwise. SMA-400 reduces the number of false signals, but it is not nimble.
#Filler: Glad to be an investor
After
watching the following YouTube video, I am glad my parents did not push me to
play piano and also glad I do not have any musical gene. How can I compete with
this kid?
https://www.youtube.com/watch?v=yf0B4rVoq44
Also, glad not into some life-threatening
professions such as surgical doctors, soldiers, fire fighters, etc. I can make
mistakes in investing from time to time without suffering from the
consequences. With the uptrend market for most of the last 50 years, most
investors should make good money. Thank God.
Evaluate an ETF
ETFs are a basket of stocks according to the
market, a specific sector, country or a specific theme.
Yahoo!Finance used to give the P/E of an ETF.
Try to get it from ETFdb.com. Enter the symbol of the ETF such as XLU, and then select
Valuation. If it is below 15 and above zero, it could be a value ETF. Also, if
the current price is lower than its NAV, it is sold at a discount (or premium
vice versa). Compare its YTD Return to SPY’s.
Alternatively, get similar
info from http://www.multpl.com/. In
addition, this website provides the following metrics: Shiller P/E, Price/Sales,
and Price/Book.
From Finviz.com, enter the ETF symbol. If SMA-20%,
SMA-50% and SMA-200% are all positive, most likely the ETF is in an uptrend. To
illustrate, SMA-200 is Simple Moving Average for the last 200 trading sessions
(no trading on weekends and specific holidays). The percent is how much the
stock price of the ETF is above the SMA. If the percent is negative, it means
the stock price is below the SMA.
If your average holding period of your stocks
is about 50 days, SMA-50% is more appropriate to you.
If RSI(14) >
65, it is probably oversold; if it is < 30, it is probably under-sold
(indicating value).
In addition, ensure the ETF’s average volume
is high (I suggest more than 10,000 shares), the market cap is more than 300 M,
and it has low fees. Most popular ETFs have these characteristics. Beginners
should avoid leveraged ETFs.
How to determine if the sector has been recovered
It is easier to profit by following the uptrend
of an ETF using the above info. It is hard to detect when the bottom of an ETF
has been reached. If SMA-20%, SMA-50% and SMA-200% are all positive, most
likely the ETF is in an uptrend or it has recovered. It does not always happen
as predicted, so use stops to protect your investment.
An example
First, determine whether the market is risky.
Most beginners should not invest in a risky market. Advanced investors can bet
against the market or a specific sector by buying contra ETFs or puts.
Next, you want to limit the number of sector
ETFs by selecting those that are either in an uptrend or hitting bottom (bottom
is hard to predict). Personally, I prefer sectors with long-term uptrends (indicated by articles found in many websites
including cnnfn.com and Seeking Alpha.
For illustration purposes only for
deteriorating market conditions, I would select the following ETFs: SPY (simulating
the market based on large companies) and XLP (consumer staples). XLP should
perform better than XLY (consumer discretionary) during a recession as those
products are the necessities.
Technical indicators such as SMA-50 (Simple
Moving Average for the last 50 sessions), SMA-200 and RSI(14) are obtained from
Finviz.com and the rest are obtained from Yahoo!Finance.com. After you buy the
ETF, use a stop loss to protect your investment. For example, biotech sector
moved up for many months until it crashed in 2015. Change the stop loss value
every month to protect your gains in this case.
|
As of 2/5/2016
|
SPY
|
XLP
(staples)
|
XLY (discreet.)
|
|
Price
|
190
|
50
|
71
|
|
NAV
|
192
|
50
|
73
|
|
·
Technical
|
|
|
|
|
SMA-50
|
-4%
|
0%
|
-7%
|
|
SMA-200
|
-6%
|
2%
|
-7%
|
|
RSI(14)
|
44
|
50
|
36
|
|
Other
|
Double bottom at $186
|
|
|
|
·
Fundamental
|
|
|
|
|
P/E
|
17
|
20
|
19
|
|
Yield
|
2.1%
|
2.5%
|
1.5%
|
|
YTD return
|
-5%
|
0.5%
|
-5%
|
|
Net asset
|
174 B
|
9 B
|
10 B
|
|
|
|
|
|
Explanation
·
The figures may not be identical among websites
due to the dates they are using.
·
XLY has the best discount among the 3 ETFs as
most investors believe a recession is coming.
·
XLP has less down trend among the 3 ETFs as
expected.
·
XLY is more undersold among the three as
expected.
·
Double bottom is a technical pattern that
indicates the stock would surge upward.
·
SPY has a better value according to its P/E.
·
XLY’s dividend is the least among the three as
they have more tech companies in the ETF. They have to plow back the profits to
research and development.
·
XLP has the best YTD return among the three.
·
As long as the asset is above 500 M (200 M for
specialized ETFs), it is fine and all three pass this mark.
There are many metrics such as Debt/Equity
not readily available from most websites. Many sites list the top holdings of a
specific ETF. Just average the metrics of the top ten or so of its stock
holdings.
#Filler: Illogical
logic
If we do not test for the pandemic, we would
have zero increase in this pandemic. Some silly folks buy this argument. What
happens to the once-great country?
# Filler: The
problems of the U.S.
1. Our
political system. We waste time arguing between the two parties. There is no
long-term planning, as the other party could claim the credit. Same as
corporations' CEOs who care about their yearly bonuses.
2. The
politicians have to satisfy their voters. Today give them free cash by jacking
up the printing press. And ignore the long-term consequences.
3. We
have to protect our workers, our environment... Hence, we cannot compete with
many countries.
4. We
have spent too much on the military and ignore our crumbling infrastructure.
5.
Historically no country can rule the world
forever.
6. We
blame China, but ignore how hard-working Chinese are.
This example
evaluates RING, a gold miner, using ETFdb and Finviz that are free from the
web. The data is from July, 6, 2020.
Bring up ETFdb
and enter RING in the search. There is basic info that are important to me:
Sector (gold miners), Asset Size (Large-Cap), Issuer (iShares), Inception (Jan.
31, 2012), Expense Ratio (0.39%) and Tax Form (1099).
They fit all
my requirements. The expense ratio is higher than most ETFs that simulate an
index such as SPY. I try to trade ETFs using Tax Form 1099 in my taxable
accounts. The large cap created about 8 years ago by a reputable company is
good.
Select
“Dividend and Valuation”. P/E of 17.39 is fine in a rank of 11 in 27 in a similar
group of ETFs. As in my books, I stated it is hard to evaluate miners. I buy
this ETF primarily to fight the possibility of inflation and the potential
depreciation of USD. The dividend rate of 0.52% (0.70% from Finviz) is in the
low range of the scale; it is fine for me as dividend is not my concern.
There is more
info from this website. For simplicity, bring up Finviz:
·
The short-term
trend is up (SMA-20% = 8% and SMA-50% = 7%).
·
The long-term
trend is up (SMA-200% = 26%).
·
It is close to
overbought (RSI(14) = 64%; 65% to me is overbought).
·
It is -4% from
52-w High. It has performed well from the YTD, Last Year, Last Quarter, Last
Month and Last Week.
·
It almost doubled
in price from mid-March this year.
·
Avg. Vol. is
fine.
From ETFdb,
check the Holding. It has 39 stocks, so it is quite diversified for this industry.
The two top holdings are NEM (19%) and ABX (18%), which is listed as GOLD in
NYSX. I also consider buying these two stocks in addition to RING. You can
estimate the other metrics that are not available by averaging these two
stocks. Here is my summary:
|
STOCK
|
NEM
|
GOLD
|
|
Forward P/E
|
20
|
25
|
|
Debt / Share
|
0.31
|
0.24
|
|
ROE
|
17%
|
22%
|
|
Sales Q/Q
|
43%
|
30%
|
|
EPS Q/Q
|
389%
|
254%
|
|
SMA50
|
2%
|
4%
|
|
RSI(14)
|
59%
|
60%
|
|
Insider Trans
|
-13%
|
N/A
|
|
Fidelity’s Equity Summary Score
|
6.1
|
6.8
|
3 Rotate
four ETFs
We can beat the market by rotating one ETF
that represents the market such as SPY and cash via market timing. Aggressive
investors can add SH or PSQ (contra ETFs) to the four to have better returns
during market plunges.
During a market uptrend, rotating the
following four ETFs could be more profitable than staying with SPY (or any ETF
that simulates the market). Be warned that a short-term capital gain in taxable
accounts is not treated as favorably as the long-term capital gain; check
current tax laws.
The allocation percentages depend on your
individual risk tolerance. You can use indexed mutual funds. Compare their
expenses and restrictions. Some mutual funds charge you if you withdraw within
a specific time period.
Select the best performer of last month (from
Seeking Alpha, cnnFn, or one of many ETF/mutual fund sites). Add a contra ETF
such as SH to take advantage of a falling market for more aggressive
investors. Add sector ETFs to the
described four ETFs such as XLY, XLP, XLE, XLF, XLU, IYW, XHB, IYM, OIL and XLU
to expand your selection.
|
ETFs
|
Money
Market
|
U.S.
|
International
|
Bond
|
|
Fidelity
|
|
Spartan Total Market
|
Spartan
Global
Market
|
Spartan US
Bond
|
|
Vanguard
|
|
Total
Stock Market
|
Total
International
Market
|
Total Bond
Market
|
|
My choice
|
Fidelity
|
SPY
|
Vanguard
|
Fidelity
|
|
|
|
|
|
|
|
Suggest %
|
|
|
|
|
|
During
Market plunge
|
90%
|
0%
|
0%
|
10%
|
|
After
plunge
|
10%
|
60%
|
20%
|
10%
|
Explanation
·
The above are
suggestions only. If your broker offers similar ETFs, consider using them.
·
Check out any
restrictions of the ETFs and commissions.
·
4 ETFs (one
actually is a money market fund) are enough for most starters. They are
diversified, low-cost and you do not need rebalancing except during a market
plunge.
·
The percentages
are suggestions only. If you are less risk tolerant, allocate more to a money
market fund, CD and/or bond ETF.
·
Have at least 10%
allocated to the money market fund for safety.
·
When the market
is risky, reduce stock equities (i.e., increase money market and bond
allocations).
·
The symbols for
Fidelity ETFs are FSTMX, FSGDX and FBIDX.
·
The symbols for
Vanguard ETFs are VTSMX, VGTSX and VBMFX.
·
If you are more
advanced, use additional sector ETFs to rotate. Also buy long-term bond funds
(such as 30-year Treasury) when the interest rate is 10% or more.
#Filler: Where common sense is not common sense
Excessive printing of money is not a
long-term solution. Servicing the huge debt weakens our competitiveness. The
politicians just want to buy votes today and finance their campaigns. Our next
generations have to pay for these huge debts.
#Filler: Cayman Island
Most global corporations are making fun of
our tax system. Moving the "headquarter" to low-tax countries such as
Cayman Island with a mailbox, a bank account and/or an office that has never
been used is a norm. The profitable Boeing has negative tax liability. What a
shame!
4 Simplest
ways to evaluate stocks
Beginners should trade ETFs only. This
chapter is for the readers who are ready or getting ready to trade stocks. In
general, ETFs are diversified, less volatile than trading stocks. However,
stocks offer higher profit but higher risk.
Many stock researches have already been done
recently and some are available free of charge. I have no affiliation with
Fidelity except I retired from it. You can open an account with them with no
balance. Their Equity Summary Score is one of the best indicators; I check out value stocks with scores higher than 8.
Concentrate on fundamental metrics such as P/E for long-term holds, and
momentum metrics for short-term holds. Add criteria to limit the number of
screened stocks. Finviz.com is a free screener.
Several sources
The popular ones are Morningstar, Value Line,
The Street and Zacks (currently free for rankings of individual stocks). If
they are not free, check out whether they are available from your local
library. I have 3 simple ways to evaluate stocks starting with the simplest. In
addition, read the articles on the selected stocks from Fidelity, Finviz,
Seeking Alpha and many other sources for further evaluation.
Fidelity
Select only stocks that have Fidelity’s
Equity Summary Score 8 or higher. There are tons of information about a stock.
Once in a while I did not agree with this score such as SHOP and ZM that scored
high in August, 2020. Include the following for your analysis.
A
modified stock selection based on a magazine article
Most metrics are available from Finviz except
EV/EBITDA.
1. Forward
P/E (expected earnings and not based on the last twelve months). It should
range from 5 to 15 (10 to 25 for high tech stocks). EV/EBITDA (from Yahoo!Finance) is a better choice as
it includes the debts and cash than P/E; it would be more effective if it uses
forward earnings. If you do not use EV/EBITDA, ensure Debt/Equity is less than
0.5 except for the debt-intensive industries.
2. ROE
(Return of Equity) measures how well the company uses the capital. I prefer
stocks with ROE greater than 5%.
3. Volatility.
Conservative investors should select stocks with a beta of less than one (i.e.,
less volatile).
4. Insider
Transactions for sales (i.e., negative) should be less than 5%. If it is -5%,
most likely the insiders are dumping it.
5. Compare
the metrics such as P/E and Debt/Equity to its five-year average and its
competitors (available in Fidelity).
6. Momentum.
Check out the SMA-50 (actually SMA-50%) and SMA-200. Ideally, they should be
positive. SMA-50% is especially important for stocks you do not want to keep
for a long time.
7. Check
out articles on the stock as some recent events (for example a new lawsuit)
have not been included in the metrics.
8. Compare
the trend of the sector this stock is in. Under Finviz, enter the related
sector ETF.
Summary
The sources are Fidelity (Equity Summary
Score and various comparisons), Finviz and Yahoo!Finance (for EV/EBITDA). Value
stocks should be held longer.
|
Category
|
Score / Metric
|
Value /Momentum
|
|
Score
|
Fidelity’s Equity Summary Score
|
Both
|
|
|
|
|
|
Value
|
EV/EBITDA
|
Value
|
|
|
P/E cheaper compared to 5-year avg.
|
Value
|
|
|
P/E cheaper compared to its sector.
|
Value
|
|
|
Insider Purchases
|
Both
|
|
|
|
|
|
Safety
|
Debt/Equity
|
Value
|
|
|
Compare it to its sector.
|
Value
|
|
|
|
|
|
Momentum
|
50-SMA%
|
Momentum
|
|
|
200-SMA% (for long term holds).
|
Value
|
|
|
|
|
|
Articles
|
Check out latest events
|
Both
|
|
|
|
|
|
Market
|
No purchase if market is risky.
|
Momentum
|
A
simple scoring system using Finviz
Bring up Finviz.com and then enter the stock symbol.
|
No.
|
Metric
|
Good
|
Bad
|
Score
|
|
1
|
Forward P/E1
|
Between 2.5 and 12.5, Score
= 2
|
> 50 or < 0, Score = -1
|
|
|
2
|
P/ FCF1
|
< 12,
Score = 1
|
>30 or < 0,
Score = -1
|
|
|
3
|
P/S1
|
< 0.8,
Score = 1
|
< 0,
Score = -1
|
|
|
4
|
P/ B1
|
< 1, Score = 1
|
< 0,
Score = -1
|
|
|
|
Compare quarter to quarter of last year
|
|
|
|
|
5
|
Sales Q/Q
|
> 15%,
Score = 1
|
< 0,
Score = -1
|
|
|
6
|
EPS Q/Q
|
> 20% ,
Score = 1
|
< 0,
Score = -1
|
|
|
|
|
|
|
|
|
|
|
|
Grand Score
|
|
|
|
Stock Symbol
Date2
|
Current Price
|
SPY
|
|
Footnote
1
Negative
values for Sales (due to accounting adjustments), Equity and Book are possible
but not likely.
2
The last
row is for your information only. SPY is used to measure whether it will beat
the market by comparing the return of this stock to the return of SPY.
The Score
Score each metric and sum up all the scores
giving the Grand Score. If the Grand Score is 3, the stock passes this scoring
system. Even if it is a 2, it still deserves further analysis if you have time.
You may want to add scores from other vendors. To illustrate on using Fidelity,
add 1 to the score if Fidelity’s Equity Summary score is 8 or higher. Monitor
the performance after every 6 months or so to see whether this scoring system
beats the market.
Very
basic advice for beginners
Beginners should stick with U.S. stocks with
Market Cap greater than 800 M (million), Debt/Equity less than .25 (25%) except
for debt-intensive industries such as utilities and airlines and Forward P/E
between 5 to 20 (25 for high-tech companies). These metrics are all available
from Finviz.com, which is free.
Do not have more than 20% of your portfolio
in one stock (unless it is an ETF or mutual fund) and do not have more than 30%
of your portfolio in one sector.
For more conservative investors, buy
non-volatile stocks whose beta (available from Yahoo!Finance) is less than 1.
Beta of 1 represents the market (the S&P 500 index). For example, a stock
with beta 1.5 statistically fluctuates more than 50% of the market and hence it
is very volatile.
Try paper trading to check out your strategy
and your skill in trading stocks. If your broker does not provide one, use a
spreadsheet to record your trades or check the availability of simulator.investopedia.com.
#Filler: Silence is golden
I am
glad I did not give advice to a friend who had to decide whether to take a lump
sum payment or an annuity. The correction in March, 2020 would wipe out a lot
of his portfolio if he took the lump sum payment. No one would share his
profits when the predictions are correct, but the blame if it does not
materialize.
It is the same in investing that nothing is
certain. With educated guesses, we should have more rights than wrongs especially
in the long run.
When the stock, the sector that the stock is
in and the market are all above its SMA-N averages (Single Moving Average for
the last N sessions), most likely the stock is trending up.
1. Bring
up Finviz.com from your browser.
2. Enter
SPY. Write down the SMA-200 (Single Moving Average for 200 sessions). Positive numbers
indicate that the trend for the market is up.
However, the market could be peaking or overbought. Be careful
when SMA-200 is over 5% and / or RSI(14) is
over 65%. RSI is a metric on overbought / underbought.
3. Enter
the sector ETF the stock is in. Write down the SMA-50. Positive numbers
indicate that trend for the sector is up.
However, the sector could be peaking or overbought. Be careful
when the SMA-200 is over 10% and / or RSI(14) is over 65%.
4. Enter
the stock symbol. If your average holding period of the stocks is 200, use
SMA-200 and so on. I recommend SMA-200 for holding value stocks long term and
SMA-50 for momentum stocks. Write down the SMA-N for your stock. Positive
numbers indicate that the trend is up.
However, the stock could be peaking or overbought. Be careful
when the SMA-200 (or SMA-50) is over 25% and / or RSI(14) is over 65%.
If the above three criteria and the
fundamental criteria are satisfied, most likely it is a good buy. If you buy
sector ETFs or mutual funds only, you can skip step #4. In any case, use stop
loss to protect your investment.
#Filler: The Ten Commandments
of Investing.
http://www.investopedia.com/articles/basics/07/10commandments.asp
·
Set goals. *
Personal finances in order. * Ask questions. * Do not follow the herd. * Due
diligence. * Be humble. * Be patient. * Be moderate. * No unnecessary churning.
* Be safe. * Do not follow blindly.
·
My additions: *
Diversify. * Study market timing. * Protect your losses and profits. * Monitor
your screens and your metrics. * Be emotionally detached from investments. *
Learn from mistakes. * Stay away from bubbles. * Be socially responsible.
The
best-kept secret in investing is to buy a weighted ETF. I use SPY as an example
here. This ETF is well diversified as it keeps all 500 stocks in the S&P
500 index. The ETF has a higher position (in percentage) on stocks with higher
market cap. The stocks with higher
market caps usually grow the market cap by having good management and good products.
The bad stocks are deleted from the index periodically.
The
second best-kept secret is using simple market timing as described in this book
to reduce the losses in market crashes.
It is
very hard to beat this strategy. You do not need any knowledge in investing,
and you only spend a few minutes every month to time the market. The market is
risky when the metrics show you so such as the price is close to the simple
moving average in using SMA-350 method; in this case you time the market more
frequently.
·
Do not use leverage: options, margin and leveraged ETFs.
·
Do not short stocks.
·
Buy low and sell high.
·
Buy value stocks. Sell profitable stocks after a
year and losers before holding 12 months for favorable tax treatments in non-retirement
accounts. Be a turtle investor.
·
Limit momentum trades.
·
Use stops to protect your portfolio.
·
Do not follow ‘experts’ blindly (most have their
own agenda).
·
Do not trade penny stocks (i.e., stocks less
than 200 M and/or price less than $1 to my definitions).
·
Venture into momentum trading when you have
knowledge and time. Avoid trading systems that are available.
·
Do not day trade. Most beginners lose most of
their money.
·
Do not take classes / seminars that promise you
big money - if it works, they will give out their secrets.
·
Be selective on investing subscriptions. If they
give you a handful of stocks to thousands of subscribers, most likely the
actual performance will not be good. Check their past performances that use
real money.
·
Beginners (even some experts) miss many
opportunities by only buying blue chips and/or the companies they know.
·
Do not buy stocks making new lows, as there
could be another bottom.
·
Buy stocks on their way up, especially when the
market is in an uptrend with low inflation and low interest rates.
The following improves the odds of success
but there is no guarantee.
Risky Market?
Bring up Finviz.com. Enter SPY. If both
SMA-50% and SMA-200% are both negative, do not invest especially when SMA-50%
is more negative than SMA-200%.
Evaluate value stocks from others’ researches
Gather a list of stocks from screens and/or
recommendations from magazines. Use researches that are free. Value stocks
should be kept for at least 6 months. In six months or so, evaluate the bought
stocks again to see whether you want to sell the stocks. Some other sites may
provide free trial or one-time evaluation: IBD, GuruFocus, Zacks and
Morningstar. Fidelity requires an account but there is no minimum position.
|
Name
|
Pass Grade
|
Link
|
|
Fidelity’s Equity Summary Score
|
>=8
|
|
|
Value Line2
|
Timeliness > Average
|
|
|
|
Proj. 3-5 yr.% > 5%
|
|
|
VectorVest1
|
VST > 1 and RV > 1
|
Link
|
|
|
|
|
1
Should be available from your local
library.
2
Free for limited number of stocks and
free trial.
Evaluate stocks
Bring up Finviz.com
and enter the stock symbol.
|
Metric
|
Passing Grade
|
|
Forward P/E
|
Between 5 and 20 (25 for tech stocks)
|
|
P/FCF
|
< 15 and ratio is positive
|
|
Sales Q/Q
|
>10
|
|
EPS Q/Q
|
>15
|
Intangible Analysis
Bring up Finviz, Fidelity, Yahoo!Finance or
Seeking Alpha (fewer articles now) and enter the stock symbol. To prevent
manipulation, the stocks should have larger cap (> 200 M) and higher daily
average volume (> 10,000 shares).
You have better things to do than investing
or you do not have the time, the desire to learn and/or expertise in investing.
You should be better off to buy ETFs.
I recommend the following 4 ETFs. If you have
$100,000 to invest, buy $25,000 for each recommended ETF. Consult your
financial advisor before taking any action. The recommended ETFs should have a
large market cap (the ETFs themselves and not the stocks they hold) and have a
high volume.
Most returns started on July 1 and ended on
July 1 the following year; this article is written on July 20, 2021. All are
annualized returns for easy comparison. Fees, commissions and dividends have
not been included; you can add the dividend yield and prorate it for YTD
return.
|
Symbol
|
Name
|
YTD1 Return
|
1 Year2
|
5 Years3
|
Bear4
|
|
IWF
|
Russel 1000G
|
30%
|
34%
|
40%
|
-33%
|
|
QQQ
|
QQQ
|
30%
|
46%
|
42%
|
-31%
|
|
VTI
|
Vang. Viper Tot
|
34%
|
22%
|
42%
|
-35%
|
|
VUG
|
Vang. Growth
|
37%
|
33%
|
41%
|
-32%
|
|
|
|
|
|
|
|
|
Avg.
|
|
31%
|
34%
|
41%
|
-33%
|
|
SPY5
|
|
34%
|
21%
|
39%
|
-35%
|
|
Beat6
|
|
-9%
|
60%
|
6%
|
7%
|
1 The start date is 1/4/2021 and
the end date is 7/1/2021.
2 The start date is 7/1/2020 and
the end date is 7/1/2021.
3 The start date is 7/1/2016 and
the end date is 7/1/2021.
4 The start date is 1/2/2008 and
the end date is 4/1/2009. My estimates.
5 SPY is the ETF for the S&P
500 index. It is used as a yardstick.
6 = (Avg. – SPY) / SPY. Again, it
does not include fees, commissions and dividends.
Comments:
·
The YTD is the only period that this portfolio
does not beat SPY (the market to many). It could mean the market could be
changing the favorite from growth stocks to value stocks. However, 31% return
is far above the average of the market.
·
The one-year return beats the market by 60%.
·
The 5-year return beats SPY only by 6%, but the
return of 41% is nothing to sneeze at.
·
All except Vanguard’s Viper Total are ETFs for
growth stocks. Hence, I expected it would not beat the market, but it still did
by 7%.
·
You can time the market using the techniques
described in this book as often as you can. When the indicator tells you to
exit, you can sell these ETFs and reenter the market when it recovers. Riskier
investors can buy contra ETFs such as PSQ and SH instead of holding cash when
the market is down.
·
At least once in a year review the selection.
Use ETFdb.com for information. If you do not have time, it is fine skipping the
review. When you switch ETFs, taxes should be considered.
·
Most ETFs replace some stocks periodically to
ensure better appreciation potential.
It is a suggested sample. You need to tailor
it to fit your personal requirements and your risk tolerance. In general, you should have an emergency fund
for at least 3 months (6 months preferred). Many of our generation have one or
even no layoff. However, I estimate the current generation will have 3 layoffs
in their work life. It is due to automation, artificial intelligence, global
economy, etc.
The rough estimate of stock holding in
distribution between stock and bond is equal to 100 – Your Age. To illustrate
in the following three portfolios, I use a 30-year-old, and hence he should
have 70% in stocks and 30% in bonds (including gold, CDs and cash).
In addition, some sectors are better than
others according to the market conditions. The following three portfolios are
for regular, todays’ market and one during a market crash. I use low-cost ETFs
exclusively. ETF is exchange-traded funds. They are traded similar to stocks, but
most are more diversified; their fees are usually lower than mutual funds.
|
ETF
|
Normal
|
Today
(2/2021)
|
Crashing5
|
|
SPY1
|
40%
|
30%
|
0%
|
|
QQQ2
|
5%
|
10%
|
0%
|
|
ARKK2
|
5%
|
0%
|
0%
|
|
VTIAX3
|
20%
|
5%
|
0%
|
|
LQD3
|
15%
|
20%
|
5%
|
|
GLD
|
5%
|
15%
|
15%
|
|
CD
|
5%
|
0%
|
0%
|
|
Cash
|
5%
|
20%
|
60%6
|
|
SH4
|
0%
|
0%
|
5%
|
|
PSQ4
|
0%
|
0%
|
15%
|
1 VOO is a low-fee alternative for
SPY.
2 QQQ has more tech stocks, while
ARKK is an actively managed ETF specializing in ‘disruptive technologies’.
During market crashes, avoid them, esp. ARKK.
3 VTIAX is an ETF for global companies.
LQD is an ETF for corporate bonds.
4 SH and PSQ are contra ETF to SPY
and QQQ. They are shorting the corresponding index. When the market is
recovering, switch them back to SPY and QQQ.
5 Need to balance the allocations
about two times a year as ETFs can grow or shrink. When the market crashes,
rebalance it right away. All markets will crash, and the last two (2000 and
2008) have an average loss of about 45%. Refer to the chapter “Simplest
marketing timing”.
6 Today’s low interest rate does
not benefit us for CDs. I would leave the cash not invested and wait for the
recovery to move back to stocks.
Of course, everyone’s situation is different.
If you are conservative, do not buy SH and PSQ. If you are afraid of inflation
(especially due to the excessive printing of money), allocate more on GLD, a
gold ETF.
Do not listen to financial news. They are
used by institutional investors / analysts to manipulate the market. Many times
they act the opposite from what they preach. This is the primary reason retail
investors do not do better. With the GameStop incident, do not invest in most
hedge funds. Buffett has proved the hedge funds with their high fees cannot buy
an indexed ETF such as SPY.
The above is my
recommendation. In the long run, it should work fine. Consult your financial
advisor before taking actions. If you have more time, time the market as
described (Death Cross and Golden Cross). If you are interested in investing,
study the more sophisticated techniques described in my book “Art of Investing
2nd Edition”.
#Filler: Simple measures to reduce net
security.
Do not click any links from unknown sources.
Some seem to be ok but not.
MalwareBytes, for checking viruses, is free
for download (they do not pay me). Personally, I use a Chromebook for my
financial transactions and a two-factor login for my stock trading.
#Filler
“How to make a 50% return”
https://www.youtube.com/watch?v=eEto5nEkf1Y
#Filler Buffett, the
person.
https://www.youtube.com/watch?v=w-eX4sZi-Zs
