Jake Bernstein no bull investing_6

106 NO BULL INVESTING INTRODUCING THE METHOD It is difficult to write an investment guide that will be tailored to the level of expertise of all investors. Some of you may be com-pletely new to the stock market, while others will have had many years of experience. If I begin at too basic a level, I run the risk of alienating those with more experience. If I begin at too ad-vanced a level, I’ll lose the beginner. Accordingly, please find your place in the following list and act accordingly: n Complete newcomers to investing. If you have had no experi-ence in the stock market, you need to learn the basic ter-minology of the market. If you have no experience in real estate, you’ll need a working knowledge in this area as well. I suggest reading Stock Market Strategies That Work. It will help you become acquainted with the basics and with many of the important issues. There are other books for begin-ners that may be more basic. It may take a little more time for you to get started, but I urge you to build a sound base of knowledge before you invest a single penny in stocks. n You have had some experience but . . . This category is one step above being a newcomer, but it’s an important step because you have learned some of the basics. Here again, I recommend my book Stock Market Strategies That Work. n You’re an experienced investor. This means you have traded in stocks, options, futures, or all of these. You have a good understanding of the terminology used in stock investing and trading. I suggest that you read my books, Momentum Stock Selection (McGraw-Hill, 2001) and How to Trade the New Single Stock Futures (Dearborn Trade, 2002). These books will help you with the concepts discussed in this chapter. THE METHOD 107 As an alternative, you may want go ahead with this chapter, regardless of your experience level. If things don’t make sense to you, then go back to the basics and read the recommended books. Note that there are many books for beginners, so choose one that you enjoy or that is more on your level of knowledge and experience. Now let’s proceed with the topic at hand. ManyDifferent Methods There are literally thousands of investment and trading methods in the stock, options, and futures markets. Truth be known, most of them are only marginally successful for various and sundry reasons. If you can find a method that has been profitable 50 percent of the time, and if you manage your losing investments by exiting them quickly while you keep winning in-vestments, you will do well in the long run. Few professional in-vestors are correct a majority of the time. Too many investors are preoccupied with the question, What percentage of the time has your investment decision been correct? The question is not only a foolish one, but it can also get you into trouble. The important question is not how often has a system or methodology been right, but rather how much money has an investment method made for individuals at your financial level. Consider the following scenarios: n Investor #1: Ten investments at 90 percent correct. One investment lost money, the others made money. n Investor #2: Ten investments at 30 percent correct. Seven investments lost money, only three made money. 108 NO BULL INVESTING Which of these two is best? Most people would pick the in-vestor #1 approach, but the choice would be impossible to make without more information. Consider the following: n Investor #1: Ten investments at 90 percent correct. One investment lost $2,000, the others made a total of $457 after commissions. Net LOSS: $1,543. n Investor #2: Ten investments at 30 percent correct. Seven investments lost a total of $2,500. Three investments made a total of $5,000. Net PROFIT: $2,500. Which of these two is best? Clearly the second choice is the correct one. Note that for investor #1, accuracy was excellent but the results were poor. Investment Methods,Accuracy,and Risk As you can see from the foregoing example, accuracy is not the issue. If you have a method that is both accurate and prof-itable, you have the best combination. Although this chapter is about an investment method, I will tell you frankly that if you manage your risk correctly, then virtually any method can make you money if you follow some basic rules. These rules are dis-cussed at the end of this chapter. I believe that the methods dis-cussed in this book can boost your accuracy well over the 60 percent level. This advantage, combined with effective risk man-agement, can give you excellent and consistent results for many years. THE METHOD 109 INTRODUCING MOMENTUM There are many ways to measure the strength or weakness of a stock. There are many ways in which we can attempt to deter-mine if a stock is ready to go up or down. Momentum is one of the many technical methods used to measure the strength or weakness of a stock. I will use the abbreviation MOM for mo-mentum. I like to think of MOM as a measure of underlying market strength or weakness and of change in direction (or trend). In fact, I like the analogy of fuel in a gas tank. If a stock is going to continue to move higher, it must have sufficient fuel, or momentum, to do so. If a stock or futures contract is going to continue going down, it must have sufficient fuel, or momen-tum, to push it lower. If a market is moving higher, while its mo-mentum, as measured by the MOM indicator, is moving lower, the market is in danger of topping. If a market is moving lower, while its MOM indicator is moving higher, then the market is developing a bottoming pattern. Each of these conditions is defined as a divergent condition. Divergence means moving in different directions. Markets that are likely to change direction tend to develop divergence before they change direction. Divergence does not always happen prior to a change in the direction of a market, but it often does. Why is this important? Because if you are going to make money on your investments, you will want to buy when markets are either low in price or likely to go up. And you will want to get out before markets go down, or soon after they begin going down. You will take your profits and put them into other investments using this approach. 110 NO BULL INVESTING The Normal Situation First, let’s take a look at the “normal” conditions for price and momentum. Figure 7.1 shows a normal uptrend (bull trend) in which momentum and price are moving up together. This is a “healthy” market, one in which a top is not likely at this time. Figure 7.2 shows a declining trend (bear trend) in which price and momentum are declining. This is also a “normal” pattern in which the odds of a continued drop in price are quite good. FIGURE7.1 This illustration shows momentum with price. Note that as price moves higher, momentum moves higher. The “vehicle” has fuel behind it and, as a result, a top is not imminent. Of course, this can change quickly, depending on the behavior of the MOM indicator. ... - tailieumienphi.vn