How to Be a Successful Investor

How to Be a Successful Investor: Strategies to Help You Tame the Bear & Ride the Bull!

Book by William Cai

While investing is easy, successful investing is tough.

Excerpt from page2-3

Through my portfolio management experience, the most important rule for successful investing is to first learn how not to lose money — i.e. one has to learn to survive first. This is also what many investment gurus have constantly preached. I learnt that profits take care of themselves but losses never do. Investors should learn how easily they can be 'killed' in the stock market, and should develop strategies to survive before risking their hard-earned money. 

My experience has also made me realise how most investors suffer great losses and would probably continue to do so because of three reasons. Firstly, they are not really aware of the causes of huge losses. Very often, they have an investment advisor to blame, who in turn blames the bear market and the inability of the investors to stomach risk and "think long term". As a result, they get hit again and again whenever the stock market crashes. 

Secondly, many investors and financial advisors alike subscribe to the "buy and hold" advice when it should have been "buy and hold until fundamental changes". When they lack the knowledge to make the right investment decision, it is often more convenient to stick to the buy-and-hold concept. They ignore the fact that fundamentals do change and they become sitting ducks, losing money in the end. Perhaps their fundamental views are wrong in the first place. Instead of taking action to limit the damage, it is easier to be in denial and chant the "buy and hold" mantra. 

Thirdly, many investors do not have a stop-loss policy in place. When things go wrong, many freeze up like a deer caught in headlights and end up getting run over. When a 10% loss occurs, it is allowed to widen to 30% and more until it becomes too late for investors to react. That is precisely how investors get 'killed' and become "long-term investors" unwittingly. 

Lastly, most investors rely on tips do not know how to make actual buy or sell decisions to avoid bear markets and ride bull markets. They get confused by the different advice and headlines from the media.

If you have been an unsuccessful investor in the past, you need to change in the way you think and invest.

Nothing will change until we change in the way we think.

Successful investing takes discipline, consistency, hard work and it can get quite boring.

Chapter 8:  THE PSYCHOLOGY OF THE MARKET 

Bull markets are born on pessimism, "grown on scepticism, mature on optimism, and die on euphoria." 

~ Sir John Templeton 

An investment strategist friend once said, "Human beings are naturally programmed to lose money." I found his statement hilariously true as most investors are often willing to invest only after they feel `safe', which is often the worst time. Ironically, it is hard for investors to make a bold decision to invest when I see the opportunities, as it is always during a time when it feels wrong to invest. That is why most investors do not make money from the stock market. They invest at a market peak and bail out at a market bottom, only to repeat this losing process. 

To be successful investors, we often have to act against our human nature. We must look to exit the market when we feel the safest and invest when our guts chum at the idea. Other than all the methods shared in this chapter, it is important that investors understand the psychology of the market, as investors themselves will be the biggest enemy of their investment success. 

Head for financial freedom the barefoot way

Published
Feb 5, 2017, 5:00 am SGT

Lorna Tan
Invest Editor/Senior Correspondent


THE BAREFOOT INVESTOR

By Scott Pape

Wiley/Paperback/ 264 pages/$31.95
Available at major bookstores


WHAT'S THE BOOK ABOUT?

The Barefoot Investor


In The Barefoot Investor, Scott Pape provides nine "barefoot" steps to help you achieve financial freedom.

Written in a reader-friendly manner and peppered with interesting anecdotes of real-life people, the money management book is about getting a plan in place so that you can devote the best years of your life to the things that give you meaning and purpose.

An international bestseller, the book was first published in 2004 and has been extensively updated. This is its latest edition, printed in November last year.

Pape himself had lost his Australian home in a bush fire in 2014. In this book, he recounted what he did next to get back on his feet.

He went as far as providing scripts on how to converse with finance providers to negotiate and get a better deal on your debts and fees.

The steps in the book serve as a guide on how to pay off your mortgage and debts, and build a financially secure life. And you do not need a huge salary to achieve it. After all, it is not how much you earn but how much you save.

SEVEN KEY TAKEAWAYS

1. Just like any life goal, being financially free requires a strong commitment. Pape wants his readers to make a commitment to becoming a little wealthier each day.

2. Start a financial plan by dividing your income into three buckets - "blow" (expenses and some splurge money), "mojo" (safety money) and "grow" (long-term wealth). Put your money on autopilot by channelling your income into these accounts automatically. Pape recommends opening the "mojo" account with $2,000.

3. Go for cheaper investment funds with low fees, and sort out your insurance by determining your need for coverage and compare costs among insurers.

4. Regain control of your life by paying off your debts. This is where you can use your spare money into eliminating debts fast. His advice is to use debit and not credit cards.

5. It is generally cheaper to rent a home instead of owning one. But remember to save and invest the difference.

6. The book offers tips on buying a home, such as the importance of saving the 20 per cent deposit and checking on availability of government grants. The book's advice is to borrow less than what the bank will lend you. The repayments should generally be less than 30 per cent of your take-home pay, it says. And if you are planning on having kids in the next five years, factor in the drop in income and the rise in costs.

7. Buying an investment property is not the only way to make money in property. You can also buy property shares.

•Write in to lornatan@sph.com.sg if you have come across a good financial read. This will be a series of regular book reviews in Invest.

Stock Market Rules

by MICHAEL D. SHEIMO

01: Sell the Losers and Let the Winners Run
02: Make Winners Win Big
03: Losers Demand Careful Strategy
04: It Is Better to Average Up Than to Average Down
05: Good Companies Buy Their Own Stock
06: Price Doubling Is Easy at Low Prices
07: Look for Insider Trading
08: Buy Low, Sell High
09: Buy High, Sell Higher
10: Buy on the Rumor, Sell on the News
11: Sell High, Buy Low
12: The Perfect Hedge Is Short against the Box
13: Never Short a Dull Market
14: Never Short the Trend
15: Never Buy a Stock Because It Has a Low Price
16: Beware the "Penny Stock"
17: Give Stop Orders Wiggle Room
18: Buy the Stock That Splits
19: Institutions Show Where the Action Is Now
20: Avoid Heavy Positions in Thinly Traded Stocks
21: There Are at Least Two Sides to a Story
22: Follow a Few Stocks Well
23: Be Wary of Stock Ideas from a Neighbor
24: Get Information before You Invest, Not After
25: Never Fight the Tape
26: Heavy Volume, the Price Rises-Light Volume, the Price Falls
27: Buy on Weakness, Sell on Strength
28: It Is Best to Trade "At the Market"
29: Understand the Types of Orders
30: Order Modifications Might Cause Delay
31: Remember That Others Might Have the Same Idea
32: Use Limit Orders as Insurance
33: Values Can Be Found Bottom Fishing
34: Heavily Margined, Heavily Watched
35: Winners Keep on Winning
36: Indicators Can Meet Overriding Factors
37: Take a Loss Quickly
38: Beware the Triple Witching Hour
39: Buy on Monday, Sell on Friday
40: Never Get Married to the Stock
41: Diversification Is the Key to Portfolio Management
42: Partial Liquidation Might Be the Answer
43: Act Quickly, Study at Leisure
44: Records Can Make Money
45: Fraud Is Unpredictable
46: Use Margin for Leverage Only
47: Avoid Overtrading
48: Buy When There's Blood in the Streets
49: Look for Divergence in Trends
50: Invest in What You Know Best
51: Buy Stock Cheaper with Dollar Cost Averaging
52: There’s Always a Santa Claus Rally
53: There's Always a Year-End Sell-off
54: The First Week Determines the Year
55: It's Always a Bull Market
56: Watch the Bellwethers
57: Buy the Dips
58: Buy the Dow Dogs
59: A Trend Remains in Force until It Changes
60: It Depends on Support and Resistance
61: The Stock Market Predicts the Economy
62: There Is a Bear Market Coming
63: There Are More Advances in a Bear Market Than There Are Declines in a Bull Market
64: Use Protective Puts in Volatile Markets
65: The Stock Market Is a "Random Walk'
66: Use the Rule of 72 to Double
67: A Stock Price Splits When It Gets Too High
68: Join the Club
69: Small Stocks Make the "January Effect?
70: Invest According to Objectives


TOP 10 RULES OF INTERNET INVESTING (by Merril Lynch)

• Allocate no more than 5 to 10 per cent of a portfolio to direct internet investing.


• Own a basket of of stocks - don’t “bet the farm" on any one stock or the sector as a whole.


• Buy sector leaders with “huge opportunities, great management, and strong sequential revenue growth"


• Focus on company and industry fundamentals: “they matter"


• Be prepared for at least 50 per cent volatility in both directions.


• Recognise that “what looks like a bubble probably is": we think valuation floor is 75 per cent below current levels.


• Recognise that stocks trade on sentiment and catalysts, so look out for shifts.


• If desired , “trade around" core positions - “sell on spikes, buy on busts"


• If can’t stand the heat, remove self from kitchen

Online Stock Investment

by Leslie Loh, Charlie Soh, Stephen Lai

Five Simple Steps Steps to Profit

Planning Your Investment
People invest according to their investment style, return expectation and risk appetite. Value investors buy fundamentally sound stocks that are selling below intrinsic value and hold them for years. Growth investors buy stocks with a good business model, and high sales and earnings growth. Traders on the other hand are more likely to be short-term speculators. For example, day traders tend to buy volatile stocks and sell them within a short period, from a few hours to a few days, for profit. They use simple rules such as price-volume breakout to make a quick trade. Some day traders do scalping by exploiting the bid and ask spread to make a small profit from each trade. Other day traders buy stocks based on rumors, hot tips and news like earnings announcement and contracts won. Technical traders rely on charts to guide them in buying stocks. They believe that everything is reflected in the stock price and use technical indicators to time purchase.

Whether you are a day or technical trader, value or growth investor, you need to have a 'game plan on what you intend to achieve. The plan describes your investment or trading goals and money management technique. The plan provides clear steps on how you select stocks, where to get relevant information about the stock, and when to buy or sell the stock. Exhibit 2.1 and 2.2 provide examples of a game plan.

Exhibit 2.2: Investment Plan
Goal:
To earn a return that is higher than one year fixed deposit rate.
How?
Identify a list of blue chip stocks with high dividend yield.
Where to get information?
Use NextVIEW to pick high dividend yield stocks and get fundamental information.
What to Buy?
High dividend yield stocks.
When to Buy?
Buy only if dividend yield of the stock is at least three percent higher than current fixed deposit rate.
Money Management
Each stock should not take up more than 10 percent of capital available for stock
investment.

Are you an investor or a trader? Well, the choice is yours. Most importantly, be very clear about what you are. Once you have decided what you are, come out with a one-page game plan to guide you through the investment or trading process. Review the plan periodically and make the necessary changes to improve your investment profit. For the trader, remember to "Plan your trade, and trade your plan."

Exhibit 2.2: Trading Plan
Goal :
To earn $500 a week.
How?
Identify a list of stocks with strong momentum.
Where to get Information?
Use NextVIEW screening function to select stocks with strong momentum and high trading volume.
What to Buy?
Two or three stocks with strong momentum and high volume.
When to Buy?
• Study the chart of stocks identified for trading.
• Establish the price support and resistance levels of the stocks.
• Establish strict trading entry and exit price levels.
• Use technical indicators such as MACD and RSI to support your trading decision.
Money Management
• Set aside $10,000 for trading.
• When trading, focus on at most 3 stocks each time.
• Sell when profit is at least 3 percent of amount invested or is equal to $500.
• Cut loss at 5 percent of purchase costs.

It is important to equip yourself with an online investment tool, such as NextVIEW, to support your trading. Use the powerful features found in NextVIEW, such as charting, time & sales statistic, queue track, and volume distribution, to help you in your trading. The time & sales statistic, queue track, and volume distribution provide a good gauge of the underlying demand and supply of a stock. For the investor, "Always invest like a business partner." Use NextVIEW to help you search for stocks, gather financial information, and do portfolio management.

Online Investment Plan — Five Easy Steps
Now you are ready to execute your plan with the help of an online investment tool, NextVIEW. The plan consists of five easy steps:

1. Identify potential stocks.
2. Select stocks with the best probability of success.
3. Study the chart of the stock to time purchase.
4. Determine demand/supply of stock to get better price.
5. Manage your portfolio to improve investment performance.

Step 1: Identify potential stocks
The first step is to identify a list of potential stocks. The stock screening feature in NextVIEW will be used to help you identify a list of potential stocks. Using NextVIEW to pick stocks takes the emotion out of investing. Stock screening using fundamental and technical criteria to pick stocks is discussed in Chapter 3. You will also learn how to create a watchlist to monitor potential stocks.

Step 2: Select stocks with the best probability of success
The second step is to pick stocks that have the best chance of making money for you. You will learn how to get financial information of stocks using NextVIEW. With this information, you can study the fundamental of each stock and pick the top three that have the best fundamental and thus, higher probability of success. This involves looking at the price earnings ratio, dividend yield, and other financial ratios. The fundamental study of stocks and financial ratios is discussed in Chapter 4. You will also learn how to get the latest news about the stock to support your investment decision.

Step 3: Study the chart of the stock to time your purchase
The third step is to study the chart to determine the current trend and use technical indicators to time your purchase. In Chapter 5, you will learn how to use NextVIEW to plot charts and use technical indicators to time your purchase.

Step 4: Determine demand/supply of stock to get a better price
The fourth step is to gauge the underlying demand/supply for the stock at time of purchase and get a better price entry. The time & sales statistic, queue track, and volume distribution are powerful features found in NextVIEW, which are used to determine the current demand/supply for a stock. In Chapter 6, you will learn how to use these features to buy a stock at a better price.

Step 5: Manage your stock portfolio to improve performance
After buying stocks, you need to track their return. Managing stock portfolio involves keeping record of trades, ensuring that you are not overexposed to a single stock, selling over-valued stocks and replacing them with under-valued stocks, balancing between holding cash and stocks, and reviewing investment performance. In Chapter 7, you will learn how to use NextVIEW portfolio management feature to manage stocks and improve investment performance. You will also learn how to set stock alert to notify you when the price reaches your profit target or cut loss level.

Your Winning Edge
When you invest in stocks you want to play a winning game of making money. To make money in stock investment, you must do four things right:
1. Avoid the mistakes of losers.
2. Develop the habits of successful investors.
3. Have an investment plan.
4. Use an online investment tool to give you the edge.

Avoid the Mistakes of Losers
Losers are highly emotional and irrational bunch of people. They buy stocks on impulse and hot tips. They do not have an investment plan or money management strategy. The end result is huge loss and broken dream. For example, retail investors chalked up contra losses of S$300 million in the first half of the 1999 bull market. Based on our experience, investors lose money because of the following reasons:
x Do not have an investment plan.
x Do not practice money management.
x Lack investment knowledge.
x Highly emotional.
X No discipline.
x Greedy.
x Gambler attitude.
x Do not learn from mistakes and repeat them instead.
x Do not cut losses when they are wrong and allow losses to get out of hand.
x Buy on tips and rumors without checking on the reliability of information source.
x Buy and sell on impulse.
x Too lazy to do basic research.
x Want to make money fast without any effort.

Develop the Habits of Successful Investors
Successful investors are willing to put some effort in studying the fundamental of the stock. They know the intrinsic value of the stock and will not chase or pay ridiculous price to own the stock. Warren Buffett, a well-know investment guru, listed six qualities of a successful investor:
• be animated by controlled greed and fascinated by the investment
process;
• must have patience;
• must be able to think independently;
• must have the security and self-confidence that comes from knowledge, without being rash or headstrong;
• must be able to accept it when one does not know something; and
• must be flexible to the types of business one invests, but never pay more than they are worth.

Develop the habits of successful investors by doing the following:
^ Have an investment plan.
^ Practice money management.
^ Be patient, realistic, and rational.
^ Do research before you buy the stock.
^ Buy fundamentally sound stocks at reasonable price.
^ Sell stocks when these stocks are over-valued or pushed up to exorbitant prices by speculators.

Have an Investment Plan
You must have a simple plan to guide you buy the right stocks that make money for you. In this book, you learn how to create a simple investment plan and do online stock investment in five easy steps. Now, you need to put into practice what you have learnt from the book. The five-step investment plan provides a rational, disciplined approach to investing online. If you follow the plan, you will not buy a stock based on impulse or tips. Instead, you will check out the stock first before making your investment decision. The five-step plan forces you to follow some simple money management techniques such as using stock alert and portfolio management. Start out your investment journey right. Try out the five-step investment plan on your next stock purchase. Use the portfolio management feature in NextVIEW
five-step investment plan to a "test" portfolio. Monitor the performance of the "test" portfolio to refine your investment plan.

Use an Online Investment Tool to Give You the Edge
You need to use an online investment tool for quick access to the latest financial information to check that you are on track in making the right investment decision. Having quick access to the latest financial information is critical to successful stock investment. In this book, you learn how to use an online investment tool, NextVIEW, to get the latest financial information. You were introduced to basic technical analysis and taught how to use charts for timing your purchase. You were also shown how to use many of the powerful features in NextVIEW, such as watchlist, time & sales statistic, queue track, volume distribution, and stock alert. Make use of these powerful features to give you the edge in making money from investing online. Remember that the latest financial information is just a mouse click away. Use this information to make money for you!

APPENDIX 1
Words of Wisdom for Trading

Have a Game Plan for Trading
You must have a game plan for trading. The game plan must articulate your trading strategy, profit target, cut loss level, risks to avoid, and money management guidelines. Review the plan on a periodic basis and make the necessary changes to improve performance.

Make Sure You Have a Money Management System in Place
You must have a money management system in place to ensure that you do not risk all your capital on one single trading idea. For example, if you have $100,000 and you used the whole amount to buy 10,000 shares of one stock at $10. If the stock dropped to $2, you would have lost $80,000. On the other hand, if you set a limit of 20 percent of your capital for each trading idea, you can only buy 2,000 shares at $10. Using the same example, your loss would only be limited to $16,000.

Practice "Positive” and "Proactive" Mental Attitude
Very often, a trader becomes very negative when the price plummeted after he buys the stock or goes up after he sells, the stock. He starts to doubt his trading ability, feels upset, and makes negative statements about himself. This is a natural reaction to a bad trade, especially when money is lost. A more positive and proactive attitude is to learn from your trading mistakes, avoid them in future, and recognize that your trading system needs improvement. Make sure you have a positive mental attitude before you trade. Otherwise, stay out of the market until you regain your composure. Remember the market is always around and does not miss your presence.

Only Trade Stocks You Know Well
Only trade stocks that you know well. You must have a good understanding of the stock trading range, liquidity, latest news flow, and recent important announcements.

Only Trade in Liquid Stocks
Only trade in stocks that have good liquidity. Liquidity refers to the existence of a large number of buyers and sellers and large trading volume. If the trading volume of the stock is low, you may not be able to ;ell when you decide to cut loss.

Establish a "Risk/Reward" Outcome
Before entering a trade, make sure you have an idea of the expected risk/reward" outcome. Are you trading on a "risk/reward" ratio of 1:1, 1: or 1:5? For a "risk/reward" ratio of 1:1, your upside gain is equal to your ownside loss. Try to set a "risk/reward" ratio of at least 1:2. For example, uying a stock with a downside of five cents and an upside of ten cents.

Understand the Trend of the Stock Well and Trade the Trend
Experts have advised that the "the trend is your friend" and "never go gainst the tide." If the chart shows that a stock is trending down (sharp drops and weak rallies), do not buy because there are more sellers an buyers. You will lose money if you buy against the downtrend. The exception is if you are trading for a technical rebound because the stock is deeply oversold. Even then, you must have very tight loss control and get it if what you expect did not happen.

Rcognize a "Hidden" Change in Trend
Very often a stock will go through very bad periods of poor earnings and negative news flow. The stock price will drop and continue to drop to discount the current bad results and future poor earnings visibility. There comes a time when any bad news or poor results do not cause the stock drop very much. Recognize that the trend has changed as there is underlying strong support for the stock. Change your trading strategy to recognize the "hidden" change in trend. Check around for divergent views out the stock. There may be some development that is not known to the market.

Wait for the Price of a Stock to Stabilize Before Buying it
Experts have always advised never to catch a falling knife, which means never to buy a stock that is going through a major price correction as what looks cheap today will get cheaper tomorrow. For example, a stock price that is coming down very quickly (10 percent correction or a gap down in price) implies that the seller has a large quantity to sell. Usually, the selling is because of some bad news about the company such as profit warning, slowdown in earnings growth, or major bad debts. If you still like the stock because of its fundamentals, wait for its price to stabilize before buying it.

Test Out Your "Price Discovery" Ability
Do hypothetical trades to test out your "price discovery" ability. Study how you react to events and news flow in relation to your trades. Are you buying or selling too quickly in reaction to an event or news flow? Are you taking profit too early or cutting your losses too slowly? Put aside five percent of your capital to do real trade and understand your price discovery behavior. You will be surprised with the results. Some of you may be stuck at a profit range of two percent or a loss of 20 percent. In other words, you take your profit too early and losses too slowly. There is a need to improve your price discovery ability as this impairment can cause serious damage to your capital. Keep a trade journal to help you gain insight on your "price discovery" ability.

Break Trade into Smaller Sizes to Hone in "Price Discovery" Ability
Divide your trade by half, one-third or one-quarter portion and wait for two conditions to happen. First, the price must be at the level that triggers a purchase. Second, you buy during each window period. If you divide your purchase into two portions and your window period is one day, then, you have only two opportunities to buy the share in the day. For example, you bought the stock in the morning. You cannot purchase additional stocks as the next window period to buy the stock is in the afternoon.

Get Your Entry Price Right
If you have got your entry price right, the stock should be making money for you almost immediately. Always be disciplined by plotting a chart of the stock you are trading. Use short-term moving averages and other indicators to help you determine the right entry price. Cut your loss immediately the moment you find that you have made a mistake. If you get the entry price correct, then the stock should not go down more than 5 percent on the day you buy the stock.

Practice Trading Discipline by Giving "Limit” Order
A "market" order is buying or selling the stock at the current market price. A "limit" order buys or sells the stock at the price you specify. For example, the buying price of SIA is $10 and selling price is $10.10. If you give a market order to buy SIA, your broker will buy SIA at $10.10 (the current selling price). Try to practice your trading discipline by buying the stock at the price you specify (i.e. "limit" order). The "limit" price is specified at a level based on some buying criteria or technical indicators.

Have a Cut Loss Strategy and Cut Your Losses Quickly
For trading, it is recommended to set the cut loss level at between three to eight percent. For example, if the stock is one dollar. At three percent, your cut loss level is 97 cents (3% of $1 is 3 cents). At eight percent, your cut loss level will be 92 cents. Make sure that you stick to your cut loss level. Otherwise, your losses will become so painful that your trade becomes a long-term investment mistake that stays in your portfolio report, reminding you year after year of your folly.

Cut Your Loss Quickly Before it Damages You Permanently
If you buy a stock at $1 and it drops in price to 50 cents because you did not cut your loss, the stock has to go up by 100 percent for you to breakeven. Assuming you trade $100,000 worth of share. The end result is that you have loss $50,000 or half your trading capital of $100,000. You need to make $50,000 profit to get back your capital of $100,000. However, if you have a tight loss control of 5 percent, you would have sold the stock when it hits 95 cents. Your loss is $5,000 (5% of $100,000) and you are still in the game.

Cut Your Loss When the Events You Bet on Did Not Materialize
You buy a stock betting on some events to happen: a technical breakout, surprise announcement, or syndicate play. The stock did not move up as expected. Cut your loss at the level you set. If what you expect to happen is actually happening, your trade should make money for you very quickly. If it does not, you have to be very discipline to stick to your loss control plan.

Keep a Trade Journal
Keeping a journal of your trade history is important as it clarifies your trading decisions and helps you understand your price discovery behavior.
the reasons for the trade, you reading of the market in relation to the trade, your profit/loss levels, frequency of trade, and returns achieved. The journal helps you to manage your emotion, improve your price discovery judgement, focus on the quantitative part of trade, and make rational adjustment on your risk level and return target. By reviewing trades done over a year, you should be able to see your performance and pattern in taking profit and cutting loss. The journal should help you answer the following questions: Are you taking profit too early? Are you cutting losses too slowly. Are you trading in a reckless manner? Are you preserving your capital? Do you follow your plan? Do you need to adjust your plan?

Use an Online Investment Tool to Give You the Edge
To be a successful trader, you must have access to real-time charts, trading statistics (e.g. time & sales statistic), and latest news to help you make profitable trade. Use an online investment tool such as NextVIEW
Advisor (www.thenextview.com) to do charting and get access to critical trading statistics real-time.

Rich Dad's Prophecy

by Robert Kiyosaki

Robert’s rich dad used to tell him, “If you want to be a rich business owner or investor, you need to understand the story of Noah and the Ark.” First, you got to have the vision to see the flood was coming and then the faith and courage to build the Ark to ride out the storm. The author details out in Prophecy why the biggest stock market crash is yet to come and gives an 8-step plan to build your financial ‘ark’.

How to Build Your Financial Ark
Robert says to build your financial ark so that you could ride out the coming storm you need to have control over 8 aspects:

Control #1: Control over Yourself
Control #2: Control over Your Emotion
Control #3: Control over Your Excuses
Control #4: Control over Your Vision
Control #5: Control over the Rules
Control #6: Control over Your Advisors
Control #7: Control over Your Time
Control #8: Control over Your Destiny

"A Change in the Law... A Change in the Future."

Rich Dad

"Losers cut their winners and hang on to their losers. Winners cut their losers and hang on to their winners."

"Excuses are the words coming from the loser in you."

"Cash flow determines if something is an asset or a liability."

"One of your greatest assets is time. One of the reasons most people do not become rich is because they do not make good use of their time."

"Inside each of you is a rich person, a poor person, and a middle-class person. It is up to you to decide which person you become."

"Take control of your own financial ark and buy or build assets that generate cash flow. Include real estate, business, and paper assets. as soon as your income from your assets (your money working for you) exceeds your expenses you are financially free."

Warren Buffett

"Diversification is a protection against ignorance. It makes very little sense for those that know what they're are doing."

"Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those that take the subway."

"The market, like the Lord, helps those who help themselves."

Buffett likes to buy stocks "when the bears are giving them away."

"If you cannot control your emotions you cannot control your money."

Rich:
Good financial education
Build business
Large real estate investments
Private equity funds
Hedge funds
Personal money manager
Private placements
Limited partnerships

Middle Class:
Good education
High paying jobs
Profession
Home
Savings
Retirement plan
Mutual funds
Small real estate investments

Poor:
Large family
Government support programs

How to Get a Rich Life

• If you want to be rich, do your homework. Find out what, where, who, why and how to make the most money in the shortest possible time.
  
• Work to learn, not to make money.
  
• Make your day job what is truest to yourself.
  
• Have fun while you are at it, but make sure the fun is legal, ethical and does not harm anyone.
  
• Beware of being so busy at work that you end up being lazy about the other parts of life that matter.
  
• Focus on how much you keep, not how much you earn.
  
• Focus on acquiring more assets, not loading up on liabilities.
  
• Understanding that the point of money is not to make more money, but to gain you financial freedom so you are free to follow your heart.
  
• People, not money, are what count most in life. So, invest most of your time in good relationships.
• Invest in what you do today, not what might come tomorrow.
  

Financial IQ will determine one's wealth
HOW many people do you know who are successful academically or professionally, but not rich?

Very few. The reason is they do not have financial IQ. My own dad had a PhD and he was broke after he retired.

How do you take control of your financial future?

You have to take control of four things.

First, take control of your attitude. Many people have a poor person's attitude. They say: 'I'll never be rich', or 'I can't afford this or that.' To be rich, you have to reverse that attitude. Ask instead: 'How can I be rich?' and 'How can I afford it?'

Second, take control of your financial education. I consistently read, go to seminars, hang out with friends and talk about getting rich. It is 24/7. I choose to be rich.

Third, take control of a plan to get rich. Learn to be an entrepreneur, invest in real estate and stocks. People say investing is risky. It is not risky. It is they who are risky.

Fourth, control who your friends are. If you hang out with all the losers in your company, you don't have a chance.

You should talk to people who know what they are talking about. Most people are poor because they take advice from other poor people or sales people. Put together an adviser team, meet people who want to be rich and talk about money.

There are four types of people, and you can identify them by certain words they use.

Employees, whether it is the president or the janitor, say: 'I'm looking for a safe job.' Then there are self-employed people, business owners and investors.

If you want to see what your financial future is, think about who are the six people you spend the most time with. Are they employees, or self-employed people, or business owners or investors?

My friends are business owners and investors.

Rich Dad’s Guide to Investing

by Robert Kiyosaki

To be successful in investing, you need
1. Education
2. Experience
3. Excess cash

Instead of trying to predict what will happen in the market, be prepared for three things :
Changes in the laws
Changes in the market’s momentum (sentiment)
Changes in the fundamentals of the business or real estate in which you are investing.

Investing itself is not necessarily risky, not being in control is risky.

The Ten Investor’ Controls
The control over yourself
The control over income/expense and asset/liability ratios
The control over the management of the investment
The control over taxes
The control over when you buy and when you sell
The control over brokerage transactions
The control over the E-T-C (entity, timing, characteristics)
The control over the terms and conditions of the agreements
The control over access to information
The control over giving it back, philanthropy, redistribution of wealth.

Investing is a plan, often a dull, boring and almost mechanical process of getting rich.

Why it is so hard for most people to follow a simple plan?

Because following a simple plan to become rich is boring.

Find a formula that will make you rich and follow it.

The path to achieving investment success is to study long-term results and find a strategy or a group of strategies that make sense. Then stay on the path.

History does repeat itself. Yet people want to believe that this time things will be different.

The main reasons for investing:

To be secure
To be comfortable
To be rich

Poor people measure in money and rich people measure in time.

The moment you begin to think of time as precious and that is has a price, the richer you will become. Because time is more important than money.

The basic of investing is to always know what kind of income you are working for

1. Earned Income
   Portfolio Income
   Passive Income
   
2. To convert earned income into portfolio income or passive income as efficiently as possible.
3. To keep your earned income secure by purchasing a security you hope converts your earned income into passive income or portfolio income.
4. The investor is the asset or liability?
5. Prepared for whatever happens. Most investments that will make you rich are available for only a narrow window of time. But regardless of long the window of opportunity is open, if you are not prepared with education, experience or extra cash, the opportunity if it is good, will pass.
6. If you are prepared, which means you have education and experience, and you find a good deal, the money will find you or you will find the money.
7. It is the ability to evaluate risk and reward.
   

You invest for one reason : to acquire an asset that converts earned income into passive income or portfolio income. That conversion of one form of income into another form of income is the primary objective of a true investor.

You can become rich by being financially smart.

You can become rich by being generous. The more people I serve, the richer I become.

It Starts with a Plan
To be a rich investor you much have a plan be focused and play to win.

To be very rich, you must have 5 D’s ;
Dream
Dedication
Drive
Data
Dollars

The accredited investor earns a lot of money and/or has a high net worth
The qualified investor knows fundamental and technical investing
The sophisticated investor understands investing and the law
The inside investor creates the investment
The ultimate investor becomes the selling shareholder


Market Up down

Losing investor loses loses

Average investor wins loses

Qualified investor wins wins


Rule number one in becoming an entrepreneur is to never take a job for money. Take a job only for the long-term skills you will learn.

If you cannot sell, you cannot be an entrepreneur.

Personal traits of a successful entrepreneur
Vision
Courage
Creativity
The ability to withstand criticism
The ability to delay gratification

Financial Ratios of a Company
1. Gross Margin Percentage=(Sales-Cost of Goods Sold)/Sales
2. Net Operating Margin Percentage=EBIT/Sales
3. Operating Leverage=Contributions (Gross Margin-Variable Costs)/Fixed Costs
4. Financial Leverage=Total Capital Employed (Debt & Equity)/Shareholders’ Equity
5. Debt to Equity Ratio=Total Liabilities/Total Equity
6. Quick Ratio=Liquid Assets/Current Liabilities
7. Current Ratio=Current Assets/Current Liabilities
8. Return to Equity=Net Income/Average Shareholders’ Equity

The Battle for Investment Survival

by Gerald M. Loeb

Why Buy Quiz
If you want double dividends, double profits and half losses, try filling out a quiz sheet on every issue you are considering buying.
(1) How much am I investing in this company?
(2) How much do I think I can make?
(3) How much do I have to risk?
(4) How long do I expect to take to reach my goal?

I believe you have a good buy if you think you can obtain an ultimate gain of one and a half to two times the amount invested in six to eighteen months, by risking no more than 10% to 20% of your investment.

It takes a book to outline how to do it, but here are a few brief ideas to help:

(1) If you are a novice, invest 10% of your capital, no more, no less, in each venture. If an expert, you do not need my advice. Experts invest from 20% to all the law allows. If you don't feel confident enough to invest a sum that is important to you, better look for something else. If you are right, you want a profit big enough to satisfy your aims.

(2) The gain you expect to make is the heart of your problem. You must see something ahead that is not reflected in the current price to bring about the expected advance in price. If everybody expects what you expect, there will be no profit. This is gross oversimplification, but helpful. Following trends is easier than trying to call turns in them. To put it another way, it is more likely to pay off to buy into an advancing situation at a seemingly high price than to attempt to discover when a declining situation will stop declining and turn upward.

(3) I believe in retreating and living to try another day. On high-priced shares you generally will get a run for your money, if you limit losses to 10% of purchase price. On low-priced shares, perhaps 20%. There will be times when you will sell out 10% below cost only to find the stock come back and make good, but this will happen rarely enough, if you know what you are doing. Limiting losses is like paying worthwhile insurance premiums. The novice can limit his losses mathematically. The expert will have his reasons. The fool will let them run.

(4) Time is the essence of life. Taxwise, six months is the current minimum period. It is hard to see too far ahead. Even a 50% gain, if it takes many years to achieve, can become a conventional percentage figured annually.

Try filling out a quiz sheet and you will be surprised at how it will spur your thinking in new and helpful directions.

"The Last Is First"
I was on a two months' vacation and had to double column at a time when I was remote from both the stock ticker and a reference piece of financial data. This pushed n discussion of "how" rather than "what" to do.

Most of us logically think that "first" comes before "last?to the shoemaker-"the last is first."

Likewise, most investors think that the stock which is nearest to the low level range, or which sells for the least number of times earnings, or sells to return the highest income yield, or which sells at lowest figure in relation to its book value, must logically be best buy. To the really successful, experienced and sophisticated, professional speculator "the most expensive is the cheapest."

If you consider a tabulation of a handful of equities in a given group, one can almost blindly buy the seemingly expensive and make a profit provided you are right on them and don't overstay your market.

Understand I do not this as a method of investing. I write about it because do use the reverse of this method, i.e., buying the "cheapest" with necessarily poor overall results.

The basic reason for this seeming paradox is that this always weighing and appraising the shares trade. Ninety-nine times out of a hundred, if one motor stock yields and a second one 7%, there are points of weakness in the second taken into account by all buyers and sellers in the market, but which escape the buyer who feels high yield makes for a bargain.

The next time you think you see a bargain, take it as a red signal to look further and see if you have missed an important weakness. The next time you feel like selling short some super blue-chip yielding 2%, selling at an all-time high and up fifty points on the year, stop and look again. See if these facts are, in reality, green lights reflecting past success that promises even more success in the future.

"When Sell Quiz"

Making a commitment is many times easier than closing one. When you consider buying shares you can avoid a decision altogether, if the situation is in anyway puzzling or not completely to your liking.

But once you own your stocks, the decision as to whether to hold or sell is quite another matter.

You are forced to a yes or no answer, no matter how uncertain or confused you may be. It is like having your car straddling the railway track with the express coming down the line. Neither backing up nor going ahead may appeal as a sure way to avoid getting hit. You are on the tracks and the train is coming, so you must do one or the other. Or, maybe you should abandon the car and jump.

If you have a loss in your stocks, then I think the solution is automatic, provided you decide what to do at the time you buy. I am always in favor of limiting losses. In the case of high priced stocks the limit should be perhaps 10% of the amount invested. In the case of lower-priced shares, the limit should be 20% of the price paid. The beginner can do this as a mathematical rule. The more experienced can temper the plan with a little judgment. It is when you have a profit that the problem intensifies. It is vital to investment success to let profits run - but not melt away.

Assuming the average reader owns several stocks, the question divides itself into two parts. The first is are we in a bull or a bear market? Few of us ever really know until it is too late. For the sake of the record, if you think it is a bear market, just sell your stocks regardless of any other consideration.

Since 1946 we have been in a market where some stocks have moved up, others marked time and still others declined. Shares and things such as real estate have been in a bull market. Equities have been better than cash. Only equities in industries that have bad particular troubles, or equities that have become overbought, have been good sales. At this writing the same inflation climate seems to prevail. Under such bullish circumstances do not sell unless:

(1) You see a bear market ahead.

(2) You see trouble for a particular company in which you own shares.

(3) Time and circumstances have turned up a new and seemingly far better buy than the issue you like least in your list.

(4) Your shares stop going up and start going down.

Not since perhaps 1920 have I been investing in the stock market without knowing that four rules and fifty words will never tell anyone when to sell. They will help if you think them over.

The second part of the question is which stock?

(A) Do not sell just because you think a stock is "overvalued."

(B) If you want to sell some of your stocks and not all, invariably go against your emotional inclinations and sell first the issues with losses, small profits or none at all, the weakest, the most disappointing actors, etc. Always keep your best issues for the last.

In a bear market stocks always go 'way below' "under valuation." In a bull market they advance 'way past' "over valuation." An investor should be guided more by trend than price. Stocks make their lows at that time and point when the greatest number of active investors think the worst of them. The actual low or high point in news occurs many months before or after the market low or high. It is the expectation of coming events, rather than the events when they materialize, that moves markets.

Quiz yourself along these lines before you close your next commitment and I think it will improve your average result.

Study Guide for Come into My Trading Room

by Alexander Elder

• Do not wait for perfect signal, which is likely to come late.
  
• Best edge over the others is to have a very high level of discipline.
  
• Observe money management rules.
  
• Keep good records and review them.
  
• When a group agrees that a certain trade looks good, it is usually time to go the other way.
  
• Boiling markets are less rational, creating opportunities for calm pros.
  
• Quiet markets are more efficient, making it more difficult to take money from others.
  
• Any fool can enter a trade but it takes knowledge and experience to find good exit points.
  
• Discussing open trade with others is one of the most subversive behaviors, which is why a disciplined trader does not do it.
  
• Day trading is more expensive and demands higher degree of concentration but losses are generally smaller.
  
• Penny stocks are unsuitable for day trading.
  
• Day trading stocks must be those with high liquidity and volatility.
  
• Stops must be placed immediately after entering a trade. Most traders must place actual stop orders; only the pros of proven discipline may be mental stops.
  
• 2% stop loss rule on any trade. Aim for a risk/reward ratio of at least 2 : 6.
  
• Record your account size at the beginning of the month. Stop trading when your equity dips 6% below that level, stay out for the rest of the month.
  
• Putting on bigger trades in an attempt to recoup losses is typical amateur behaviour.
  
• Overtrading means risking too much for your account.

Trading for a Living

• You need to base your trades on a carefully prepared trading plan and not jump in response to price changes.
  
• You need to know exactly under what conditions you will enter and exit a trade.
  
• Write down your reasons or rules for entering and exiting a trade and rules for money management.
  

Link:

Momentum Trading with Discipline

What Works on Wall Street

by James P O’Shaughnessy

After reading What Works on Wall Street, investors will know the following:

• Most small-capitalization strategies owe their superior returns to micro-cap stocks with market capitalizations below $25 million. These stocks are too small for virtually any investor to buy.
  
  

• Buying low price-to-eamings ratio stocks is very profitable only if you stick to larger, better-known issues.
  
  

• Price-to-sales ratio is the best value ratio to use for buying market-beating stocks
  
  

• Last year's biggest losers are the worst stocks you can buy.
  
  

• Last year's earnings gains alone are worthless when determining if a stock is a good investment.
  
  

• Using several factors dramatically improves long-term performance.
  
  

• You can do four times as well as the S&P 500 by concentrating on large, well-known stocks with high dividend yields.
  
  

• Relative strength is the only growth variable that consistently beats the market.
  
  

• Buying Wall Street's current darlings with the highest price-to-earnings ratios is one of the worst things you can do.
  
  

• A strategy's risk is one of the most important elements to consider.
  
  

• Uniting growth and value strategies is the best way to improve your investment performance.
  

Valuegrowth Investing

by Glen Arnold

The Devil Made Me Do It should not be your excuse after making these common investing mistakes...

1. Don't trust the crystal ball gazers

• Macro economic forecasts... A tremendous amount of time and energy can be saved by not trying to forecast GDP growth, unemployment statistics, purchasing managers' confidence levels and so on. Every day the newspapers are full of discussions on the next move in inflation, interest rates or currencies - much of it contradictory. The value investor should read the headline and move on. The latest statement from the Federal reserve or a report from an economic forecaster at a prestigious investment bank should be given less than ten seconds of your time. Guesses about the future of the economy are largely irrelevant to the investor who is focused on company analysis. Intrinsic value is determined by the owner earnings generated over a number of economic cycles. Whether GDP rises by 3% or falls by 1% in the next year has little impact on this calculation. And besides, forecasts are notoriously unreliable.

• Market timing... Attempting to time purchases and sales to coincide with market highs and lows is wasteful. Unless you are exceptionally clever, and most famous value investors admit they are not, you will not be able to consistently call market tops and bottoms. You are likely to be pessimistic and optimistic at precisely the wrong times. Furthermore, buying and selling on the basis of a prediction of short-term market trends can be very expensive in terms of brokers' fees and buy/sell spreads. The great value investors, with scores of years of experience insist that they cannot predict short-term movements. Why do people with a fraction of the experience of Buffett or Neff believe they can tell you where the market is headed next? These people are everywhere: on the TV, at brokerage houses, in the newspapers. Ignore them all. They display a dangerous combination of supreme confidence and profound ignorance. They are people that don't have a clue but are paid to have a view.

• Chartism and technical analysis... Do not look to price wiggles and other trend data to guide you. The great investors and academic researchers agree that you cannot, with any useful degree of regularity, outperform the stock market indexes by exploiting a perceived pattern in the statistical record. Past movements are of little relevance to the future.

• Short-term selectivity... Buying shares on the strength of the corporation's or the industry's near-term business prospects - say, earnings over the next quarter of half-year - is a pointless exercise and does not deserve to be termed security analysis. There are three potential problems... (1) analysts' fallibility means that the forecast can be wrong, and frequently are, (2) even if the forecast is correct, the good prospects may already be reflected in the stock price, and (3) the market behaves in strange ways and the price may not move the way is rationally should.

2. Don't touch these types of companies

• Hot stocks receiving lots of publicity... The hottest stocks in the hottest industry receive vast amounts of favorable publicity. The result is sky-high share prices and price-earnings (PE) ratios, often supported by nothing more than hope and thin air.

• Technology stocks... This is an optional don't. If you have particular knowledge of a technology and think you could analyze the strength of a business franchise in a rapidly changing technological environment, and assess the ability of a hi-tech managerial team to lead the company to long-term success, then you are entitled to ignore this don't. For those of us that don't know our DNA from our Megabyte Ram, it is best if we don't try to pretend we can understand a technological industry. Analyzing companies at the cutting edge of science is especially difficult. Stay with your circle of competence, and be honest about its boundaries.

• Companies lacking a profit history or start ups... Companies that are full of promises of future profits but lack solid evidence of actual profits should be shunned. It is impossible to assess the durability of the competitive advantage or the strength of the management of such firms. Often these are companies in industries in a constant state of flux. Investors are being enticed to fantasize about what might be. This is not a rational basis for investment with the principle of margin of safety at heart. There are too many imponderables and the chance of error is too great. Why take unreasoned risks when you could devote this energy to the analysis of stocks that do meet the criteria of a value investor?

• Turnaround stocks... For many years Buffett tried buying companies that had fallen on hard times in the hope that they could be turned around. After repeated failure he concluded that the struggle was generally in vain as turnarounds seldom turn.

• New issue stocks (IPOs)... Initial public offerings are generally fully priced. Bargains are few and far between in the primary market; richer pickings are available in the secondary market.

3. Don't manage your portfolio conventionally

• Playing the 'in-and-out' game... Many investors have a tendency to churn their portfolio in a belief that they can take advantage of short-term price movements. Investors simply cannot profit from financial flip-flopping over the long run. Continually fiddling with the portfolio means that the investor (or, more properly entitled, speculator) does not become acquainted with the underlying businesses. In addition, he or she faces high transaction costs. Thousands of day traders have discovered that even if they were lucky enough to throw four sizes in a row the fifth throw of the dice brought disaster.

• Pulling the flowers and watering the weeds... Some investors seem to believe that it makes sense to automatically sell stocks that have risen in price, but hold on to those that have fallen. The maxim that 'you can't go broke taking a profit' is a foolish premise on which to sell a good company's stock. By selling when it has doubled you may miss out on the greatest part of its capital appreciation. A good stock can rise 10- or 20-fold in value. Especially silly is the tendency to hold on to a poor stock because you are afraid of crystallizing a loss. If the company fails to meet the value and growth criteria you set after purchase then the mistake should be admitted and the attempt to 'at least come out even' be abandoned. Money, thus released, can be invested in a good company.

• Stop-loss orders or mechanical selling rules... Selling automatically based on a pre-set trigger price is illogical. Just because the market, in its manic-depressive way, has caused your stock to fall from your buying price you should not automatically sell. If your analysis is sound then you should be a more enthusiastic buyer, not a seller, at the lower price.

• Simple contrarianism... Naive contrarians are always zigging when the market is zagging. Such knee-jerk contrarians, who seem to bask in the warmth of just being different, are being as foolish as those that always follow the crowd. The true contrarian may take a different view to the generality of investors based on thorough analysis. Often, however, the value investor's conclusions will agree with the market consensus, or, at least, not disagree sufficiently to provide a margin of safety.

• Accepting consensus optimism or pessimism... Periodically the market gets carried away with optimism or pessimism. The herd of investors overreact, pushing up the price of a favored stock to irrational levels, while selling or ignoring stocks with intrinsic value much higher than the current price. At the top of bull markets vast numbers of stocks become the object of over-excitement. Speculation runs riot and people who, in normal circumstances behave as investors morph into speculators. Even Graham and Fisher seemed unable to resist the temptation to play the market for short-term gains in 1928-9 (although Buffett did admirably resisted the Great Bubble of the late 1990s). At times of market exuberance stock pickers seem to have an infinite capacity to believe in something good. On the other hand there are times when bad news becomes over represented in stock prices. The mood of investors can become so downbeat that even good news is ignored or spun into bad news.

4. Don't make investment too difficult

• Don't use equations with Greek letters in them... None of the great value investors through history made use of modern financial theory constructs such as the capital asset pricing model with its beta or portfolio theory. And these are relatively simple models being produced by business schools. Financial academic journals are full of complex mathematics that attempt to explain market behavior, provide tools for valuation, or to understand and reduce risk. All of this is rejected as ephemera by the practitioners who rely on much simpler methods of value investing. And yet, these investors are highly successful.
  
  That's all very well, say the financial economists 'perhaps it does work in practice, but it'll never work in theory!' Could it be that great value investors like Graham, Buffett, Fisher Neff, Miller and Lynch were all lucky rather than that the stock market is (at least occasionally) inefficient in terms of pricing businesses, and this inefficiency is exploitable by those with superior techniques and judgement (and courage)? Is it that the complex models will prove, in the end, to possess the truly valuable insights while the personal experiences and accumulated knowledge of the practitioners turns out to be of limited applicability? Perhaps. But I know whose judgement I trust, especially having discussed with university students over many years the difficulties of many of these academic models.
  
  It would seem that modern complex financial models sometimes allow you to perform average. To outperform, it is necessary to invest in undervalued businesses that you understand rather than in shares with particular correlation coefficients and covariances. Complex behavior is not rewarded more than simple behavior.

• Don't use derivatives... Derivatives are an expensive way of reducing risk. The value investor knows that risk is reduced through a thorough understanding of the business, not by using hedging instruments. As for the use of derivatives for leveraging-up returns; this is gambling and should not be considered by an investor in business.

• Don't continually try to go for home runs... Most of us are not brilliant at baseball. We have to add to the score by going for a series of base hits. Don't expect to find a series of spectacular winning stocks. Be consistent, persistent and patient. Stretching yourself to try and make extraordinary high gains can result in disaster. Be reasonable in your goals.

• Don't confine yourself to high liquidity stocks... There are many bargains to be had in stocks that have a low market turnover. Many institutions ignore these stocks and thereby prepare the ground for bargains to be found by individual value investors. Ease of divorce is no sound basis for a relationship!

Common Stocks and Uncommon Profits

by Philip A. Fisher

Before buying the stock of a company, check the followings :

1. Does the company currently have the potential of several years' sales growth?
   
2. Is the company likely to produce new products and processes in the future?
   
3. Is the R&D department effective, given the company size?
   
4. Does the company have an above average sales organization?
   
5. Does the company have a worthwhile profit margin?
   
6. What is the company doing to maintain or improve profit margins?
   
7. Does the company have outstanding labour and personal relations?
   
8. Does the company have outstanding executive relations?
   
9. Does the company have depth to its management?
   
10. How good are the company cost analysis and accounting controls?
    
11. Are there other aspects of the business­ which will give the investor important clues as to how outstanding the company may be in relation to its competition?
    
12. Is the company short-termist or long-termist?
    
13. Will there be equity financing in the near future that will damage the stockholders' interests?
    
14. Do managers talk freely to investors when all is well but clam up when there is trouble?
    
15. Does the management have integrity?

The List of Don'ts

1. Don't buy into promotional companies.
   
2. Don't ignore a good stock just because it is traded over the counter.
   
3. Don't buy a stock just because you like the tone of the annual report.
   
4. Don't assume that a high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted in the price.
   
5. Don't quibble over eights and quarters.
   
6. Don't overstress diversification.
   
7. Don't be afraid to buy on a war scare.
   
8. Don't forget your Gilbert and Sullivan. Growth stocks may change rapidly and historical price movements and EPS will give no hints of such changes before they occur.
   
9. Don't fail to consider time as well as price in buying a true growth stock.
   
10. Don't follow the crowd.

Technical Analysis: Power Tools for Active Investors

by Gerald Appel

Lessons I have Learned during 40 years as a Trader

These are hardly original, which makes them no less valid. As you might notice, many, if not most, are associated not so much with the stock market as with our own attitudes as traders. Unfortunately, most investors pay for what they learn over the years in some way. I have certainly paid in bad experiences for much of what i have learned. Maybe you can save yourself some money by considering the price of this book your payment and go directly on from there. Here they are in no particular order:

The news media, including the stock market TV channels, tend to be the last to know and almost always tend to follow stock market trends rather than to lead them. As a general rule, a good time to buy stocks is when the popular magazines and front pages of major newspapers are featuring stories dealing with bear markets and investor doom. In a similar vein, stock market newsletters and advisory services have not had the very best of records in terms of market forecasting. The greater “gurus” have often tended not to be more correct than others.

There might be many benefits in attending, lectures, meetings, and technical classes regarding trading tactics and investing, but it is probably best to operate alone in making and implementing actual trading decisions and to assume, within yourself, the responsibilities of poor trades and the credit for good ones.

Similarly, it is best to keep your results and performance private. The temptation to boast of your successes and fears of reporting failures will almost certainly not help your performance.

Human nature operates against good trading practices. We enjoy taking profits and hate taking losses. As a result, traders often tend to close out their strongest positions too early (locking up the profit) and maintain their weakest positions for too long (“not a loss until I take it”) instead of letting their strongest positions run and closing out their weakest with small losses. Keep in mind that even the best timing models tend to be profitable only a certain percentage of the time, but their winning trades are much larger, on average, than their losing trades.

The name of the game is to make a good (but not unreasonably good) return for your time and capital, not to feel “smart”. I know many, many people who overextended their welcome in the stock market as 1999 moved into 2000, not because they failed to recognize the dangers of the stock market, but because they were having such a good time feeling smart during the bull market that they hated to leave the party.

Don’t confuse rising stock prices with being a financial genius.

For most people, in-and-out trading will not be as profitable as well-considered intermediate-term trading. It is not easy to overcome the additional costs in transaction expenses and bid-ask spreads involved in day trading and very short-term trading, although there are, no doubt, successful traders in this regard.

It is better to miss a profit than to take a loss.

For the most part, it is probably best not to operate at the market opening. There are pauses during the day, usually at around 10.30 am Eastern time and around 1.15 to 1.30 pm, when the stock market is quieter and when you can act with relative calm.

Do not enter into an invested position without an exit plan.

It is much better to trade with no more capital than you can comfortably risk.

One successful trade makes us feel good. Two successful trades in a row make us feel pretty smart. Three consecutive successful trades make us feel like a genius. That’s when they get us…

Make note of your losing transactions. Have you violated some basic rules of trading or investing because of some emotional reason? There will be losses. Not every losing trade is a mistake. The stock market, at best, is a game of probabilities.

Finally, we have reviewed in this book many techniques and tools that are designed to help you identify market conditions that most favor profitable investing. There is no need to be invested in the stock market at all times. If matters appear unclear or if you are less certain than usual (there’s no such thing as certainty regarding stocks), be free to simply stand aside until matters clarify.

24 Essential Lessons For Investment Success

by William J O’Neil

Ten Ways to Invest Smartly

1: Cut your losses
As a new investor, be prepared to suffer small losses and always cut losses at about 7-8% below your purchase price. That way, you will learn to preserve capital.

Caveat: In a whipsaw market, you can be cut in two before too long. Markets these days seldom move in one direction long enough for one to cut losses.

2: Get started now – anytime is a good time
It does not take much to get started - only about $1,000 as deposit if you want to trade online. Concentrate on high quality stocks and avoid volatile ones.

Caveat: But volatile areas are where all the fun is. You can double your investment in a week but you can also lose your pants. Anytime is a good time - but only with the benefit of hindsight.

3: Follow a system, not emotions
Do not get emotional about a stock, follow a set of rules on what to buy and sell. For example, buy when the price-earnings ratio goes below eight or sell when it is 18.

Caveat: Easier said than done. Rules are made to be broken and it is human nature to go with emotions. That's why we are humans and not robots.

4: Fundamental or technical analysis? Use both!
Using a combination of fundamental and technical investment styles is better than other.

Caveat: It's almost impossible to combine the two ways of investing, The technically inclined will say buy when it is going up and that’s where the price-earnings multiples are at their highest.

5: Earnings and Sales are Most Important
The most important facts about the company's prospects are earnings and sales. Stocks with rising sales and earnings are most likely to perform.

Caveat: True, true. But alas and alack, they do not apply to Internet stocks and there are many ways to fudge sales figures.

6: Relative price strength, or RSI, is a key technical indicator
Knowing where the RSI is will allow one to buy low and sell high.

Caveat: Many a time the RSI gives false signals and a stock can stay overbought for months or oversold for years simply because they are either in fashion or out of fashion.

7: Know a stock by the company it keeps
Pick stocks that are leaders in their sector. Among banks for instance, it will be DBS Bank and property, City Developments Ltd.

Caveat: Market leadership does not occur all the time and when the market is directionless, you may end up in the leaders' lap for a very long time without any profit.

8: Volume and sponsorship are important
The volume traded on the way up or sold on the way down indicates where the smart money is going.

Caveat: It is not always possible to know whether there is net buying or selling. Sometimes when the volume is high on a price ascent, it could be due to distribution rather than accumulation.

9: Growth and value – the perennial debate
Growth stocks show consistent earnings growth and generally trade at a higher price earnings ratio. Value stocks may look cheap but will remain cheap simply because their underlying assets have not been unlocked.

Caveat: There is often more hype than fact in growth stocks and the growth story sometimes remains just that – a story. Buying value, on the other hand could see value sinking even lower.

10: Don't try to be a Jack of all trades
The more counters you own, the less attention you will have for each. Keep the portfolio simple and keep it small.

Caveat It is always possible to add another winner - hope springs eternal so long as there are more and more IPOs.

Growing Rich with Growth Stocks

by Kirk Kazanjian

Foreword

".....Investing is an activity for all responsible adults. By setting aside today's gratification to ensure tomorrow's well-being, we demonstrate our maturity. These are hard lessons to learn. The temptation to spend today is great.....

.....Too many of us grow up without investment role models. The subject rarely comes up even in schools. We spend a lifetime finetuning our shopping skills, but we don't work nearly as hard at our investment skills. The same person who will drive across town to save a 50 cents on a six-pack cola will throw thousands of dollars at a stock or a mutual fund on the basis of a hot tip or an unsubstantiated rumor. We are, despite much well-intended educational efforts, a nation of investment illiterates. We need help. We need role models.

That's where Kirk Kazanjian's Growing Rich with Growth Stocks comes in. Kirk has gone right to the best investment role models out there. These experts share their secrets with Kirk, who in turn has translated their collective wisdom into a sound agenda for any investor looking to learn the ropes.In a field dominated by get-rich-quick schemes, Kirk has sought and found a different breed of investor, one who accumulates money throught diligent research and patience. The advice of these managers isn't flashy, it works.

Investment is a simple activity at its core. Buy low and sell high isn't a tough lesson to learn. It's just phenomenally difficult to put into practice. If you're going it alone, it can be maddening. With the counsel of these great investors at your side, however, the road will not only be smoother, it should also be much more profitable.

My best to you on your journey. May you truly grow rich with growth stocks."

----- Don Philips

Forget About the Market.

Take a long-term view of investing and ignore the day-to-day fluctuations of the economy, interest rates, and over stock market. These constantly changing variables have little or no impact on the companies in your portfolio.

Invest Like a Tortoise, Profit Like a Hare.

The real message for investors is this: On Wall Street, you truly get rich slowly, Don't be a trader. Buy quality companies and stick with them for the long haul. By doing so, one day you'll wake up and realize you have more money than you know what to do with. Without question, traders die poor, while investor prosper. Besides, as Peter Lynch often said, most of his money was made in the third or fourth year he owned a stock. Sometimes it took even longer.

Buy the Best at Bargain Prices.

Buy good business at the right prices. It is also often wise to concentrate on large, established companies with first-class management teams, predictable earnings, diverse product lines, pristine balance sheets, lean expense structures, innovation and successful international operations. One useful guideline for making sure you don't overpay is to stick with stocks you can purchase for PE below the companies' overall growth rate. Also, try not to purchase a stock selling for a PE that's greater than the PE of the index.

Take a Good Look Around You.

Always be on the lookout for promising investment ideas. Keep an eye on what products you use the most and what your kids are buying.Then, figure out how you can profit from them. In addition, look for broad trends in the economy and determine which companies are likely to benefit from them the most.

Get To Know Your Partners.

Always find out about top management before buying shares in a company. These people are your partners, and how they act will determine whether you make or lose money in both the long and short term. Make sure they have integrity and are "doers" not "bluffers".

Avoid Unnecessary Risk.

Never fail to evaluate the risks involved with every security you buy. With short-term bonds and cash, your greatest risk is that you'll earn an inferior return that might not keep up even with the rate of inflation. This is yet another reason why equity investing makes so much sense.Without question, stocks are inherently volatile. One way to reduce your risk is by concentrating on large corporations with proven staying power, low debt, and a diverse product line. Also pay attention to the price you for for your shares. The cheaper your entry point, the less downside exposure you face.

Travel Around the Globe, but Stay at Home.

Wise investors look to profit from the prosperity being enjoyed by countries around the world, not just the United States. However, instead of buying stocks on foreign soil, seek out American companies that derive a good portion of their earnings from overseas sales. US companies are more stable, closely regulated, easier to follow, and governed by strict accounting and regulatory standards. They also tend to be better run and are often fiercer competitors than their foreign counterparts.

Be Willing to Change.

You must be willing to alter your investment process to keep up with the changing times. Stock market techniques and theories that worked decades ago may no longer be relevant. Failing to adapt to current conditions can cause you to invest in companies and industries that are no longer growing, while preventing you from buying more promising prospects.

Never Underestimate the Power of Technology.

Technology stocks should be a part of every twenty-first-century investment portfolio. Since high-tech companies are inherently volatile, you can reduce your risk by sticking with some of the established names with diversified product lines, such as Intel, Motorola, HP and Microsoft. Furthermore, be on the lookout for companies in other industries that use technology well to reduce costs and increase profitability.

Read the Fine Print.

Pay special attention to the balance sheet. Is there plenty of cash on hand? At what pace are sales and earnings growing? How much debt has been taken on, and what is the money being used for? Use this information, not only to determine whether the company is financially strong, but also to figure out whether its current stock price is a bargain or too expensive based on the underlying fundamentals.

Don't Spread Yourself too Thin.

Keep a well-diversified portfolio of 20 to 30 companies from many different industries. This will reduce your overall risk, while making sure you have broad exposure to a well-rounded number of sectors.

Know When to Say Good-bye.

Some reasons to let go: The company's fundamentals begin to deteriorate; The stock meets your price target; You find a better company at a lower price; There is a secular shift in the industry that's bound to negatively impact the stock.

How and When to Sell Stocks Short

by William J O'Neil

Risk is Always Present
Always remember that all common stocks are speculative and involve substantial risk. You must be willing to take many small losses in order to avoid the risk and possibility of substantially larger losses. Consider it as your fire insurance premium against catastrophic reverses.Bernard Baruch said,"If a speculator is correct half the time, he is hitting a good average. Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he had been wrong."

Short Selling Checklist
Let's review our short selling principles as a checklist that the aspiring short seller should run through before making hat first short sale:

1. The general market should be in a bear trend, and preferably in a position that is relatively early in the bear trend. Shorting stocks in a bull market does not offer a high probability of success, and shorting stocks very late in a bear period can be dangerous if the market suddenly turns to the upside and begins a new bull phase.

2. Stocks that the would-be short seller has identified as candidates for short sales should be relatively liquid. They should have sufficient daily trading volume so as not to be subject to rapid upward price movement if the stock experiences a sudden rush of buyers that can result in a significant short squeeze. a general rule of one million shares or more traded per day on average is a resonable liquidity requirement.

3. Look to short former leaders from the prior bull cycle. Stocks that offer the best short sale opportunities in a bear market tend to be the very same stocks that lead the prior bull phase and had huge price run-ups during the bull market.

4. Watch for head & shoulds top formation and late stage, wide, loose, improper bases that then fail. These are your optimal short sale chart patterns.

5. Look to short former leaders five to seven months or more after the stock's absolute price peak. Often,the optimal shorting point will occur after the 50-day moving average has crossed below the 200-day moving average, a so-called "black cross," and this may take several months to develop. Once a former leading stock has topped, monitor it closely and be prepared to take action when it signals an optimal shorting point.

6. Set 20-30% profit objectives, and take profits often!

A Loud Warning to the Wise
If stocks have been in a bear market for one-and-a-half to two years or more, and many former leaders from the prior bull cycle have corrected 70-90% or more off their bull market peaks, you may be late to the party if you start trying to short the market at such a late stage. Selling stocks short in the late phases of a bear market can be dangerous, if not outright disastrous. Always exercise extreme caution whenever you decide to sell stocks short, particularly if you have been late in identifying the start of a new bear market and are merely following the crowd when it becomes obvious. In other words, if the stock market has been acting terribly and in a downtrend for some time, and you've just bought this book because you have decided you are now going to sell short and cash in on the action-watch out!

Link:
Selling Strategy
http://www.stockhouse.com/help_technical.asp?subitem=euphoria

How to Make Money in Stocks

by William J. O'Neil

C-A-N S-L-I-M

C-A-N S-L-I-M stands for seven basic fundamentals of selecting outstanding stocks

C = Current quaterly earnings per share. They must be up at least 18% or 20%.
A = Annual earnings per share. They should show meaningful growth for the last five years.
N = New. Buy companies with new products, new management, or significant new changes in their industry conditions. And most important, buy stocks as they initially make new highs in price. (Forget cheap stocks; they are usually cheap for a very good reason.)
S = Supply and demand. There should be a small or reasonable number of shares outstanding, not large capitalization, older companies. And look for volume increases when a stock begins to move up.
L = Leaders. Buy market leaders, avoid laggards.
I = Institutional sponsorship. Buy stocks with at least a few institutionaal sponsors with better than average recent performance records.
M = The general market. It will determine whether you win or lose, so learn to interpret the daily general market indexes (price and volume changes) and action of the individual market leaders to determine the overall market's current direction.

18 Common Mistakes Most Investors Make

• Most investors never get past the starting gate because they do not use good selection criteria. They do not know what to look for to find a successful stock.
  
• A good way to ensure miserable results is to buy on the way down in price.
  
• An even worse habit is to average down in your buying, rather than up. This amateur strategy can produce serious losses and weigh you down with a few big losers.
  
• The public loves to buy cheap stocks selling at low prices per They incorrectly feel it's wiser to buy more shares of stock in round lots of 100 or 1000 shares, and this makes them feel better, perhaps more important. You would be better off buying 30 or 50 shares of higher-priced, sounder companies. You must think in terms of the number of dollars you are investing, not the number of shares you can buy. Buy the best merchandise available, not the poorest. The appeal of a $2, $10 stock seems irresistible. But most stocks selling for $10 or lower are there because the companies have either been inferior in the past or have had something wrong with them recently. Stocks are like anything else. You can't buy the best quality at the cheapest price!
  It usually costs more in commissions and markups to buy low-priced stock, and your risk is greater, since cheap stocks can drop 15% to 20% faster than most higher-priced stocks. Professionals and institutions will buy the $5 and $10 stocks, so you have a much poorer grade following and support for these low-quality securities. As discussed earlier, institutional sponsorship is one of the ingredients needed to propel a stock higher in price.
  
• First-time speculators want to make a killing in the market. They want too much, too fast, without doing the necessary study and preparation or acquiring the essential methods and skills. They are looking for an easy way to make a quick buck without spending any time or effort really learning what they are doing.
  
• Mainstream America delights in buying on tips, rumors, stories, and advisory servvice recommendations. In other words, they are willing to risk their hard earned money on what someone else says, rather than on knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.
  
• Investors buy second-rate stocks because of dividends or low price-earnings ratios. Dividends are not as important as earnings per share; in fact the more a company pays in dividends, the weaker the company may be because it may have to pay high interest rates to replenish internally needed funds that were paid out in the form of dividends. An investor can lose the amount of a dividend in one or two days¡¯ fluctuation in the price of the stock. A low P/E, of course, is probably low because the company's past record is inferior.
  
• People buy company names they are familiar with, names they know. Just because you used to work for General Motors doesn't make General Motors necessarily a good stock to buy. Many of the best investments will be newer names you won't know very well but could and should know if you would do a little studyng and research.
  
• Most investors are not able to find good information and advice. Many, if they had sound advice, would not recognise or follow it. The average friend, stockbroker, or advisory service could be a source of losing advice. It is always the exceedingly small minority of your friends, brokers, or advisory services that are successful enough in the market themselves to merit your consideration. Outstanding stockbrokers or advisory services are no more frequent than are outstanding doctors, lawyers, or baseball players. Only one out of nine vaseball players that sign professional contracts ever make it to the big leagues. And, of course, the majority of ball players that graduate from college are not even good enough to sign a professional contract.
  
• Over 98% of the masses are afraid to buy a stock that is beginning to go into new high ground, pricewise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.
  
• The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.
  
• In a similar vein, investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of investment procedure. Investors will sell a stock with a profit before they will sell one with a loss.
  
• Individual investors worry too much about taxes and comissions. Your key objective should be to first make a net profit. Excessive worrying about taxes usually leads to unsound investments in of achieving a tax shelter. At other times in the past, investors lost a good profit by holding on too long, trying to get a long-term capital gain. Some investors, even erroneously, convince themselves they can¡¯t sell because of taxes - strong ego, weak judgment.
  Commission costs of buying or selling stocks, especially through a discount broker, are a relatively minor factor, compared to more important, aspects such as making the right decisions in the first place and taking action when needed. One of the great advantages of owning stock over real estate is the substantially lower commission and instant marketability and liquidity. This enables you to protect yourself quickly at a low cost or to take advantage of highly profitable new trends as they continually evolve.
  
• The multitude speculates in options too much because they think it is a way to get rich quick. When they buy options, they incorrectly concentrate entirely in shorter-term, lower-priced options that involve greater volatility and risk rather than in longer-term options. The limited time period works against short-term option holders. Many options speculators also write what is referred to as "naked options," which are nothing but taking a great risk for a potentially small reward and, therefore, a relatively unsound investment procedure.
  
• Novice investors like to put price limits on their buy-and-sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for eighths and quarters of a point, rather than emphasizing the more important and larger overall movement. Limit orders eventually result in your completely missing the market and not getting out of stocks that should be sold to avoid substantial losses.
  
• Some investors have trouble making decisions to buy or sell. In other words, they vacillate and can't make up their minds. They are unsure because they really don't know what they are doing. They do not have a plan, a set of principles, or rules, to guide them and, therefore, are uncertain of what they should be doing.
  
• Most investors cannot look at stocks objectively. They are always hoping and having favorites, and they rely on their hopes and personal opinions rather than paying attention to the opinion of the marketplace, which is more frequently right.
  
• Investors are usually influenced by things that are not really crucial such as stock splits, increased dividends, news announcements, and brokerage firm or advisory recommendations.

If you hunger to become a winning investor, read the above items over very carefully several times and be totally honest with yourself How many of the habits mentioned above describe your investment beliefs and practices? As Rockne would say, "These are the weaknesses which you must systematically work on until you can change and build them up into your strong points." Poor principles and poor methods will yield poor results. Sound principles and sound methods will, in time, create sound results.

Parting advice: Have courage, be positive, and don't ever give up. Great opportunities occur every year in America. Get yourself prepared and go for it. You'll fmd that little acorns can grow into giant oaks. Anything is possible with persistence and hard work. It can be done, and your own determination to succeed is the most important element.

Contrarian Investing

by Anthony Gallea.

Contrarian Investing is a state of mind. Contrarians seek to invest against the opinion of the crowd when that opinion reaches an extreme. When a stock or a market plunges on bad news, most investors sell, or avoid the investment altogether. But that is just when the contrarian becomes interested and takes notice of a potential opportunity.

The Buy Signals
1. A stock must be down at least 50 percent from its highest closing price during the past 12 months.
2. Any two of the following four criteria
- A Price/Earnings (P/E)of less than 12
- A Price/Free Cash Flow (P/FCF) of less tthan 10
- A Price/Sales (P/S) of less than 1.0
- A Price/Book Value (P/BV) of less than 11.0
3. A change in top management or stock buyback in concert with the other indicators may be viewed as additional bullish indicators.

The Minor Rules
1. Look for high priced stocks. Many institutions won't buy low-priced stocks.
2. Look for companies with market capitalisations of more than $150 million.
3. Consider a change in top management as positive in a company with problems.
4. Consider brand name, proprietary product positioning, company's size, one time event eg war, accident .

The Sell Signals
1. Sell once the stock rises 50 percent from its purchase price, or after 3 years whichever comes first. The exception is when a once-troubled company's prospects are clearly improving, or when the stock price seems to be climbing a "wall of worry".
2. With a stock that's a winner, but isn't yet set to be sold, established a stop loss that guarantees you a profit of 30 percent or more.

Risk Management
1. Place a good-until-canceled, stop-loss order to sell the shares automatically should they fall 25 percent from purchase price. If the stop loss is triggered, you can buy the stock again later, but only at a price higher than you paid when you bought it the first time.
2. Diversify by holding a portfolio of 20 to 35 different stocks with no one stock comprising more than 5 percent of your portfolio (3 percent is recommended).
3. Don't concentrate any more than 15 percent of your portfolio in any one idea or theme (such as gold or utility stocks). Less than 10 percent is preferred.
4. Consider having dividends paid in cash, and not reinvested, to build a stake for other contrarian plays.