Read an Excerpt
Invest to WinEarn & Keep Profits in Bull & Bear Markets with the GainsMaster Approach
By TONI TURNER GORDON SCOTT
McGraw-Hill Companies, Inc.Copyright © 2013 The McGraw-Hill Companies, Inc.
All right reserved.
Chapter OneAnd Away We Go!
Chances are you're a reasonably bright person, possibly between the ages of 25 and 80. You've probably worked at one job or another for most of your life. And, through good sense or good fortune, you have gathered enough money to fund an investment account.
You may have a stockbroker you like and trust, but you want to understand how the stock market maneuvers, for your own peace of mind. Or, maybe you have been investing on your own for a few years, but would like to take a more hands-on approach and drive your capital gains to a higher level. Finally, perhaps you are brand new to the stock market, a bit overwhelmed by the size of it all, and want a guiding hand to help lead you on the world's most exciting street, Wall Street.
So ... where do you start? How do you choose the right stocks, in the right sectors, at the right time? When do you buy? How do you manage the position so you don't lose your shirt or blouse? More important, how do you know when to sell, either to protect your capital or to take profits off the table?
That, of course, is what this entire book is about. Gordon and I have been engineering our way through this challenge for years now. Separately and as a team, we've taught thousands of stock market traders and investors how to take profits from the market.
First, we've noted that the technology advances of the last two decades have empowered individual investors like never before. In the "old days," let's say before the early 1990s, information about publicly-held companies that issued common shares to their stock holders, was held (it seemed) in sacred vaults by stiffly-suited vault keepers known as stockbrokers. These bespectacled men and women sat in their mahogany offices and pushed thick reports with shiny covers across their desks to us—their clients.
"Take this quarterly report home and read it," the broker would say, peering at us down his nose through his bifocals. "If you like the numbers, we'll purchase three hundred (or three thousand, depending on our account size) shares for your account."
"Very impressive," we murmur, staring at the shiny cover and leafing through the binder. Once home, we open the report and scan through the first two pages. Sleek. The pictures of the company's stalwart headquarters and dignified CEO look reassuring. After that, though, the printed paragraphs morph into convoluted financial jargon, punctuated with long rows of mind-numbing numbers. Good grief. Good cure for insomnia, we think. We slap the binder closed and place it on our desk, making a mental note to read it thoroughly ... soon.
A few days later, our broker calls. "How about that company we talked about? Riveting quarterly report, wasn't it? What do you say? Shall we add three hundred shares to your portfolio?"
"Uh, looks like a great company," we agree lamely, eyeing the unread report on our desk. "Sure. OK. Let's go for it."
A couple of days later, the stock-purchase confirmation arrives in the mail. We note with some satisfaction that we own three-hundred shares of the shiny stock. Then our gaze drifts to the commission—$252.00. Geez. That comes to about two percent of the purchase price! We file the statement in a desk drawer, blow out a breath, and walk away. The doggoned stock better move higher.
Those days are over. Freed from the once-hallowed halls of doughty stock brokerage firms and their hefty commissions, investors have been liberated by computers and the ever-present, content-rich Internet. We are the "vault keepers" now, and we have quarterly reports (should we ever really want to read them) as close as our keyboards.
Since by law, stock transactions have to be executed through a registered broker, we can't ignore stockbrokers completely. (The truth is, most of them are knowledgeable professionals who give good advice.) But by now, most of us have opened investing accounts at an online discount broker.
Many of you make your own investing decisions. You rely on your own research, and your own opinions. And, you hold the power to buy and sell stocks via computer or wireless device, with a keystroke, at your convenience, and often paying only single-digit commissions.
You Hold the Power
Say you've got a particular stock you want to research. Go online to your broker's website—or one of any number of other financial sites—and you can journey through the company's fundamentals, such as P/E (price-to-earnings) ratio, earnings per share, graphs of quarterly earnings growth, annual dividend (if paid), and fundamental comparisons to competing companies. (If those terms make you scratch your head, don't worry. They're simpler than they sound, and you'll soon understand them.)
You can also spend a few moments scanning information on the sector where your stock resides. Along with the information provided in later chapters, you can decide if this is—or is not—a good time to enter that arena.
Best of all, once online, you can access historical price charts of your target stock. In the same way that "If you know where a person's been, you can tell where he or she is going," price charts show, at a single glance, the past performance of the stock as relates to price. And, that performance, past and present, can broadcast signals as to the stock's price strength.
News in a New York Minute
Of course, whether we're active investors or not, the most prominent material we receive via satellite every single minute of every day is the news. The evolution of wireless networks and social media has accelerated news delivery to near-lightning speed. On a global basis, news arrives as happens, or seconds afterwards. We are instantly informed about uprisings and wars, storms, geopolitical events, and financial troubles the world over. To a greater or lesser degree, all of these events can affect the prices of stocks.
Does that mean we panic and dump all our portfolio's positions the same day a chunk of disruptive news blindsides us? Absolutely not. But as wise investors, we can learn and apply techniques that guide us to take prudent actions. Then, we know which news to let pass ... and which news to investigate. We know when to hold our positions ... and when to take action.
The Global Financial Markets: A Community Affair
From Sydney to Shanghai, from Berlin, to London, to New York, each weekday the sun rises and sets on our global community of financial markets.
Every trading day, the world over, traders and investors partake of the sumptuous buffet offered by the global markets. Indeed, we could say the smorgasbords of stocks, bonds, and other financial assets on display offer the most appealing—and exciting—goods in the world.
Why are they so attractive? Because it is in these settings that you can trade your dollars for shares (units of ownership) of the largest, most dynamic companies on earth. As these companies expand their businesses and become worth more, your shares of ownership increase in worth.
Want to sell your shares? If your stock has risen in value since you first purchased it, you will receive a higher price than you paid, and thus pocket a sweet profit.
Or, would you rather hold on to your shares on the chance that during the next five years or so, your share value will double, triple, or even multiply ten-fold? (We call that a "ten- bagger.") That scenario can become a reality, as long as you assess your risk and manage it appropriately.
By now you are thinking, "Hey, stock prices go down, too. The stock market isn't all ice cream and apple pie."
You're absolutely right. If you've participated in the equities market for any length of time, you've experienced price retracements and corrections, some of which have been devastating to investors. Falling prices are the risk that we take for the chance of potential reward.
Recessions and depressions mean less spending by companies and consumers, so demand for goods (produced by companies) shrinks. Shrunken demand results in decreasing company earnings. Lower earnings usually result in lower stock prices. A severe turndown can also cause what we call a "bear" market, which can last from several months to roughly two years.
In those situations, we agree with Ben Graham, famed economist and co-author of the legendary book Security Analysis, who said, "The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques" (Benjamin Graham and David Dodd, Security Analysis, New York: McGraw-Hill, 1996). We will show you such a "selling policy" in the chapters to follow.
On the "silver lining" side, please know that markets have an upside bias. Growth is more prevalent than contraction, and economic expansion dominates most of the time. That means stocks of stalwart companies increase in value more than they fall. We call rising stock prices throughout the majority of sectors for a protracted period of time a "bull" market. And here's more good news: on average, bull markets last longer than bear markets.
First and foremost, Gordon and I believe that your investment account should always be an asset—not a liability. To accomplish that objective, we will show you how to manage your account on a risk and time-friendly schedule that you will personalize to fit your objectives.
Strategy-wise, we'll push into a "full court press," when the bull is roaring. But when the bear emerges from his cave, growling and ready to fight, we confirm our position's protective stops, and perhaps even head to the sidelines. Our strategy is to earn—and keep—our profits. We have no intention of handing them over to a bad-tempered bear.
What's in It for You? The Benefits of Investing in the U.S. Stock Market
The following list offers some of the advantages of investing in the stock market.
* Voted the "Most Likely to Succeed"—For the past seven decades, stocks have returned about 10.5%. Corporate bonds returned 4.5%, U.S. Treasuries averaged 3.3%, and inflation grew 3+%. When Treasuries' return equals inflation, your return on Treasuries is zero. Figure in taxes, and you lose money on that deal. Over time, stocks offer capital appreciation and many pay an annual yield that exceeds that of Treasuries.
* Convenience— Imagine you see a home, or an office building, or piece of property you'd love to purchase. If the current owner is unwilling to sell it to you, you can't have it. Period. Or, say you already own a home, office building, or piece of property. You want to sell it. If no one offers to buy it, then you have to keep it until a buyer shows up. In other words, just because you want to buy, or want to sell, doesn't mean you can. Stocks and exchange traded funds (ETFs) are different. If you see a publicly traded company that looks attractive and fits into your investing objectives and risk management criteria—and you like the price—you can go to your broker's website, log into your account, and purchase shares of that company in a heartbeat. When you want to sell those shares, make a quick visit to your online broker and complete the sale.
* Liquidity— We say publicly traded stocks are "liquid." That means there are ample shares available during the trading day to buy and sell. So, if you see an attractive stock and want to purchase shares in it, assuming you have enough purchasing power in your investing account, you can own it in a nanosecond. As well, if you own a stock and want to sell it, someone at the stock exchange is always there to buy it. That means your stock portfolio is always "liquid."
* You, the Business Owner, Minus the Headaches— When you invest in stocks and their colleagues, ETFs, this offers you the advantages of owning a chunk of the world's most successful companies. Even better, you own them without the headaches of having to get up every weekday morning, put on a tie or high heels, and go to the office.
* Timeliness— During different economic environments, certain sectors (sector examples are: energy, technology, health care; we'll discuss these in detail later) thrive, while others tend to dive. Investing in the stocks and ETFs gives you the benefit of seeding your account with the right sectors at the right time, and then "harvesting" the gains given by those sectors at an opportune time.
* Double Your Pleasure— Occasionally, stock prices not only rise in value, the shares, themselves, can multiply. If a company wants to make its shares more attractive and affordable to a wider audience of investors, the company's board of directors will authorize a "stock split" to create more shares, selling at a lower price.
If the company authorizes a 2-for-1 stock split, it doubles the number of outstanding shares and halves the current price. For example, if you own 100 shares of a stock selling at $50 a share, for a total value of $5,000, and the company authorizes a 2-for-1 split, you would own 200 shares priced at $25, with the same total value of $5,000.
Many stocks of U.S. industrial icons, such as the thirty stocks listed in the Dow Jones Industrial Average, have split ten times or more since they were first offered. McDonald's (MCD) went public (first issued stock certificates in a public offering) in 1965; subsequently, the stock has split eleven times. Imagine you bought 100 shares in 1965, for the offering price of $22.50 per share. As of this writing, forty-seven years later, you would now own 37,180 shares of the hamburger king, worth more than $3.6 million. Very nice.
Bubbles and Belly Punches: The Challenges and Risks of Investing in the Stock Market
Let's pretend we know an investor named Pamela. Pamela has a seven-year time horizon before she retires. She has put aside savings and intends to put that money into stocks to build a nest egg for her retirement. Pamela doesn't know, and no one tells her, that the market has moved up for the last four years. The uptrend, as we say, is "mature," and the major indexes are losing steam. Technology stock prices, especially, are considered to be forming a "bubble." Stock prices of market leaders such as Apple, Inc. (AAPL), and Google Inc. (GOOG) have flown to extremely high prices of late. Now, to most market pros, they appear overblown and subjects for profit-taking.
Pamela opens a brokerage account. Just as the market begins to scream south in a dive, she unwittingly plunks much of her hard-earned savings into technology stocks. Result? She loses a hefty percentage of her portfolio's value, and her retirement is delayed until the market recovers.
This story could have ended on a happy note. Had Pamela known that it is unwise to buy stocks without perusing the company's "fundamentals" and "technicals" as you will learn in the pages that follow, she would have known to wait for the market to pause and then show signs of strength before she purchased. She could have retired on time, and her savings would have grown nicely.
Billionaire and mega-investor Warren Buffett says it perfectly. "In this game, the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder for six months, until you get a pitch."
Whether we are teaching live seminars at financial forums or teaching online webinars, the question Gordon and I are asked most often is, "If I decide to buy shares of a certain stock, how do I know the right time to get in?"
In this book, using the GainsMaster approach, we are going to show you how to choose stocks and ETFs, and opportune entry methods, using simple, yet extremely effective measuring tools.
Please know, however, that while investing wisely in stocks and ETFs represents a terrific technique for growing your money, participating in the potential rewards of the financial markets also involves risk. When you purchase shares of stocks or ETFs, or any other asset class—no matter how carefully you evaluate the underlying companies, sector, or timeliness—there is always a chance your position can decrease in value.
After all, the financial markets don't stand still. And if they become agitated enough, they can act downright cranky. Every day, markets around the globe react to rising or falling interest rates, geopolitical events, economic and earnings reports, wars, weather, and seasonal forces. To that extent, risk is inherent to the stock market. It's baked in. It's part of the game and always present.
As a savvy investor, you will want to purchase equities in a market that has enough upside room to grow in an uptrend—as opposed to buying stocks in a market that appears to be toppy and overbought, as our investor, Pamela, did earlier. (We'll explain in upcoming chapters how to spot an overbought market.)
If you follow the guidelines we offer to you in this book, your losses should be minimal. Your profits will far exceed them. Before you invest money in stocks, however, consider your personal risk tolerance. If the thought of losing any amount of money in an equity position gives you hives, then you may want to avoid the financial markets and invest your money in more conservative vehicles, such as money-market funds or certificates of deposit.
What We Bring to the Party ...
Some of you already know me from my earlier books, as the author of A Beginner's Guide to Day Trading Online, Second Edition, A Beginner's Guide to Short-Term Trading, Second Edition, and Short-Term Trading in the New Stock Market.
"Wow," you might say. "That's a lot of trading stuff. I'm not interested in buying and selling all day. I just want to buy good stocks, sit back, and make money. Do you know anything about investing?"
Sure do. I started investing in the stock market in 1991; I am both an investor and a trader to this day. Learning—and eventually teaching—faster-paced trading techniques added immensely to my knowledge of the stock market. The knowledge also enhanced my ability to earn profits.
Excerpted from Invest to Win by TONI TURNER GORDON SCOTT Copyright © 2013 by The McGraw-Hill Companies, Inc. . Excerpted by permission of McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.