Improving Investment Profits
This article is recreation of a booklet originally published by @toadslinger in 2002. I am expecting a total of 7 installments.
This report is intended as educational and informational material only. The process of investing your funds for profit can be risky and requires a certain amount of caution and due diligence. Iam not a registered financial advisor or investment broker and none of the information in this report should be considered as a buy or sell recommendation.
This page was not written for beginners, but, with the assumption that you are familiar with the fundamentals of investing. Beginners are still welcome to read and use this report, just be prepared to do a little homework to get the maximum benefit from this material.
I selected the title "Improving Investment Profits" because there is no such thing as the perfect investment strategy nor are there any guarantees. If you are an investor that is practicing "Buy and Hold", "Buy the Dips", or "Long term Investor", then this report was written for you. I will show you how to tell when your stock or mutual fund is about to turn down which would normally cause you anxiety and lost sleep. Now, armed with the information in this report, you can avoid most down cycles allowing your portfolio to continue to grow. After using these techniques for 8-10 years, your portfolio should be 2-4 times larger than a typical "Buy and Hold" portfolio.
Many investors were drawn into the stock market during the bull market of the 1990's. Most of them committed their money with little knowledge or planning. They were just anxious to make some money and get on the train before it left the station. The investment media drew them in with convincing messages of "Be a Long-Term-Investor", "Buy and Hold", "Diversify or allocate your funds among industry groups", "Buy the Dips" and "dollar cost averaging". All of these slogans are really "Buy and Hold" in disguise. In 2000, along came a monster of a bear market which began slaughtering all of the investors that didn't know their market history and whose investment method wasn't designed to protect them from a major decline in stock prices.
I couldn't stand it anymore after hearing "Buy and Hold" advice on the radio for two months between May to early July of 2002. Having studied the market since 1968,I knew intuitively that there were investment strategies better than "Buy and Hold". I developed the strategies in this report to debunk the "Buy and Hold" concept. I used an imaginary investment of $ 15,000 between 1994 and 2002, an 8 year period that covered 5 years in a bull market and 3 years in a bear market (see the chart #1 below).
After 8 years, the returns ranged from $18,785 to $162,444. In this report I will show you how and why I developed each strategy and how these strategies perform in both bull and bear markets. You will find that some of the points I make are common sense, but, the main thing most people need is a plan for WHEN to sell the stock they hold. My examples use a pair of mutual funds, but, the principals can be applied to common stocks and I will provide some examples at the end of this report. Throughout the rest of this report I will use the term STOCK to mean "stock or mutual fund".
The first rule you must learn is: (1) Don't get married to any stock. All investment vehicles are subject to bear markets either through their own fundamentals, those of their industry or national economic cycles. Your money is invested in a given stock for profit, not to prove your loyalty. You will profit more by sidestepping major down moves rather than hanging on and hoping to get even some day, that's an excuse of a gambler not an investor. When to move OUT of a stock is the most crucial question in investing and one I will help you answer in this report.
The second rule is: (2) When any stock stops making you money, sell it and move on. At any given time there are always some stocks rising and some falling. In a bull market, stocks rise while in a bear market there are hedge funds and put options rising. As a corollary to this rule, never suffer more than a 15% loss in a stock. You should either have a stoploss order at this price level or initiate action yourself to get out of a stock when reaching this level. While the techniques covered in this report can support your decision to buy a stock, they are more intended to help you decide when to sell because of a downturn in the stocks' price.
The third rule is: (3) Don't get greedy pursuing the highest return. The recent bull market made some investors feel like they couldn't lose and that a 200+% annual return on Tech stocks or IPOs (Initial Public Offering) were normal. You will never know which stock will yield the highest return. No matter how fast a stock rises, there will always be another you ignored that rises faster. You can't hop from stock to stock in pursuit of the highest gain or worry about missing a high flier. You will find that avoiding the normal market down cycles will give you a greater advantage than riding a high flier.
And the fourth rule: (4) Do your homework, study. I'll translate this into three areas, study fundamental investing; study technical investing and do your "due diligence" on each stock you consider buying.
For those that need the definitions; fundamental investing is the use of details of a company's business like sales volume, profit margin, cash flow, inventory levels, production etc to judge the health of the company and its growth potential. Technical investing is the analysis of the behavior of a stock's price and use of certain recognized price patterns to make buy/sell decisions. Due diligence means to check the current condition of the company whose stock you want to buy in search of (good or bad) issues that could affect its stock price. Such issues include major law suits, product recalls, investigation by the SEC, employee strikes, new products being developed/announced, landing new business contracts and hiring/firing key employees.
Neither fundamental or technical investing is perfect all by themselves. A better approach would be a blend of the two. Search out acceptable sources for stock information. Use the internet for your research or subscribe to a stock information resource like Value Line. The public libraries in medium to large cities have a lot of free investment information including the Value Line reports I mentioned.
While you are studying, expand your list of subjects to include inflation, hyperinflation, deflation, depression and economic collapse. I am not suggesting that any of these will occur, but, you need to understand these subjects and in particular, how to protect against them. Once you have studied these issues, you will recognize their symptoms and know how to protect your investments.
while studying sharp market rises and declines the thought kept nagging me "how to profit from such moves", "when to jump in (or out)". In the long run, the answer is get in (or out) early. The techniques presented here are for selling, but they can also be use for buying.
This is installement 1 of 7. Please vote and follow @toadslinger