Chapter 01 - Learn from the Past Flashcards
Fear and Greed
The time to buy stocks is when everyone else, including you, are the most scared. The time to sell stocks is when everyone else, including you, thinks that the sky is the limit for profits.
The trend is your friend
2/3rds of stocks follow the market. So do not try to be a hero by going against the general trend of the market. When deciding on whether or not to buy a stock, first look at the direction of the index it trades in and only buy in an uptrend and sell short in a down trend.
Don’t catch a falling knife.
Buy stocks on their way up after forming a base and avoid buying stocks in a downward trend . Look for a successful re-test of the established low and subsequent reversal before buying, and do not buy if the stock makes a new low. Don’t average down on your losers until the conditions described above are met.
Thumbs Up Thumbs Down
Use analysts as contrarian indicators. Remember that analysts work for the firms that hire them, not for individual investors. Stock upgrades near a high are a sign to sell while downgrades near a low are a sign to buy. In cases of upgrades near the low or downgrades near the high, wait a couple of days until a trend is apparent and the knee jerk reaction is over and decide accordingly.
The Long-Term Trap
Your broker may say, “Don’t worry about short-term fluctuations in the market. You’re investing for the long term.” He’s playing with YOUR money, not his.
Be sure to place loss limits of no more than 15%. That is, if a stock closes at 15% below your purchase price, sell it and replace it with a better choice.
Trading or Investing
“Investing for the long haul” should actually mean that you should be in the market for the long-term. It doesn’t mean falling in love with any stock and ignore taking profits.
The days when you could buy Microsoft or Intel and hold for years and count on 10-20% return every year are gone with the emergence of the Internet.
Hold onto a stock as long as it is in an upward trend; when you see it selling off on large volume or breaking below the previous low, you should get out and take your profit or loss. Do not try to justify holding onto the the stock just because you think the fundamentals are good.
The Present or the Future
Fundamental analysis tells you which stocks to buy.
Technical analysis tells you when to buy them.
Price and Volume
Price and Volume should move together. Anything contrary spells trouble.
1) In an uptrend, a reduction in volume as the price is rising indicates a pending reversal
2) In a downtrend, an increase in volume indicates a pending sell-off
3) A substantial reduction in volume after a steep sell-off indicates a pending upward reversal
Smart Money or Stupid Money
Institutions and fund managers are generally thought of as the smart money. Retail investors are generally viewed as stupid money. The reverse is true.
How many retail investors can buy 10,000+ shares of a $150 stock, sending it to $800/share? It was the stupid money mutual funds and institutions buying Qualcomm.
If you own a stock that eventually gets noticed and experiences heavy fund buying resulting in massive average daily volume increases over extended periods of time, take your profits and run.
Your Broker Can Make You…Broker!
There are low-risk strategies to make 20%+ cash income from your winning -or- losing stocks each year without having to sell them. You don’t need to rely on your broker any more.
Do Not Average Down to Zero
The only time you should average down is when the following two conditions are in place:
1) The stock has stopped dropping to new lows and has established a base
2) The stock is emerging from a base with a new uptrend.
The Diversification Trap
95% of actively managed mutual funds underperform the S&P 500 index.
Don’t diversify by buying mutual funds, which frequently own hundreds of stocks, which most likely will underperform the market.
The techniques described in this book apply only to stocks, not mutual funds.
The cash income using the strategies describe in this book will give you 20% returns and beat most funds without having to sell.
The “Are You Close to Retirement Trap”
The standard advice most financial advisors give to individual investors is to move their money from growth into income as they approach retirement. They usually suggest selling some stocks and buying bonds and CDs and be satsfied with 5-8% returns. Why do this when you can continue to safely earn 20% or more with stocks?
Keep stocks only if they are performing well. If long term indicators (described in Chapter 14) turn negative on a stock, you should sell it and replace it with a better candidate.
