Stern (To Hell and Back) offers fierce investment advice, goading readers to admit that their brains get in the way of profits. They must trust "animal instincts" instead, sharpen their claws and get ready to live by the "law of the jungle" to capture prey and "spit out the bones." With such rhetoric, the system Stern sets forth is surprisingly tame and prosaic (e.g., reviewing investments monthly for underlying value, price direction and market sentiment). Individual strategies include technical analysis (drawing lines on charts to try to guess future price movements), fundamental analysis (valuing companies based on accounting and economic data) and market psychology. This is not a book for beginners; it does not cover the basics of financial planning and assumes a familiarity with accounting and financial data. Although no figures are given, it seems to assume about a million dollars available for investment in liquid securities and enough outside income that the portfolio need not provide cash. This book would be most appropriate for seasoned investors who trust the author's investment acumen and want a blueprint for imitating it. (May)Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
Pounce: How to Seize Profit in Today's Chaotic Marketsby Ken Stern, William Dufris
As Seen on Public Television
EAT OR BE EATEN
In turbulent markets you need to become an investment predator. Investment predators create a plan for capturing their prey (prime investment opportunities) while risk is fairly low, and spit the bones out (sell the investment) before they become prey/b>
As Seen on Public Television
EAT OR BE EATEN
In turbulent markets you need to become an investment predator. Investment predators create a plan for capturing their prey (prime investment opportunities) while risk is fairly low, and spit the bones out (sell the investment) before they become prey themselves.
Pounce describes a system that is neither frantic day trading nor passive buy-and-hold investing. You set up a three-pronged strategy based on quantitative measures of market value, economic direction, and market sentiment, and then choose stocks, exchange traded funds (ETFs), or mutual funds using easy-to-understand criteria. You tweak the system no more than once a month. You’ve now got the laws of probability in your favor. Recessions, disruptive periods, or bear markets become windows of opportunity.
Pounce teaches you with dozens of specific examples how to run your investment life so as to never be the prey again!
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Read an Excerpt
How to Seize Profit in Today's Chaotic Markets
By Ken Stern
St. Martin's PressCopyright © 2009 Ken Stern
All rights reserved.
Assess Your Kingdom
PROFITABLE POUNCE IN EVERY SITUATION
In a minute you will peek into Pounce. By way of summary, let me tell you what I like about Pounce. It is simple, yet advanced and smart, it works. If you do it right, you need to master only three ideas:
1. Hold one investment meeting (even if it's with yourself) once per month — and trade only once per month.
2. Summarize three market direction indicators.
3. Implement the investment strategies provided in Book Three into your Personal Pounce Platform.
That is it. I don't mean to oversimplify the system. You will have to gather information every month for your meeting, even if your meeting is just with yourself. It might take an hour or two. Subsequently, you will probably be making a few trades every month. What you do not have to do is very much in the way of internal debate (with yourself). You do not need to make any gut decisions or rely on instinct. The investment screens will tell you when to buy and sell. If you can adhere to the discipline, you will love Pounce.
If a strategy exists regarding money and wealth, it is likely I have studied it and might even have tried it. I have found the analytical books to be too complicated for most people to follow — and probably too smart to work. All the "fluff" books are just that — they feel soft and nice, make us feel good at the end of the day. The fluff books deliver the same message — we get it! Right? Wrong! You are still searching. The premises of these books are fine; live modestly, invest your money for the long term, buy some rental property and some solidly performing long-term mutual funds, diversify, and live happily ever after.
This is wrong, wrong, wrong.
First, it is BORING! This just doesn't cut it for me. I want to live a fabulous life. I don't want an average existence. I need more. Think back to Rose. She was able to carry out her investment plan on limited time and resources. Life should not be consumed by investing. In fact, being too involved will have a deleterious effect, as it may cause you to make emotional decisions. As I've said, our system is based on making, if necessary, changes to your portfolio once per month — and only once, and only if necessary.
The second problem with these books is the fact that life interrupts your plans; kids, recessions, energy crises, a longer life span, high medical costs, possibly issues we have not even begun to think about yet — food or water shortages maybe?
Third, this buy-and-hold approach is not going to be very lucrative in the absence of a long-term bull market. From the beginning of 2000 until the middle of 2008, the Standard & Poor's 500 Index has been actually down. I think the same may be true over the next eight years. If you had eight years without growth in your money, that would be a serious setback. (The Standard & Poor's 500 Index is our benchmark. When I refer to the "market" going up or down, I am referring to this index.)
Best Defense — Strong Offense
Seeing that the best defense is a strong offense, I opted out of the average investment system, and so should you. Instead of being a "defensive" investor, I decided to go on the offensive. I want to act, not react. Basically, I want to make profitable and wise investment choices throughout my life. I want to actually be positioned to take advantage of chaos, trying economies, bull and bear markets alike. To accomplish this I have become a predator ... an investment predator, prepared and trained to pounce at will.
But there is a catch: Training for predatory wealth is not automatic. The training will require you to dig just a bit deeper to realize your true pouncing potential. If you can commit to a slightly more active role with your investments, and a bit of education, you are more than halfway toward greatness.
One of the areas of further education is going to be in your ability to execute an investment screen. Pounce will give you all the parameters. Pounce will show you how and where (on the Internet) to execute the screen. It really is quite simple; however, it's understandably intimidating if you have never built an investment screen before. Think back to the first jump in the lake on that hot, sticky day. The anxiety and fear of the unknown were quickly replaced with the elation and gratification of hitting the water. Don't psyche yourself out.
Once you are willing to admit your brain has been holding you back, we will get on with sharpening your investment skills. When you read chapter 3, "Animal Instincts," you will learn a little bit about our brains and how they are wired incorrectly to help us be successful investors. Make no mistake about it. The skill and talent are there, but your instinct kicks in — either to help you survive or to give you pleasure — and overrides what your true abilities are. Once we get beyond that ...
As mentioned earlier, here are the three Power Indicators (P3). These indicators are going to give you direction. They are:
[check] Economic Direction
[check] Investor Psyche/Market Behavior
Upon mastering these directional indicators, you will have the power of sight — the sight to watch the trend of the investment landscape. The direction of the P3 indicators will give you the ability to choose the bias of your Personal Pounce Platform; bullish, bearish, or neutral.
With this valuable knowledge, you will sharpen your claws and be prepared to pounce.
In Book Three you will be presented with different investment strategies — Rising Stars, Fallen Angels, Top Gun, Market Neutral hedging, and others. You will use these strategies in your Personal Pounce Platform. You will be provided the key, the screen to each strategy. I have designed Pounce so you can go to your computer, screen what I tell you to screen, and buy and sell based on the result. It is objective and simple. No longer do you bite your nails deciding how you should invest, or worry if the recession will get worse or the bull market will end. We'll incorporate this into your investment strategy. You just need to implement it.
Your Personal Pounce Platform is an investment platform designed to maximize your success using three strategies. The strategies vary, depending on the direction of the investment landscape. The Personal Pounce Platform has three systems, each of which has 33 percent of your investment capital to start. We'll go into all this in much more detail in Book Three, but here's an overview:
THE PERSONAL POUNCE PLATFORM
The investment strategies reviewed in Book Three will be utilized within your investment model, the Personal Pounce Platform. Using the data you collect from the P3 Indicators, you will bias your Personal Pounce Platform to a bullish, bearish, or neutral stance.
Your Personal Pounce Platform is your frame. All decisions that you may face regarding investments will be filtered through it. This platform is divided into three sections — go figure! I love it. Simple, neat, and effective. The Personal Pounce Platform is designed to embrace, and thrive during, varying markets and economic scenarios.
The Personal Pounce Platform is not a trading system. Rather it is a long-term investment platform designed to help you act, not react. The strategy calls for you to review the platform once a month to determine what, if any, alterations need to be made.
The Personal Pounce Platform is divided into three parts (known as systems):
System 1 — Core
System 2 — Tactical
System 3 — Uncorrelated/Hedge
System 1: Core. This is designed to search for companies that offer superior growth for each particular market. Although many systems attempt to accomplish the same goal and mimic similar systems, two distinct differences exist with regard to your Core. The first difference is how your criteria change based on your P3 indicators. For example, if all three indicators are bullish, you will allocate a higher percentage to your Core system. Or if P3 is trending bearish, dividends and stock buybacks would be more important. The second variation is the fact that this is not a "buy-and-hold forever" system. At any point that a company does not meet the system's rigorous screening process, the stock will be sold. Your Core system will seek primarily to invest in individual stocks.
Within Core, I have created two investment strategies. The first strategy is called Rising Star. The second is Pounce for Income and Growth. You will see that each strategy performs exceptionally well. Each strategy is objective, requiring you only to run a screen during your monthly Pounce meeting to determine which investments will be bought and sold. And each strategy will always be present within Core.
System 2: Tactical. This will expose you to an entirely different asset class. The system will primarily utilize Exchange Traded Funds (ETFs). It takes the approach that regardless of the economy or the type of market (bull, bear, or neutral), leadership will rise to the top. Leadership may be expressed through industry or sector performance.
This system will utilize our Top Gun investment strategy for tactical investing. In this regard you will screen for the "best" sector within the Standard & Poor's 500 Index. You will screen for the "best" global sector. You will screen for the "best" sector based on size (large, cap, mid-cap, or small cap). Once you find the best, with a few simple rules you will buy this sector and hold it until it is no longer "the best." You will understand what the Pounce definition of "the best" is in Book Three.
System 3: Uncorrelated/Hedge. This is the portion of your portfolio that has the ability to zig when the market zags. Based on the P3 reading, you have the ability to bet that certain markets, sectors, and industries will experience negative returns, giving you the opportunity to pounce on the bubble. You can invest in various securities that will bet that a certain sector or market will drop in value as well as invest in specific investment strategies that should do well if the market stays flat for extended periods. We'll review these strategies, including Fallen Angels and Pair Trades, later.
Many superior strategies exist to take advantage of markets that move up and down over extended periods. Yet few individual investors understand these strategies or utilize them. Without utilizing these strategies you have all the weight on one end of your seesaw. This is not prudent, at best. Today that stops. Today, you get access to everything.
FACT VS. FICTION
Do you think Warren Buffett invests like Peter and Rose? Probably not. Warren Buffett has consistently, and for many years, enjoyed a return on his company stock, Berkshire Hathaway, in excess of the S&P 500, something very few investors do.
This is accomplished through his predatory skills and his pouncing ability. When the companies that insured municipal bonds flirted with bankruptcy (due to investing in a bunch of subprime loans that went belly-up), Buffett offered to bail them out. Was this an act of charity? Absolutely not! The deal tentatively proposed that Buffett would give the insurance companies the financing to stay afloat (which was really all they needed since the municipal bonds they were insuring were not defaulting), and in turn he would own a large percentage of the insurance company and most of their revenue — regardless of whether or not they made a profit. Virtually a no-lose deal. That is a perfect example of a predatory pounce. Similar actions were initiated after devastating hurricanes and other natural disasters.
The fact is, great investors take a proactive approach and realize that greatness is realized through turbulence, because of people's psyche and their overreactions. Great investors relish mispriced securities. They realize that often it takes adversity and it may be uncomfortable as well as unpopular, but having a system they rely on to invest during turbulent times is what makes them great.
WHAT DO YOU EXPECT?
What I expect is to create a system that will direct me to more winning investments than losing investments. I expect this system to do well in both up and down markets.
Over the next twenty years, we will experience longer lifetimes, inflation, recessions, and bull and bear markets. Many market watchers think we will be lucky to make 6 percent per year on our investments. I think this is half right. I think that the markets, based on long-term trends, historic valuation averages, and available capital, will be lucky to make 6 percent.
We will have much fodder for doom-and-gloom scenarios — food and water shortages, labor issues, and supply constraints for other commodities, to name a few.
The future, of course, is unknown. Yet the unknown is what excites me; it does not worry me. I have no idea, nor do I wish to predict, what the S&P will return over the next twenty years. It really does not concern me. My system also is not a system that states, "We will seek to earn a consistent return of x percent per year." That is silly. What is not silly is to state that I will use market chaos, bubbles, and people's shortsighted emotional decisions for opportunity.
To me a great investment system is one that is right at least 60 percent of the time (preferably 70 percent) and insures that my positive trades go higher more frequently than my negative trades go lower. Whatever the future throws at us, there is an opportunity to pounce. If Warren Buffett can find ways to make money off a real estate debacle, subprime investments, and hurricanes, you should be able to as well.
HOW CAN YOU PROFIT WHEN THE MARKETS ARE DOWN?
What is a bear market? Forget the textbook definition. A bear market is a market that investors sell to an extreme, oversold territory. If you rode the roller coaster all the way down, the negative return would likely wipe out much of your profits (assuming you had profits from the preceding up market cycle). However, a bear market creates two powerful opportunities. First, it creates lists of companies ready for a pounce. It makes your rational job that much easier. Second, it creates opportunities to find companies that excel during and because of the bear market. I have always believed in the Top 20 Percent.
Consider the S&P. These are 500 stocks grouped together to create an index. I steadfastly believe that I need only the top 20 percent in order to be successful. I don't need 400 stocks that are what I consider to be inferior investment choices. Just give me the best 20 percent, and whether we are experiencing a bull or a bear market, I should do well. If you think about it logically, there have to be at least 100 companies that are doing well because of adverse market conditions, right? This is contrary to popular belief that when markets are down everything is down.
Recently, during an analyst meeting, my colleague Eric Hoffman shattered that belief. Eric ran numerous studies and found that I was slightly off. Take 2001 as an example. The S&P lost 12.6 percent, but guess what? Two hundred nineteen stocks were up that year!
The next year was worse. In 2002 the S&P was down 21.9 percent. But 138 stocks were up! That means just over 27 percent of the stocks were higher in 2002. You can do this during most bear markets and find similar results.
The next logical question is, were there any repeated patterns for stocks that outperformed? Did certain sectors outperform others consistently or did the winning stocks have a lower price-to-earnings ratio, or some other indicator?
The answer is yes, there were trends, but this is a dangerous way to consider the data. If I told you that, on average, consumer staples outperformed other sectors, you might run out and buy stocks of companies selling consumer staples. This is statistics at its purest. But during the next bear market, staples may not be the best performer. Please do not manage money based on this type of analysis.
The similarities or common themes that will give a pounce investor an advantage to a winning investment strategy are embedded in the strategies themselves, which you will learn. You will learn what I feel is important and what the common patterns and similarities are, such as companies that exceed earnings guidance.
Excerpted from Pounce by Ken Stern. Copyright © 2009 Ken Stern. Excerpted by permission of St. Martin's Press.
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.
Meet the Author
Ken Stern is the founder of Ken Stern and Associates, a multimillion-dollar corporation managing wealth for affluent individuals, families, and institutions. He has appeared on CNBC, CNN, and The Today Show, and speaks monthly to hundreds of listeners. He resides with his family in Southern California and enjoys reading, writing, investing, eating, exercising, skiing, swimming, and traveling.
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