HOW TO BECOME A WEALTHY INVESTOR PAGE II
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Reproduction, duplication, or free redistribution of this book is permitted but only in its entirety. The entire book may be distributed without charge and without any changes, deletions or additions. You are not permitted to use any part of it in any other way without prior written consent from Wealthy Investor Limited.
Copyright: Wealthy Investor Limited, © 2010–2011HOW TO BECOME A WEALTHY INVESTOR PAGE III
Note: Principals of Wealthy Investor Limited may actively trade their own stock recommendations. The following legal notices are required by the U.S. Securities and Exchange Commission (SEC):
How to Become a Wealthy Investor (this book) and Wealthy Investor Weekly is an impersonal service; therefore, no consideration is made towards your individual financial circumstances. All contents presented within these publications and wealthyinvestorweekly.com (henceforth referred to as "the Web site") is not to be regarded as investment advice. It is for general informational purposes only. Trading securities involves risk, so you must always use your own best judgment when trading securities.
We cannot guarantee profits of any kind, nor can we protect you from losses. You assume the entire cost and risk of any investment you choose to undertake. You are completely responsible for making any investment decisions. Wealthy Investor Limited, its owners, and representatives are not registered as securities broker-dealers with the U.S. Securities and Exchange Commission (S.E.C.).
Use of the Web site and other materials in no way constitutes a client/advisor relationship. All information we communicate to you either through our Web site or other forms of communication are purely for informational purposes. We recommend seeking individual investment advice before making any investment; you are assuming sole liability for your investments. Wealthy Investor Limited will in no way have discretionary or any other authority over your trading or investment accounts.
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Wealthy Investor Limited, its owners, or its representatives may hold positions in the securities mentioned in its weekly advisories. However, in no way is Wealthy Investor Limited soliciting an offer to purchase or to sell securities mentioned.
There is no guarantee past performance will be indicative of future results. No assurances can be given that the trades posted by Wealthy Investor Limited will be profitable or will not be subject to losses. Always take time to do your own research.
The results listed in this book are based on historical data. They were not actually executed. Back testing results have certain inherent limitations.Unlike an actual performance record, simulated trades do not represent actual trading. Also, the trades may not have been actually have been possible to execute. The results may have over or under compensated for the impact, if any, of certain market factors such as lack of liquidity, money flow, etc. Your results may have been better or worse than the results portrayed. No representation is made that any account will or is likely to achieve profits or losses similar to those shown.
HOW TO BECOME A WEALTHY INVESTOR PAGE IVNo independent party has audited the results shown in this book, nor has any independent party undertaken to confirm that it adheres to the assumptions or conditions specified in the methodology.
While the results presented at this book are based on certain assumptions that are believed to reflect actual trading conditions, these assumptions may not include all variables that can affect, or have affected in the past, the execution of trades indicated by Wealthy Investor Limited.
The hypothetical results in this book are based on the following assumptions:1. The record does not include deductions for brokerage commissions, exchange fees, or slippage.
2. The simulation assumes that prices are not influenced by the trades of Wealthy Investor Limited, its owners, or its representatives, regardless of the number of trades executed. 3. The simulation assumes purchase and sale prices believed to be attainable. In actual trading, the prices attained may or may not be the same as the assumed order prices.
4. The hypothetical results do not take into account any tax implications arising from the sale or purchase of securities, which in actual trading have an impact on net gains and losses. Terms and Conditions
Reproduction, duplication, or free redistribution of this book is permitted but only in its entirety. The entire book may be distributed without charge and without any changes, deletions or additions. You are not permitted to use any part of it in any other way without prior written consent from Wealthy Investor Limited.
You agree that by yourself, or with others, you will not compete with Wealthy Investor Limited, or have any business interest in such enterprises that shall be engaged in competition, as proprietor, partner, employee, shareholder, principal, agent, consultant, director, officer, or in any capacity or manner whatsoever, anywhere unless as a stock broker. You also agree not to lend money to anyone for the purpose of creating a service that competes with Wealthy Investor Limited.
We sincerely hope you benefit from the use of our materials and increase your investment success.HOW TO BECOME A WEALTHY INVESTOR PAGE V
Introduction: Making it on Your Own ............................... 1
1. First, a Warning............................................................. 9
2. Fear, Greed and Getting the Timing Right............... 12
3. Three Unique Tools ..................................................... 19
4. Basics that must be included....................................... 28
5. Stop orders and emotions............................................ 44
6. Patience: More Than a Virtue.................................... 63
7. Balancing Act, Investment Style................................. 66
9. Putting All the Pieces Together .................................. 72
10. Rules: Quick Summary ............................................... 80
In the summer of 1983, after the stock market had made a dramatic recovery following the then-worst recession since The Great Depression an otherwise stable man in his mid-50s told me he was quitting his job to play the stock market. He had put a sizeable chuck of cash into stocks in mid-1982 and made a bundle following his broker's tips. Easy. Too easy for his own good in fact.
He knew nothing about investing. He'd sent away for a welladvertised home study course. His brokers (I think he had about six with a number of different firms) told him what to do. His total involvement was to agree with them, count his winnings, and to dream of a life of ease and riches. Nothing to it!
Naïve? Most people would think so, particularly if they had any experience at all with the stock market. Yet his story is similar to that of thousands of new investors who flock to brokerage offices each time stocks head upward. (There are not so many around when they should be: when stock prices are low and headlines talk of economic hard times.) We'll get you over than problem with this book, as you will see.
The man was so excited if he had been a balloon he wouldn't have needed helium. He needed to be brought down to earth. Had his name been Virginia perhaps I wouldn't have had the heart to give him the real low-down on Santa Claus; since it wasn't, I thought he'd be better off with a real dose of reality. A number of chats later, which included an orchestrated glimpse of the pitfalls awaiting the unwary, he came to realize he'd been just plain lucky, as gamblers sometime are. He kept his job, was able to take some profits before the market's subsequent decline, and then had the capital (and a little more knowledge) to have a reasonable chance at future success.
"Five of seven of my brokers' recent offerings lost money and two broke even," he told me some weeks later. "I guess almost anyone could have made money when I did. Now, it's not so easy."
He learned at least one valuable lesson: The key to making money in the stock market is correct timing. Each time the market hits bottom, a proportion of rank beginners get lucky and buy. Some make spectacular gains and their stories spread. People are quick to boast of their winnings, reluctant to talk about losses.
This makes it all look so easy to some of the uninitiated – and therein lies the trap. "Uncle Joe's broker gave him a real winner. I'll give him a call to see what he's got for me."
Uncle Joe's broker will always have something. That in itself is a problem; there are times to step back from the market. And even at the best of times what Uncle Joe's broker offers you may not bear the slightest resemblance to the goodies Uncle Joe got. And if what you get doesn't live up to expectations? Who do you turn to next? We all have to stand on our own two feet.
Brokers and analysts, some of them excellent, have their uses. With few exceptions, they want happy clients. Happy clients mean more commissions in the future. Why then do the majority of stock investors lose money most of the time?
The most common belief is that the "professionals" have the important facts first and the little guy is left out in the cold. But if stock price movements are based solely on facts, why don't the professionals do better?
Dozens of studies have been carried out in the U.S during the past many decades involving records of hundreds of analysts, pension fund and mutual fund managers and thousands of their favorite stocks. A whopping 71% performed worse than the average for the Standard & Poor's basket of 500 stocks. Since those stocks at any given time include a number of duds commonsense should say to avoid, one might suppose these people should outperform the average.
And if the professionals have a tough time, what chance for you and me?Surprisingly, we have a better chance. We can make decisions in minutes while institutional decisions often involve committees. Managers under pressure to perform often try to play it safe – which means going along with the pack, which is usually wrong.
Analysts, particularly those working for stock brokerage firms, must avoid upsetting the management of those companies on which they report for two reasons: to do otherwise risks cutting off their source of information and, perhaps more importantly, corporations seeking to issue more shares may not give the lucrative underwriting to a brokerage house that has been critical in the past.
The essential conclusions to be drawn from all this are:
• We must take charge of our own destiny. It's our money; we must not expect someone else to do all the work so we can reap all the benefits. This, among other things, means avoiding high-priced full-service brokers and using much cheaper discount brokers who do not necessarily offer advice that, in any case, you will not need once you start to follow the system laid down here.
• Since we cannot have all the facts all the time (and if we could, how could we put an accurate value on each fact?), we need to know how to use the tools that are instantly available to everyone in making decisions. This book will show you how to do that.
• We need a system to know when to buy and, perhaps more importantly, when to sell.
• We need to be able to assess risk and to apply that assessment so the "risk" of making money is greater than the risk of losing it.
You wouldn't expect to start a business without knowing something about it. You wouldn't hire managers to make all the decisions. You'd also make sure you were psychologically suited to the new business. The same rules apply to the stock market. If you're prepared to work at it, to make it your business, you should find this book helpful. If you want a chance of money without work, we will even do the work for you for a very low price.
We started this introduction by talking about a man in the early 1980s who thought he would quit his job to play the stock market. Believe me, he is quite typical. Maybe you recognize him in yourself or in a friend or relative.
Fast forward 20 years and we were just coming out of another stock market slump. Forward a few more years and we recorded an exceptional event, the first since The Great Depression: Investors on average lost money over an entire 12-year period.
That period is covered in this book and you will see it provided great profits.More people now are dubious about the stock market. As always after a bear market, many have locked in their losses and left never to return.
Retirement savings, shepherded so carefully by so many, were decimated, plans changed, dreams abandoned, retirements were delayed if there was that option among the millions of lost jobs.
But it did not have to be like that! I don't know how many times I have to say it, but investing with a plan is the easiest way I know of to make a lot of money without working for it. Contrary to popular opinion, you do not need a lot of money to start. The odds are strong that money you waste daily without even thinking about it can soon be quite sufficient to begin with.
Ask yourself this very important question: Was it the stock market that was wrong? Did it do anything it had not done before? Or was it that so many players were not able to deal with it in a way that would have increased their wealth rather than decreasing it?
The stock market is not as complex as the average person is led to believe. Most of it needs no understanding because you should not be involved with establishing your own strategies unless you are a pro. For now, you need a basic winning strategy uncluttered by all the rest. How to Become a Wealthy Investoris that strategy.
If you have a few thousand dollars left in the piggybank after the recent debacle, please don't despair that there are fewer dollars now than there were before. I am going to show you – to prove to you – such an idiot-proof way to have stocks tell you when and how to invest in them. That's right: the stocks themselves will tell you.
In reality shares, when they are not merely computer entries as is the case with most today, are merely pieces of paper incapable of telling you anything. But knowing how to read instantly what people are doing with them and being prepared for what they may do next week can tell you everything you need to know to be right almost every time. It's like having a map for an area with only one street.
You don't need brains, six degrees, a magic wand – just the ability to read a trail, just like a hunter, but a lot easier.Let's talk about something you already know: stocks sometimes rise and they sometimes fall. Surely even the most skeptical can agree with that. That simple and widely-known fact is the starting point for our journey. At the end of this book, after I have given you a handful of very simple rules you can follow with no further help, we will see the statistics for each stock and each trade carried out with the 30 stocks in the Dow Jones Industrial Average. The data goes back beyond 1970 for some stocks.
I urge you to prove the results for yourself. Follow the summary of rules shown in this book with each chart and know why certain things were done at particular times. Get comfortable with what you discover. You will have seen nothing like some of the system's elements anywhere else.
You be the judge of whether what you learn really works. Those 30 Dow stocks were chosen to provide a group of senior companies without any ability on my part to choose ones that produced better results than others. A computer program was written to make sure exactly the same rules were applied to every stock; no fudging.
Once the computer is switched on, there is no human intervention. The program reads markets all by itself.I can't swear to you that if you follow the rules precisely you will get exactly the same result during the next 30 or 40 years. Times and circumstances change – they did during the past several decades, too. But doesn't it seem pretty obvious that if the deer come out of the woods in early spring to graze in a field they will do so again next year?
I will tell you in the smallest detail and as simply as possible everything you need to do. But I'm also going to tell you it will mean regular work, not hard, but perhaps tedious. I'm not going to fool you.
But I will also tell you how to get all the answers from my company for each of the S&P 500 stocks every week with no work; you will know exactly what to do and what not to do to be as successful as you can be.
We will do all the work for you for a pittance! If that doesn't interest you, nothing ever will.Speculators, gamblers and many who consider themselves investors spend hours, weeks and months trying the figure out when is the best time to get into the market. They are almost always too late (or they suffered all the way through the previous crash). When the majority is sure the time is right, the best profits have long gone and the bull market is closer to dying than rising from the ground.
The average investor buys close to market tops and sells close to market bottoms (or they buy and hold with no changes along the way). How can anyone expect to make better than average returns that way?
This book will lead you without thinking, worrying or wondering to buy low and sell high. You will usually buy near the bottom and sell near the top. What do you think would happen to your returns, to your net worth, if you were able to buy low and sell high most of the time?
Think about this for a moment: What would change in your life? What would you do that you cannot do now? How would it feel not to have to worry about money again? I have been there and believe me it makes a huge difference.
You will see that what is written here is pure commonsense. You will know that what I teach works as advertised because you will be able to prove it and see it for yourself.
Not all will have the same experience or understanding as we start so forgive me for including some basics with the nuts and bolts.
Ready to get started? HOW TO BECOME A WEALTHY INVESTOR PAGE 9Completed Trades S&P 500 Dow 30
Number of trades 955 97
Profits trades 842 87
Losing trades 113 10
Average profit per share $13.12 $10.73
Average annual return on 49.08% 64.40% investment
Average length of investment 5.88 years 6.70 years
In fact, it has been an unbelievable journey that started more than 25 years ago when I wrote the Canadian best selling book, Take the Guessing out of Investing.That book and the program associated with it led to a career in the investment industry. The program averaged a fraction over 22%...but I always suspected it could do better.
In March 2009 I scratched out a plan on a scrap of paper torn from an exercise book. The intent was to simplify the old program, reduce the losses it had and increase profitability. Instead of trying to capture every hop, skip and jump of a stock I wanted a more patient approach that would reduce losses and commission expenses.
But you know how it is: you have what you think is a great idea and if only you added this...and this...and a little of that! Cooks know that does not always work. When the program was written to include all these extra little twists, results were a disappointing 11 or 12%.
(Eventually, the program designed on that scrap of paper was written by our excellent in-house programmer and chief technical officer. As expected, the average rate of return was around 30%.)
But before that program was ever written I got very frustrated. I threw out rules that for years I had understood were commonsense staples in the industry. Then late one night I just about fell over: the average annual return for the 30 stocks in the Dow Jones Industrial Average for some 40 years was then 56.46%.
I was ready to dance around the office...for all of two seconds! Then I realized that no sane person would believe this return and our business dreams came close to imitating the Hindenburg.
Our answer was to hire professionals to help us to show you that what we say here and on the website is absolutely true. There cannot be the slightest whiff of smell or our credibility (and our business) is gone in a flash. That's why every effort has been made to provide you with all the details of how we do what and why in this book.
Meanwhile, despite the returns, all was not rosy with the program. From time to time, it gave gut-wrenching drops of 50% or more.
We continued to tinker with it and, really by accident, found a way to eliminate most of those losses, cut out most of the gutwrenching drops along the way and – to make matters worse! – improve the average annual rate of return.
Losing trades with the addition of the final tool were cut to 10.31% for the 30 Dow Jones Industrials and 11.83% for the 500 stocks in the Standard & Poor Index. If you are a typical investor, you know how phenomenal that is.
The statistics at the start of this chapter are from February 11 2011.Charts for all 97 Dow Jones trades are at the back of this book. They are annotated so you can see exactly what was done when and why. Spend some time with them to understand what is happening; that should give you some confidence to move ahead with the system yourself.
HOW TO BECOME A WEALTHY INVESTOR PAGE 12There's a time to buy stocks and a time to sell them. Knowing which is which is vital to our financial health. Even General Electric or IBM, solid though they are, can cause losses of sickening proportions if our timing is wrong.
It is often said that people who try to time the market, who try to gain from market fluctuations, typically make less money than those who hunker down and hang on to their stocks regardless of what the market does.
Frankly, for most people, this counsel is correct. What those who quote it forget is that the majority of investors rely on emotion. They typically buy too late in a cycle and then sell too late. They have no disciplined approach.
Our objective, quite obviously, is to buy low and sell high. The recipe for success is in recognizing when 'low' really is low and when the latest in a series of highs is the end of the ride.
If we're too subjective in making our decisions, those demons – Greed and Fear – tend to raise their ugly little heads. Joined by their good old buddies, Ego and Impatience, they can create havoc with a bank balance.
Here's how they often work: Let's suppose that Blunder Corp. traded as high as $20 three months ago. It's a good, solid company with bright prospects but it is now trading at $15.
"But," we, the guys with the money, ask, "how do we know it won't go down further?"
"Let's figure out how low it will go," Ego chimes in. "Wouldn't we be smart if we bought it at a price lower than all those other folk paid?"
"Yes," agrees Greed, "and we'd make even more money then when the price goes back up."And some days later, with the price just a notch higher than the target set by Ego, Impatience says: "Hey, guys, the price doesn't look as if it's going to drop any more. Let's buy now before the thing squirts up on us. We don't want to miss the opportunity."
So pressured by the four demons, we let them make our investment decisions. Our role? Stand by with the check book. And sweat a little!
Farfetched? We'd never allow such a thing to happen to us, right? Be truthful! In thousands of homes and offices across the country variations of this skit are played every day of the trading week.
Objectivity is our only protection and each of us must apply it in our own individual ways. We ask the market to tell us in which direction it is most likely to move next; it tells the truth often enough to make the questioning worthwhile. The questions and answers are communicated through stock price trends.
These trends are set by a combination of fear, greed, reason, calculation, invention, corporate success or failure, luck, the wish of one person or group to acquire more shares or to dump them…there is such a vast array of factors, most in opposition to others, occurring in the same instant and in secrecy that it is quite impossible for you or me to figure out what will happen in the next second, let alone the next week.
But the market gives us pretty accurate instant clues if we will but listen.It would be supremely convenient if, in a bull market, stocks went steadily and predictably up, and in a bear market they went steadily and predictably down. Real life ain't so convenient.
Anyone who has followed stocks knows they are damnable critters that wobble a lot, sometimes going down on good news, up on bad, often up on rumor, down on fact – even if the facts confirm the positive rumor.
For all that, they are not nearly as unpredictable as one might suppose. They tend to move in trends rather than in completely haphazard fashion. Spot those trends soon enough and the profits are good when we are right, the losses limited when we are wrong.
To work the How to Become a Wealthy Investorsystem, we need up-to-date weekly bar charts of stock prices over the past s
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