Saturday, 31 August 2013

Harry Browne’s 17 Golden Rules of Financial Safety

When you read in the news that a person whom you know as rich and wealthy is in financial trouble or has declared bankruptcy, it is easy to feel a sense of futility about managing your own money. You start to think that if such a rich person, who has access to the best financial advice, can come to this state, what chance do I have?

If you read deeper into his or her story you will find that he has come to this state because he violated some basic rule of life. The Golden Rules of Financial Safety of Harry Browne are the basic rules for financial success. They are simple and obvious and if you abide by them, there is less chance than one in a million that you could lose all that you have….

Let us learn what they are…

Your career
Rule 1: Your career provides your wealth
Build your wealth upon your career.You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments.

Your investments can make your future more secure and your retirement more prosperous. But they can't take you from rags to riches. So don't take risks with complicated schemes in the hope of multiplying your capital quickly. Your investment plan should be aimed, first and foremost, at preserving what you have -preserving it from investment loss, government intervention, or mismanagement.

Most part-time investors who try to beat the markets lose part or all the savings they've worked so hard to accumulate.

Can you make big profits by relying on an expert who does have the proper qualifications? How do you find a true expert? That task is no easier than picking the right investments. If you don't understand investing as well as the pros, you won’t know how to check those who seek to advise you. And you can't rely on an advisor’s track record, even when it’s presented honestly. Track records tell you only how advisors did in the past – not how they will do next year.

You’re violating Rule #1 if you think your investments can be the sole source of your retirement wealth – or if you steal time from your work to manage your investments – or if you think about abandoning your job to become a full-time investor.


Your Wealth May Be Non-Replaceable

Rule 2: Don't assume you can replace your wealth.
The fact that you earned what you have doesn't mean that you could earn it again if you lost it. Markets and opportunities change, technology changes, laws change. Conditions today may be considerably different from what they were when you built the estate you have now. And as time passes, increasing regulation makes it harder and harder to amass a fortune.

So treat what you have as though you could never earn it again. Don’t take chances with your wealth on the assumption that you could always get it back.

You earned your wealth because your talent and effort harmonized with the circumstances in which you found yourself. But the world won’t stand still for you or repeat itself when you need it to.

So assume that what you have now is irreplaceable, that you could never earn it again – even if you suspect you could.
Say “No!” to any proposition that asks you to risk losing it.


Investing vs. Speculating

Rule 3: Recognize the difference between investing and speculating.
When you invest, you accept the return the markets are paying investors in general. When you speculate, you attempt to beat that return - to do better than other investors are doing -  through astute timing, forecasting, or stock selection, and with the implied belief that you're smarter than most other investors.

You're speculating when:

* You select individual stocks, mutual funds, or stock market sectors you believe will do better than the market as a whole.
* You move your capital in and out of markets according to how well you think they’ll perform in the near future.
* You base your investments on current prospects for the nation’s economy.
* You use fundamental analysis, technical analysis, cyclical analysis, or any other form of analysis or system to tell you when to buy and sell.

There’s nothing wrong with speculating -  provided you do it with money you can afford to lose. But the money that’s precious to you shouldn't be risked on a bet that you can outperform other investors.

Forecasting the Future

Rule 4: No one can predict the future.
Beware of fortune tellers.

Events in the investment markets result from the decisions of millions of different people. Investor advisors have no more ability to predict the future actions of human beings than psychics and fortune-tellers do. And so events never unfold as we were so sure they would.

Yes, there have been forecasts that came true. But the only reason we notice them is because it’s so exceptional for even one to come true. We forget about all the failed predictions because they’re so commonplace.

No one can reliably tell you what stocks will do next year, whether we’ll have more inflation, or how the economy will perform.

As with the rest of your life, safety doesn't come from trying to peer into the future to eliminate uncertainty. Safety comes from devising realistic ways to deal with uncertainty.

We live in an uncertain world – and that no one can eliminate the uncertainty for you.

Look for ways to assure that the uncertain future won’t hurt you – no matter what it turns out to be.

Investment Advice

Rule 5: No one can move you in and out of investments consistently with precise and profitable timing.
Don't expect anyone to make you rich. You’ll hear about many Wall Street wizards, but the investment advisor with the perfect record up to now most likely will lose his touch the moment you start acting on his advice.

Investment advisors can be very valuable. A good advisor can help you understand how to do the things you know you need to do. He can help call your attention to risks you may have overlooked. And he can make you aware of new alternatives.

The Helper (accountant, etc) is worth listening to. He or she can acquaint you with investment alternatives you weren't aware of, and that might be a good fit for you. He can teach you the mechanics and procedures for getting things done in the investment world. He can raise the questions you need to answer in order to devise a portfolio that suits your needs. He can help you reduce the tax bill on your investment profits.

You don’t act on the advice of someone you never heard of. And you hear of him only after – and because – he has made several profitable recommendations in a row.

The investment expert with the perfect record up to now will lose his touch as soon as you start acting on his advice.

But no one can guarantee to have you always in the right place at the right time. And worse, attempts to do so can sometimes be fatal to your portfolio.

Trading Systems

Rule 6: No trading system will work as well in the future as it did in the past.
You’ll come across many trading systems or indicators that seem always to have signaled correctly where your money should have been, but somehow the systems never come through when your money is on the line.

Trading systems generally arise from one of two sources.

The first source is a common sense observation about human behavior - which someone then tries to transform into a quantifiable, mechanical system.

For example, Contrary Opinion is a theory that says, among other things, that an investment is likely to be near its peak when everyone seems to know how good its prospects are.

The idea makes some sense. If everyone already knows something is a good investment, most people who are likely to buy it probably already have done so – leaving very few investors to buy it and push its price still higher.

In such a case, you should be skeptical about its prospects as a speculation.

But that doesn't mean we know precisely when or at what price the investment will peak. You know only that there doesn't seem to be room for the price to go much higher.

But people who devise trading systems aren’t satisfied with anything so indefinite. They devise indicators to measure the precise degree of bullishness and bearishness surrounding a specific investment – and then construct formulas that provide specific signals for buying and selling.


This is similar to taking an obvious truth – such as that attendance at sporting events is generally smaller on rainy days than on sunny days – and constructing a formula that supposedly translates the number of inches of rainfall into an exact forecast of the attendance.

The second source is probably finding something that has worked in the past and assuming it will work in the future. Trading systems are based on the unstated assumption that the world doesn't change. But the world is in constant change – as desires change, demand changes, and supplies change.

Operate on a Cash Basis

Rule 7: Don't use leverage.
When someone goes completely broke, it’s almost always because he used borrowed money. In many cases, the individual was already quite rich, but he wanted to pyramid his fortune with borrowed money.

Using margin accounts or mortgages (for other than your home) puts you at risk to lose more than your original investment. If you handle all your investments on a cash basis, it’s virtually impossible to lose everything - no matter what might happen in the world - especially if you follow the other rules given here.

Make Your Own Decisions

Rule 8: Don't let anyone make your decisions.
Many people lost their fortunes because they gave someone (a financial advisor or attorney) the authority to make their decisions and handle their money. The advisor may have taken too many chances, been dishonest, or simply incompetent. But, most of all, no advisor can be expected to treat your money with the same respect you do.

You don't need a money manager. Investing is complicated and difficult to understand only if you're trying to beat the market. You can preserve what you have with only a minimum understanding of investing. You can set up a worry-proof portfolio for yourself in one day - and then you need only one day a year to monitor it. Allowing the smartest person in the world to make your decisions for you isn’t nearly as safe as setting up a safe portfolio for yourself.

Above all, never give anyone signature authority over money that’s precious to you. If you should put money into an account for someone else to manage, it must be money you can afford to lose.

Understand What You Do

Rule 9: Don't ever do anything you don't understand.
Don't undertake any investment, speculation, or investment program that you don’t understand. If you do, you may later discover risks you weren't aware of. Or your losses might turn out to be greater than the amount you invested.

It’s better to leave your money in Treasury bills than to take chances with investments you don’t fully comprehend. It doesn't matter that your brother-in-law, your best friend, or your favorite investment advisor understands some money-making scheme. It isn't his money at risk. If you don’t understand it, don’t do it.


Diversification

Rule 10: Don’t depend on any one investment, institution, or person for your safety.
Every investment has its time in the sun - and its moment of shame. Precious metals ruled the roost in the 1970s while stocks and bonds were in disgrace. But then gold and silver became the losers of the 1980s and 1990s, while stocks and bonds multiplied their value. No one investment is good for all times. Even Treasury bills can lose real value during times of inflation.

And you can't rely on any single institution to protect your wealth for you. Old-line banks have failed and pension funds have folded. The company you think will keep your wealth safe might not be there when you're ready to withdraw your life savings.

We live in an uncertain world, and surprises are the norm. You shouldn't risk the chance that a single surprise will wipe out a large part of your holdings.

Diversify across investments and institutions - and keep things simple enough to manage yourself – you can relax, knowing that no one event can do you in.


Balanced Portfolio

Rule 11: Create a bulletproof portfolio for protection.
For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes.

The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio. In other words, this portfolio should protect you no matter what the future brings.

It isn't difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.

The portfolio should assure that your wealth will survive any event – including events that would be devastating to any one investment.

Three absolute requirements for such a portfolio are:

1. Safety: It should protect you against every possible economic future. You should profit during times of normal prosperity, but you also should be safe (and perhaps even profit) during bad times – inflation, recession, or even depression.

2. Stability: Whatever economic climate arrives, the portfolio’s performance should be so steady that you won't wonder whether the portfolio needs to be changed. Even in the worst possible circumstances, the portfolio’s value should drop no more than slightly – so that you won’t panic and abandon it. This stability also permits you to turn your attention away from your investments, confident that your portfolio will protect you in any circumstance.

3. Simplicity: The portfolio should be so easy to maintain, and require so little of your time, that you’ll never be tempted to look for something that seems simpler, but is less safe.

You leave it alone – to hold the same investments, in the same proportions, permanently. You don’t change the proportions as you, your friends, or investment gurus change their minds about the future.

Your portfolio needs to respond well only to those broad movements. 

And they fit into four general categories:

1. Prosperity:A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.

2. Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).

3. Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, and usually leads to a recession – a period of poor economic conditions.

4. Deflation: The opposite of inflation. Consumer prices decline and the purchasing power value of money grows. In the past, deflation has sometimes triggered a depression – a prolonged period of very bad economic conditions, as in the 1930s.

Investment prices can be affected by what happens outside the financial system - wars, changes in government policies, new tax rules, civil turmoil, and other matters. But these events have a lasting effect on investments only if they push the economy from one to another of the four environments I've just described. The four economic categories are all-inclusive. At any time, one of them will predominate. So if you’re protected in these four situations, you’re protected in all situations.

Thus four investments provide coverage for all four economic environments:

STOCKS take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.

BONDS also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.

GOLD not only does well during times of intense inflation, it does very well. In the 1970s, gold rose twenty times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.

CASH is most profitable during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.

Any attempt to be clever in assigning portions to the investments probably will do more harm than good. I prefer the simplicity of allocating 25% to each of the four investments.

The only maintenance required is to check the portfolio’s makeup once a year.

If any of the four investments has become worth less than 15%, or more than 35%, of the portfolio’s overall value, you need to restore the original percentages.

When you make your once-a-year check of the portfolio’s value, if all four investments are within the 15-35% range, no rebalancing is necessary. During the year, if you happen to notice that there’s been a big change in investment prices, you may want to check the values of the investments. Again, if any investment has strayed outside the 15-35% range, go ahead and rebalance the entire portfolio.

The test of a Permanent Portfolio is whether it provides peace of mind. A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity. No actual or threatened event should trouble you, because you’ll know that your portfolio is protected against it.

If someone warns about the “alarming parallels” between the current decade and the 1920s, you shouldn't wonder whether you need to sell all your stocks. You’ll know that your Permanent Portfolio will take care of you – even if next year turns out to be 1929 revisited. The deflation that could devastate stocks would push interest rates downward and bring big profits for your bonds.

When someone claims the inflation rate is headed back to 15%, you shouldn't wonder whether to dump all your bonds. You’ll know that the gain in your Permanent Portfolio’s gold would far outweigh any losses on the bonds.

When someone announces that a new debt crisis is on the way, or that a bull market is about to begin in stocks, bonds, or gold, you won’t feel pressured to decide whether he’s right. You’ll know that the Permanent Portfolio will respond favorably to any eventuality.

I can’t list every potential event. So if you become concerned by any possibility, reread this chapter and you should be reassured that there’s an investment in your Permanent Portfolio that will cover you if the worst should occur. Whatever the potential crisis or opportunity, your Permanent Portfolio should already be taking care of you.

The portfolio can’t guarantee a profit every year; no portfolio can. It won’t outperform the hotshot advisor in his best year. And it won’t outperform the best investment of the year. But it can give you the confidence that no crisis will destroy you, the assurance that your savings are secure and growing in all circumstances, and the knowledge that you’re no longer vulnerable to the mistakes in judgment that you or the best advisor could so easily make.


Speculation

Rule 12: Speculate only with money you can afford to lose.
If you want to try to beat the market, set up a second - separate - portfolio with which you can speculate to your heart’s content. But make sure this portfolio contains no more of your wealth than you can afford to lose.

I call this second pool of money a “Variable Portfolio” because its investments will vary as your outlook for the future changes. It might be all or part in stocks or gold or something else - whatever looks good at any time - or just in cash. You can take chances with the Variable Portfolio because you know that, whatever happens, no loss can be devastating. You can lose only the money you've already decided isn't precious to you.


International Diversification

Rule 13: Keep some assets outside the country in which you live.
Don’t allow everything you own to be where your government can touch it. By having something outside the reach of your government, you’ll be less vulnerable - and you'll feel less vulnerable. You’ll no longer have to worry so much about what the government will do next.

For example, maintaining a foreign bank account is quite simple; it’s little different from having a mail or Internet account with an American bank or broker.

Keeping some investments abroad provides safe and easy protection against surprises that might happen anywhere – confiscation of gold holdings by the government, exchange controls, civil disorder, even war.

No one knows how the people elected in the coming years might choose to solve the economic problems the country will face. It might strike them that the quick and easy solution is to take your property – as has happened so often already. Your assets will be safe even if war, civil disorder, a weakening of law enforcement, or a physical catastrophe should disrupt record-keeping in your own country.

Your entire estate will no longer be vulnerable to economic, political, or legal setbacks in your own country.


Geographic diversification is a necessary part of making sure the Permanent Portfolio can handle whatever hazard materializes.


Tax Shelters

Rule 14: Beware of tax-avoidance schemes.
Tax rates are still low enough in the U.S. that you might gain very little from the risk and effort of constructing elaborate tax shelters. And a great deal of money has been lost by people who hoped to beat the tax system. The losses came from investments that provided special tax advantages but didn't make economic sense, and from tax shelters that were disallowed by the IRS -  incurring penalties and interest on top of the liabilities.

There are a number of simple ways available to minimize taxes - through such things as IRAs and 401(k) plans. Take advantage of these tax reduction plans. These plans are effective but non-controversial. They won’t come back to haunt you.Tax deferral is the basic method for reducing the tax burden on your investment program. With tax deferral, the money you don't pay in taxes today can work to produce more earnings every year until you finally have to pay the tax.

Questions

Rule 15: Ask the right questions
In what economic circumstances is the investment’s price likely to go down?

Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?

Under what circumstances could I lose a substantial share – 20% or more – of my investment?

Under what circumstances could my entire investment be lost?

Would I have any residual liability – that is, can I lose even more than the cash I invested?

Interest rates generally reflect an investment’s risk. A higher interest rate means there’s a greater possibility the capital can be lost – through default or inflation.

Under what circumstances, if any, is the investment likely to appreciate?

Under what circumstances, if any, is the investment likely to depreciate?

In good circumstances for the investment, will the overall return – yield plus capital appreciation – help your portfolio overcome losses in other investments?

If the investment is a mutual fund, you want the fund with the lowest yield – other things being equal. Any dividend paid by a mutual fund simply reduces the price of your shares

“Is this company a potential takeover candidate?”

The crowd isn't always wrong, but you can't make much betting with it – because you will buy at a price that’s already high. By going against the crowd, you buy when an investment is out of favour and cheap; if it does succeed, there’s a long way for it to go up. So the most important factor in speculating is whether you expect something that most people don’t expect. For example, the time to consider buying inflation hedges speculatively is when most people believe inflation is under control. The time to consider buying a particular company is when everyone knows what a dog it is – not when everyone talks about its great promise. Unpopularity does not guarantee profits, but you'll never make a killing with a popular investment.

“Do the technical factors favour the investment now?”

You must have an investment plan. Without a plan, you will be tossed and turned by all the conflicting ideas you read and hear - and you’ll never ask the right questions. With a plan, you'll have a basis for evaluating whatever you hear. You'll know to ask the questions that help you determine whether an investment furthers your plan.


Enjoyment

Rule 16: Enjoy yourself with a budget for pleasure.
Your wealth is of no value if you can’t enjoy it. But it’s easy to spend too much while the money’s flowing in. To enjoy your wealth, establish a budget of money that you can spend yearly without concern. If you stay within that amount, you can feel free to blow the money on cars, trips, anything you want — knowing that you aren't blowing your future.

When in Doubt . . .

Rule 17: Whenever you're in doubt about a course of action, it is always better to err on the side of safety.
If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it.

If you wind up losing something, let it be only an opportunity that was lost – not precious capital. People rarely go broke playing it safe. But many go broke taking great risks or making investments they know too little about.

If you’re hesitating, it’s because you don’t yet know enough about the investment or the problem to make a confident decision. That means you shouldn't take the plunge until you know more and you’re sure you understand all the ramifications.

The premise for speculation is that you’re more astute than most other investors – that you understand the market better, that you have information not available to other investors, that you can make better decisions, or that your interpretation of available information is especially perceptive. The elements of speculation are timing, forecasting, trading systems, and selection. Any time you use any of these tactics you’re speculating.

Investment forecasts can be exciting. But in other areas of our lives, we think of fortune-tellers as entertainers.

Forecasts are not entirely useless. Someone’s predictions can help you recognize that your own expectations for the future aren't the only possible outcome. This can help keep you humble and prudent.

If you come to feel a given event is quite possible but most people disagree with you, the market probably will provide a big pay off if you bet on that event and prove to be right. So if you like to watch the investment markets closely and you see a potential future that most people are ignoring, you may want to make a small speculation with money you can afford to lose.

A sure way to lose what you've accumulated is to risk the funds that are precious to you on the idea that some event is inevitable.
In 1970, the chief gold trader at the largest Swiss bank told a friend of mine that the gold price would never go above $40. When asked how he could be so sure, the trader replied, “Because we control the market.”

“Insiders” are no more help than fortune tellers or high-priced pros.

You can protect yourself against the possibility of institutional crisis by using more than one institution. You can protect yourself against the failings of individuals by relying only on yourself. And you can protect yourself against investment roller coasters by diversifying across investment markets.

Split the 25% stock-market portion among three mutual funds.

For the bond portion, you don’t want to have to monitor credit risk, so buy only U.S. Treasury bonds. So long as the U.S. government has the ability to tax people or print money to pay its bills, there is virtually no credit risk.

Put the 25% in the Treasury bond issue that currently has the longest time until it matures. That will be close to 30 years. Ten years later, the bond will have only 20 years to maturity; at that time replace it with a new 30-year bond.

Buy bullion coins – coins whose only value is the gold bullion they contain. They sell for about 3-5% more per ounce than gold bullion. That means a one-ounce coin will sell for about $310-$315 if the price of gold is $300 an ounce.

The cash portion should be kept in a money market fund investing only in short-term U.S. Treasury securities, so that you don’t have to evaluate credit risk. These securities are safer than bank accounts and other debt instruments. If your cash budget is large enough, divide your holdings between two or three funds – for further protection against the unthinkable.

The value of real estate in your portfolio is indivisible, and everything else must accommodate it. Just like a 15-foot piano in the living room, you have to arrange the rest of the furniture around it.

Your house is a consumption item – the place where you live and enjoy your life.

Don't play games with your Permanent Portfolio. Don’t wait for any investment to become cheaper before you buy it. And don't go overboard investing in something that happens to be doing well now. Just put 25% in each of the four categories.

No matter how strong your expectations about the near future, you could easily be mistaken. And the point of the Permanent Portfolio is to ignore your own expectations and let the portfolio take care of you no matter what may come.

Fund it with equal portions of all four investments and don’t worry over which is going to do best. It is a package of investments that provides the safety you need. Tear apart the package and you tear apart the safety.

A foreign account in any country outside your own is a tremendous improvement over having everything in your home country. But some countries are more hospitable than others. And some have legal traditions that protect your privacy. I've always been partial to Switzerland and Austria, because each has a centuries-old tradition of respecting privacy and fending off inquiries from other governments.

If you buy and hold gold through the foreign bank, the gold most likely will be stored within the bank itself.

The secret – that things rarely work out as expected – is shared unwittingly by investors, brokers, advisors, newsletter writers, and financial journalists, few of whom can bring themselves to acknowledge it. Each wants to appear to be in command of the situation, on top of the markets, aware of what’s happening and what’s going to happen – and to appear as though everything that has already happened was anticipated. A professional needs to keep up this guise because he must look sharper than his competitors. Even investors often pose as members of the all-knowing – perhaps because no one wants to appear to be the only loser, and everyone else seems to be so smart.

When you give up the search for certainty, an enormous burden is lifted from your shoulders.

The less you know – and the more honestly you recognize the limits of your knowledge – the more likely your investment program will turn out okay. Humility is accepting that you don't know everything, or even everything about any particular topic, and it is an investor’s most vital asset. Arrogance eventually ruins any investor.

The Rules of Life

The rules of safe investing are little different from the rules of life: recognize that you live in an uncertain world, don’t expect the impossible, and don't trust strangers. If you apply to your investments the same realistic attitude that produced your present wealth, you needn't fear that you’ll ever go broke.
Source: http://thetaoofwealth.wordpress.com/

Friday, 30 August 2013

Quote for the day

"I learned to be especially wary about data mining – to not go looking for what would have worked in the past, which will lead me to have an incorrect perspective. Having a sound fundamental basis for making a trade, and an excellent perspective concerning what to expect from that trade, are the building blocks that have to be combined into a strategy." - Ray Dalio

30-Aug-2013 CSE Trade Summary


Crossing - 30/08/2013 - Top 10 Contributors to Change ASPI

Following Stocks Reached New Low on 30/08/2013



 


Thursday, 29 August 2013

Quote for the day

"Everything’s tested in historical markets. The past is a pretty good predictor of the future. It’s not perfect. But human beings drive markets, and human beings don't change their stripes overnight. So to the extent that one can understand the past, there’s a good likelihood you'll have some insight into the future." - James Simons

29-Aug-2013 CSE Trade Summary


Crossings - 29/08/2013 - Top 10 Contributors to Change ASPI

Following Stocks Reached New Low on 29/08/2013






Wednesday, 28 August 2013

Quote for the day

"You have to know what you are, and not try to be what you’re not. If you are a day trader, day trade. If you are an investor, then be an investor. It’s like a comedian who gets up onstage and starts singing. What’s he singing for? He’s a comedian." - Steven Cohen

28-Aug-2013 CSE Trade Summary


Crossings - 28/08/2013 - Top 10 Contributors to Change ASPI

Following Stocks Reached New Low on 28/08/2013






Tuesday, 27 August 2013

Quote for the day

"To make money, you will have to take risks, even if it's just your time on the line. The key to risk-taking is knowledge." -  Stuart Wilde

27-Aug-2013 CSE Trade Summary


Crossings - 27/08/2013 - Top 10 Contributors to Change ASPI


Following Stocks Reached New High / Low on 27/08/2013



Quote for the day

"The key to trading success is emotional discipline. Making money has nothing to do with intelligence. To be a successful trader, you have to be able to admit mistakes. People who are very bright don't make very many mistakes. Besides trading, there is probably no other profession where you have to admit when you’re wrong. In trading, you can’t hide your failures." - Victor Sperandeo

26-Aug-2013 CSE Trade Summary




Crossings - 26/08/2013 - Top 10 Contributors to Change ASPI



Following Stocks Reached New High / Low on 26/08/2013



Sunday, 25 August 2013

Short And Distort – Naked Short

Short and distort is a less publicly known investment scam similar to the classic pump and dump. Shorting is a word in traders jargon and means basically selling a stock, currency, paper or any other similar financial item that can be traded. Short and distort is as illegal as the pump and dump. The short and distort scheme is used in a bearish trend (prolonged period in which investment prices fall) and is the inverse method of pump’n dump.

The short and distort player will look for stocks that might be overvalued. When there is little activity on a stock due to news, the short seller may come into the market and sells the stock. He will then spread unsubstantiated rumors and other kinds of unverified bad news in an attempt to drive down the equity’s price. This can be done by negative posts to message boards, chat rooms, newsgroups, issuance of newsletters recommending the sale of the stock, seminars, private phone calls and similar. The plan is to entice investors to dump their stock with the prime objective of driving the price down. Instead of excitement, the distorter tries to stimulate fear. When the price is falling, the manipulator will buy stock to cover his position. Buying the stock at a discount and thereby making a profit. In order to create a selling frenzy which the distorted must do in order to buy enough stock to cover his position and not drive the price up he will create the impression that there is a great deal of selling taking place. He will do this by having his friends and brokers cross stock to each other giving the impression of large volume. In the end the investors who bought stock at higher prices will sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective negative campaign.

TIPS FOR AVOIDANCE

- Everyone providing investment information or advice must fully explain the nature of the relationship between him and the company that is the subject of the report. If there is no disclaimer, investors should disregard the report

- Potential profit should not be exaggerated. Assumptions upon which the earnings model is based should be clearly stated so that the reader can evaluate the reasonableness of the assumptions. If a report lacks these details, it is generally safe to assume that the report lacks a sound basis, and investors should ignore the report

- It is a good sign if the author’s name and contact information is on the report, because firstly it gives you a way to contact the author for additional information and secondly it shows the author is proud of the report. If the author’s name is not given, investors should be very skeptical of the report’s contents. Don't believe everything you read and verify the facts on your own before making an investing decision

- Beware if the report contains a lot of great words and exclamation points. Good analysts are not supposed to be boring, but good reports don’t read like a Mcdonalds commercial. A good report should be interesting, but would never use exaggerations, sure things and guarantees. You would never be suggested to mortgage your home to buy a stock

- An ongoing research coverage usually acts as a sign that the firm legitimately believes in the long-term potential of a stock
Source: http://www.bustathief.com

Pump And Dump – Stock Fraud

Pump and dump is a term referred to an investment scheme which attempts to boost the price of a company’s stock through false and misleading promotions or highly exaggerated statements. As long as there have been stocks, there have been stock fraudsters who seek to inflate the price of stocks. Usually the con artist is a third party person who is not in any relation to the company about to be scammed. The only In most cases the company itself is clueless that it is part of a scam. It’s chosen because its stock is selling for pennies a share, making it easy for the scammer to acquire a huge number of shares with a minimal investment. Due to the small float of these types of stocks it does not take a lot of new buyers to push a stock higher. Often the promoters will claim to have inside information about an impending development or to use a great combination of economic and stock market indicators to pick stocks. In reality, they are only thieves who will earn a quick profit by gaining lots of investors. Once the price is high enough they sell their shares and stop inflating and promoting the stock which ultimately ends with a sharp fall in prices and thus investors lose their money. Similar but inverse scam is Short and Distort.

HOW PUMP AND DUMP SCAM WORKS

a) You need a worthless stock, with a tight float and which is thinly traded. Small companies are needed as a precondition. Tight float means that most of the stocks are held by insiders and promoters and not by the general public. The reason for this is that it is much easier to manipulate the price of the stock when there are fewer stocks held by the general public since fewer buying of stock is needed to increase the price. You now buy an otherwise worthless stock at low prices. This sets the stage for to make money when the stock price elevates.

b) You start a promotional campaign to create interest in the stock. You use advertising campaigns, cold calls, newsletters, newsgroups, message boards, chat rooms, emails, seminars and any other media to promote the stock. Information used to promote the stock is said to be a rumor, inside information or your unbeatable technical and economical analysis. Investors are being enticed with visions of making the big score, quickly and without much risk. Your promotions will make investors swim in the water of excitement. Essentially, you are playing on the investors strings of greed to try to make the investors feel that he can’t miss the next great investment play.

c) You now attempt to increase the price of a stock. The stock chosen is thinly traded, so you and insiders can quietly raise the price by buying up the stock. Instead of putting bid offers at lower prices, they take the ask bids out and go up the price ladder. Since there is little public float, it doesn’t take a lot of buying to get the price up.

d) You have increased the price of a stock and now dump it at a higher level. You leave with a high profit, while other investors face a sharp ride to the south.
Source: http://www.bustathief.com

Saturday, 24 August 2013

The Deadly Art of Stock Manipulation

In every profession, there are probably a dozen or two major rules. Knowing them is what separates the professional from the amateur. Not knowing them at all? Well, let’s put it this way: How safe would you feel if you suddenly found yourself piloting (solo) a Boeing 747 as it were landing on an airstrip? Unless you are a professional pilot, you would probably be frightened out of your wits and would spoil your underwear. Hold that thought as you read this essay because I will explain to you how market manipulation works. What the professionals and the securities regulators know and understand, which the rest of us do not, is this.

RULE NUMBER ONE:
ALL SHARP PRICE MOVEMENTS -- WHETHER UP OR DOWN --ARE THE RESULT OF ONE OR MORE (USUALLY A GROUP OF) PROFESSIONALS MANIPULATING THE SHARE PRICE.
This should explain why a mining company finds something good and" nothing happens" or the stock goes down. At the same time, for NO apparent reason, a stock suddenly takes off for the sky! On little volume! Someone is manipulating that stock, often with an unfounded rumour. 

In order to make these market manipulations work, the professionals assume: 
(a) The Public is STUPID and (b) The Public will mainly buy at the HIGH and (c) The Public will sell at the LOW. Therefore, as long as the market manipulator can run crowd control, he can be successful. 

Let's face it: The reason you speculate in such markets is that you are greedy AND optimistic. You believe in a better tomorrow and NEED to make money quickly. It is this sentiment which is exploited by the market manipulator. He controls YOUR greed and fear about a particular stock. If he wants you to buy, the company's prospects look like the next Microsoft. If the manipulator wants you to desert the sinking ship, he suddenly becomes very guarded in his remarks about the company, isn't around to glowingly answer questions about the company and/or GETS issued very bad news about the company. Which brings us to the next important rule?

RULE NUMBER TWO:
IF THE MARKET MANIPULATOR WANTS TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD NEWS PROMOTIONAL CAMPAIGN.
Ever wonder why a particular company is made to look like the greatest thing since sliced bread? That sentiment is manufactured. Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. Stockbrokers get "cheap" stock to recommend the company to their "book" (that means YOU, the client in his book). An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings). The company signs up to exhibit at "investment conferences" and "gold shows" (mainly so they can get a little "podium time" to hype you on their stock and tell you how "their company is really different" and" not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups by the same cast of usual suspects. The more, the merrier. And a little "juice" can go a long way toward running up the stock price. The HYPE is on. The more clever a stock promoter, the better his knowledge of the advertising business. Little gimmicks like "positioning" are used. 

Example: Make a completely unknown company look warm and fuzzy and appealing to you by comparing it to a recent success story. The only reason you have been invited to this seemingly incredible banquet is that YOU are the main course. After the market manipulator has suckered you into "his investment," exchanging HIS paper for YOUR cash, the walls begin to close in on you. Why is that?

RULE NUMBER THREE:
AS SOON AS THE MARKET MANIPULATOR HAS COMPLETED HIS DISTRIBUTION (DUMPING) OF SHARES, HE WILL START A BAD NEWS OR NO NEWS CAMPAIGN.
Your favorite home-run stock has just stalled or retreated a bit formats high. Suddenly, there is a news VACUUM. Either NO news or BAD rumors. I discovered this with quite a few stocks. I would get LOADS of information and "hot tips." All of a sudden, my pipeline was shut-off. Some companies would even issue a news release CONDEMNING me ("We don't need 'that kind of hype’ referring to me!). Cute, huh? When the company wanted fantastic hype circulated hither and yon, there would be someone there to spoon-feed me. The second the distribution phase was DONE.... oops! Sorry, no more news. Or, "I'm sorry. He's not in the office." Or, "He won't be back until Monday." The really slick market manipulators would even seed the Internet newsgroups or other journalists to plant negative stories about that company. Or start a propaganda campaign of negative rumors on all available communication vehicles. Even hiring a "contraire" or" special PR firm" to drive down the price. Even hiring someone to attack the guy who had earlier written low about the company. (This is not a game for the faint-hearted!) You'll also see the stock drifting endlessly. You may even experience a helpless feeling, as if you were floating in outer space without a lifeline. That is exactly HOW the market manipulator wants you to feel. See Rule Number Five below. He may also be doing this to avoid the severe disappointment of a "dry hole" or a "failed deal." You'll hear that oft-cried refrain, "Oh well, that's the junior minerals exploration business... very risky!" Or the oft-quoted statistic, "Nine out of 10 businesses fail each year and this IS a Venture Capital Start-up stock exchange." Don't think it wasn't contrived. If a geologist at a junior mining company wasn't optimistic and rosy in his promise of exploration success, he would be replaced by someone who was! Ditto for the high-tech deal, in a world awash with PhD's. So, how do you know when you are being taken? Look again at Rule #1.Inside that rule, a few other rules unfold which explain how a stock price is manipulated.

RULE NUMBER FOUR:
ANY STOCK THAT TRADES HUGE VOLUME AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE.
When there was less volume, the price was lower. Professionals were accumulating. After the price runs, the volume increases. The professionals bought low and sold high. The amateurs bought high (and will soon enough sell low). In older books about market manipulation and stock promotion, which I've recently studied, the mark-up price referred to THREE times higher than the floor. The floor is the launch pad for the stock. For example, if one looks at the stock price and finds a steady flat line on the stock's chart of around 10p , then that range is the FLOOR. Basically, the mark-up phase can go as high as the market manipulator is capable of taking it. From my observations, a good mark-up should be able to run about five to ten times higher than the floor, with six to seven being common. The market manipulator will do everything in his power to keep you OUT OF THE STOCK until the share price has been marked up by at least two-three times, sometimes resorting to "shaking you out" until after he has accumulated enough shares. Once the mark-up has begun, the stock chart will show you one or more spikes in the volume -- all at much higher prices (marked up by the manipulator, of course).

RULE NUMBER FIVE:
THE MARKET MANIPULATOR WILL ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL AT THE LOWEST PRICE POSSIBLE.
Just as the manipulator will use every available means to invite you to "the party," he will savagely and brutally drive you away from "his stock" when he has fleeced you. The first falsehood you assume is that the stock promoter WANTS you to make a bundle by investing in his company. So begins a string of lies that run for as long as your stomach can take it. You will get the first clue that "you have been had" when the stock stalls at the higher level. Somehow, it ran out of steam and you are not sure why. Well, it ran out of steam because the market manipulator stopped running it up. It's over inflated and he can't convince more people to buy. The volume dries up while the share price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE SHARE PRICE! When earlier, there may have been X amounts of shares trading each day for eight out of 12 trading days (as in the case of CONROY), now the volume has slipped to X amount shares (or so) daily. There are some buyers there, enough for the manipulator to continue dumping his paper, but only so long as he can enlist one or more individuals/services to bang his drum. He may continue feeding the promo guys a string of "promises" and" good news down the road." (Believe me, this HAS happened to me!) But, when the news finally arrives, the stock price goes THUD! This is entirely orchestrated.

RULE NUMBER SIX:
IF THIS IS A REAL DEAL, THEN YOU ARE LIKELY TO BE THE LAST PERSON TO BE NOTIFIED OR WILL BE DRIVEN OUT AT THE LOWER PRICES.
Like Jesse Livermore wrote, "If there's some easy money lying around, no one is going to force it into your pocket." The same concept can be more clearly understood by watching the trades. When a market manipulator wants you into his stock, you will hear LOUD noises of stock promotion and hype. If you are "in the loop," you will be bombarded from many directions. Similarly, if he wants you out of the stock, then there will be orchestrated rumours being circulated, rapid-fired at you again from many directions. Just as good news may come to you in waves, so will bad news. You will see evidence of a VERY sharp drop in the share price with HUGE volume. That is you and your buddies running for the exits. If the deal is really for real, the market manipulator wants to get ALL OF YOUR SHARES or as many as he can... and at the lowest price he can. Where as before, he wanted you IN his market, so he could dump his shares to you at a higher price, NOW when he sees that this deal IS for real, he wants to pay as little as possible for those same shares... YOUR shares which he wants you to part with, as quickly as possible. The market manipulator will shake you out by DRIVING the price as lows he can. Just as in the "accumulation" stage, he wants to keep everything as quiet as possible so he can snap up as many of the shares for himself, he will NOW turn down, or even turn off, the volume so he can repeat the accumulation phase. The accumulation phase was TOP SECRET. The noise level was deafeningly silent. As soon as the insiders accumulated all their shares, they let YOU in on the secret.

RULE NUMBER SEVEN:
CONVERSELY, YOU WILL OFTEN BE THE LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF FAILURE.
Twenty-twenty hindsight will often show you that there was a "little stumble" in the share price, just as the "assays were delayed" or the" deal didn't go through." Manipulators were peeling off their paper to START the downslide. And ACCELERATE it. The quick slide down makes it improbable for your getting out at more than what you originally paid for the stock... and gives you a better reason for holding onto it "a little longer" in case the price rebounds. Then, the drifting stage begins and fear takes over. And unless you have nerves of steel and can afford to wait out the manipulator, you will more than likely end up selling out at a cheap price. For the insider, market maker or underwriter is obliged to buy back all of your paper in order to keep his company alive and maintain control of it. The less he has to pay for your paper, the lower his cost will be to commence his stock promotion again... at some future date. Even if his company has no prospects AT ALL, his "shell" of a company has some value (only in that others might want to use that structure so they can run their own stock promotion). So, the manipulator WILL buy back his paper. He just wants to make sure that he pays as little for those shares as possible.

RULE NUMBER EIGHT:
THE MARKET MANIPULATOR WILL COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS PRICE SHARES.
Placing a Market Order or Pre-Market Order is an amateur's mistake, A market manipulator (traders included here) can jack up the share price during your market order and bring you back a confirmation at some preposterous level. The Market Manipulator will use the "tape" against you. He will keep buying up his own paper to keep you reaching for a higher price. He will get in line ahead of you to buy all the shares at the current price and force you to pay MORE for those shares. He will tease you and MAKE you reach for the higher price so you "won't miss out." Miss out on what? Getting your head chopped off, that's what! One can avoid market manipulation by not buying during the huge price spikes and abnormal trading volumes, also known as chasing the stock to a higher price.

RULE NUMBER NINE:
THE MARKET MANIPULATOR IS WELL AWARE OF THE MOTIONS YOU ARE EXPERIENCING DURING A RUN UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A PIANO.
During the run up, you WILL have a rush of greed which compels you to run into the stock. During the collapse, you WILL have a fear that you will lose everything... so you will rush to exit. See how simple it is and how clear a bell it strikes? Don't think this formula isn’t tattooed inside the mind of every manipulator. The market manipulator will play you on the way up and play you on the way down. If he does it very well, he will make it look like someone else's fault that you lost money! Promise to fill up your wallet? You'll rush into the stock. Scare you into losing every penny you have in that stock? You'll run away screaming with horror! And vow to NEVER, ever speculate in such stocks again. But many of you still do.... The manipulator even knows how to bring you back for yet another play. What actors! No wonder Vancouver is sometimes called "Hollywood North."

FINAL RULE:
A NEW BATCH OF SUCKERS ARE BORN WITH EVERY NEW PLAY.
The Financial Markets are a Cruel, Unkind and Dangerous Playing Field, one place where the newest amateurs are generally fleeced the most brutally.... usually by those who KNOW the above rules. Just as I have a duty to ensure that each of you understand how this game is played, YOU now have that same duty to guarantee that your fellow speculator understands these rules. Just as I would be a criminal for not making this data known to you, YOU would be just as criminal to keep it a secret. There will always be an unsuspecting, trusting fool whom the rabid dogs will tear to shreds, but it does NOT have to be this way. IF every subscriber made this essay broadly known to his friends, acquaintances and family, and they passed it on to their friends, word of mouth could cause many of these market manipulators to pause. IF this effort were done strenuously by many, then perhaps the financial markets could weed out the crooked manipulators and the promoters could bring us more legitimate plays. The stock markets are a financing tool. The companies BORROW money from you, when you invest or speculate in their companies. They want their share price going higher so they can finance their deal with less dilution of their shares... if they are good guys. But, how would you feel about a friend or family member who kept borrowing money from you and never repaid it? That would be theft, plain and simple. So, a market manipulator is STEALING your money.

Source: http://timelesswealth.net/articles/deadly_art_of_stock_manipulation.html

Friday, 23 August 2013

Quote for the day

“If a man didn’t make mistakes, he‘d own the world in a month. But if hedidn’t profit by his mistakes, he wouldn’t own a blessed thing.” -  Jesse Livermore

23-Aug-2013 CSE Trade Summary


Crossings - 23/08/2013 - Top 10 Contributors to Change ASPI

Following Stocks Reached New High / Low on 23/08/2013



Thursday, 22 August 2013

Quote for the day

”There is no shortcut in trading, the market will quickly find out if you are lazy.” - Mark Cook

22-Aug-2013 CSE Trade Summary

Crossings - 22/08/2013 - Top 10 Contributors to Change ASPI

Following Stocks Reached New High / Low on 22/08/2013


Sir John Templeton 16 Rules For Investment Success

Interesting set of rules from legendary investor John Templeton:

1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

Complete explanation after the jump

No. 1 INVEST FOR MAXIMUM TOTAL REAL RETURN
This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.

Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.

If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.

No. 2 INVEST—DON’T TRADE OR SPECULATE
The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.

You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.

Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”

No.3 REMAIN FLEXIBLE AND OPEN-MINDED ABOUT TYPES OF INVESTMENT
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.

The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.

Having said that, I should note that, for most of the time, most of our clients’ money has been in common stocks. A look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. Had the Dow merely kept pace with inflation, it would be around 1,400 right now instead of over 3,000, a figure that seemed extreme to some 10 years ago, when I calculated that it was a very realistic possibility on the horizon.

Look also at the Standard and Poor’s (S&P) Index of 500 stocks. From the start of the 1950s through the end of the 1980s—four decades altogether—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for U.S. Treasury bonds, 5.2% for Treasury bills, and 5.4% for high-grade corporate bonds.

In fact, the S&P 500 outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s, and it outperformed Treasury bonds—supposedly the safest of all investments—in all four decades. I repeat: There is no real safety without preserving purchasing power.

No. 4 BUY LOW
Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.

When almost everyone is pessimistic at the same time, the entire market collapses. More often, just stocks in particular fields fall. Industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once.

Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”

This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.

Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

Bernard Baruch, advisor to presidents, was even more succinct:

“Never follow the crowd.”

So simple in concept. So difficult in execution.

No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high-profit-margin consumer product.

Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.

Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.

No. 6 BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK
A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.

The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.

No. 7 DIVERSIFY. IN STOCKS AND BONDS, AS IN MUCH ELSE, THERE IS SAFETY IN NUMBERS
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock.

So you diversify—by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains— and possibly better bargains—than in any single nation.

No. 8 DO YOUR HOMEWORK OR HIRE WISE EXPERTS TO HELP YOU
People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.

Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials,for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)

If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.

If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets. Years ago Forbes regularly published lists of these so-called “loaded laggards.” But remember, there are far fewer of these companies today. Raiders have swept through the marketplace over the past 10 to 15 years: Be very suspicious of what they left behind.

No. 9 AGGRESSIVELY MONITOR YOUR INVESTMENTS
Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.

Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed—because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.

No.10 DON'T PANIC
Sometimes you won't have sold when everyone else is buying, and you'll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.

Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.

No. 11 LEARN FROM YOUR MISTAKES
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.

The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.

The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.

No. 12 BEGIN WITH A PRAYER
If you begin with a prayer, you can think more clearly and make fewer mistakes.

No.13 OUTPERFORMING THE MARKET IS A DIFFICULT TASK
The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.

Remember, the unmanaged market indexes such as the S&P 500 don’t pay commissions to buy and sell stock. They don’t pay salaries to securities analysts or portfolio managers. And, unlike the unmanaged indexes, investment companies are never 100% invested, because they need to have cash on hand to redeem shares.

So any investment company that consistently outperforms the market is actually doing a much better job than you might think. And if it not only consistently outperforms the market, but does so by a significant degree, it is doing a superb job.

No. 14 AN INVESTOR WHO HAS ALL THE ANSWERS DOESN'T EVEN UNDERSTAND ALL THE QUESTIONS
A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.

No.15 THERE’S NO FREE LUNCH
This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn't mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.

Never invest in an initial public offering (IPO) to “save” the commission. That commission is built into the price of the stock—a reason why most new stocks decline in value after the offering. This does not mean you should never buy an IPO.

Never invest solely on a tip. Why, that’s obvious, you might say. It is. But you would be surprised how many investors, people who are well-educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.

No. 16 DO NOT BE FEARFUL OR NEGATIVE TOO OFTEN
And now the last principle. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.

There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up… and up.

With the fall of communism and the sharply reduced threat of nuclear war, it appears that the U.S. and some form of an economically united Europe may be about to enter the most glorious period in their history.

As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will grow. Wealth will increase. And stock prices should rise accordingly.

By the time the 21st century begins—it’s just around the corner, you know—I think there is at least an even chance that the Dow Jones Industrials may have reached 6,000, perhaps more.

Chances are that certain other indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks.

And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still “Buy low, sell high.”

Source:
BY SIR JOHN TEMPLETON
Franklin Templeton Investments