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Hi 1step,
Thanks for buying my book and I'm glad you were able to benefit from it!
In hindsight, I don't think L-1 Identity stock or its p/e were very high, but they were not low in the range of a value stock.
Instead, I bought it as a growth at a reasonable price (GAARP) stock. I figured that governments and corporations would be interested in new technologies to prevent terrorism, industrial espionage, etc.
I didn't anticipate that this spending would be derailed by a global financial crisis and recession.
That is why your statement "I feel the entry point in any stock purchase should signal value or a fair deal" is a good one.
While I have made money using my technique on GAARP or growth stocks, and I think diversifying across stock picking methods is good, I think you can sleep better at night and have a higher success rate if you focus on value stocks.
The Threat Right Now is Deflation - Not Inflation!
Too many people are preaching a gloom / doom scenario where the Chinese (and others) reject U.S. bonds because of the debt, we have to raise interest rates, and suffer hyperinflation.
That is just a fantasy at this point.
Since the "downgrade", investors have been piling into treasuries - S&P's view was completely rejected. U.S. bonds are still considered the safest and most liquid investment. There are no other options. Swiss bonds are considered safe, but their market is not nearly large enough.
Right now, we are more in danger of deflation than inflation. There is currently a liquidity trap. Companies are awash in money, but not spending. So there is no demand.
Proof: Bank of New York just started charging negative interest on large cash deposits. Any return the bank can get by investing its balances in overnight / short term paper can't even cover the insurance / overhead of holding deposits!
Even though everyone wants the debt burden eased and don't want any more government stimulus, that might end up being the only course of action. The Fed can't cut interest rates any further. Companies have money, but there is not enough demand for goods/services. Cutting government spending right now will reduce demand. The time to reduce the deficit by spending cuts will be after the economy recovers out of recession.
Hi Tom,
This is because the market rejected S&P's "downgrade". S&P does not have much credibility because they gave high marks to Lehman before it collapsed, and it gave it's seal of approval to the sub prime mess.
Now, they have the U.S. ranked below France, which has a higher debt to GDP ratio.
Also, S&P botched the numbers and calculated the US debt higher than they should:
http://krugman.blogs.nytimes.com/2011/08/07/i-heard-it-through-the-baseline/
But they still went ahead and downgraded us, so it might possibly be for political reasons.
The U.S. debt market is still seen as the safest and most liquid. Swiss bonds are considered safe, but that market isn't big enough.
It should be interesting to see what happens. The consensus prediction is that the market should drop a bit at the open, but shouldn't drop too much, because they think part of last week's decline was because of a possible downgrade.
I think a lot of last week was because of Europe, so we will see.
Of course, what happens is only of academic interest for us - it doesn't affect our trading plans, since we have our automated systems to keep us from being scared into knee-jerk reactions.
L-1 Identity Solutions (ID) - Another Real Life "Stock Trading Riches" Trade
On April 23, 2007 (my birthday by coincidence), I bought 101 shares of L-1 Identity Solutions (ID) at $19.61. L-1 makes biometric security products (retinal scanners, etc.) for government agencies, border control, courts, corporations, etc.
On July 25, ID was acquired in an all cash deal for $12/share. Thus, buy and hold yielded -39% for the last 4 years.
However, I managed the position with the Stock Trading Riches system. The formula had me do the following additional transactions:
12/29/2008 buy 230 shares at $6.04
6/4/2009 sell 107 shares at $8.91
12/22/2009 buy 89 shares at $6.40
12/28/2010 sell 145 shares at $11.90
I ended up with a +$18.6% return for 4 years. This is an annualized return of 4.4% - not bad considering that, in hindsight, I bought the stock too high.
This was another example of how my Stock Trading Riches system self-corrects your positions over time.
I am on Fox Business. I was interviewed for a personal finance article on FoxBusiness.com which featured "Five Smart Money Lessons From Reality TV" (http://www.foxbusiness.com/personal-finance/2011/07/19/5-smart-money-lessons-from-reality-tv/). They even mentioned my book "Stock Trading Riches".
They wanted financial experts to describe financial lessons that one can learn from reality TV shows. They used my example of "The Biggest Loser" - where people can learn that, like losing weight, controlling debt and making wise financial choices are skills that improve slowly and steadily. Don't get discouraged if you find it hard to make instant progress.
The "Stock Trading Riches" Ebook is Now $4.99
You can click on this link to purchase and instantly download it:
https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=YNX3AM3XA32N8
In my Scottrade account, they don't pay much interest for cash balances, so what I have done is keep the cash part of my Stock Trading Riches system in AALPX, the American Beacon no-load short term bond fund.
The "Stock Trading Riches" Ebook is Now Only $2.99
You can click on this link to purchase and instantly download it:
https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=YNX3AM3XA32N8
Trading With Charts and Technical Analysis Is A Good Way To Go Broke!
Every day, thousands of people decide that they want to "trade stocks and make millions". Unfortunately, there are no shortage of snake oil salesmen willing to encourage them, and sell books, and fancy technical indicator and charting software.
The truth is that if you approach the stock market with a small amount of capital, and expect to get rich quickly, you are setting yourself up for failure:
1. You might gamble a large percentage of your money on one or two risky trades.
2. Pay too much in expenses (commissions, fees, books, software, DVDs, seminars, etc).
3. Use technical analysis and charting.
4. Get involved in futures and options.
The stock market is a fantastic way to make your money grow and work for you, but you can't expect it to triple or quadruple a small stake. Instead, count yourself as a good trader or investor if you can reliably generate between 10 - 20% per year consistently.
Please do not buy into hype about technical analysis and charts. Now, you do need to use technical (i.e. price based) rules for deciding buy and sell points, but these are about managing risk and taking profits from positions determined through fundamental analysis. But, you need to beware of depending on charts and technical indicators to predict when stocks will go up or down.
Most of these technical indicators have been recycled and sold since the 1970's, when computers and calculators were available for the first time. "Trading gurus", who make more money from selling systems than actually trading, found they could create indicators that sometimes gave reliable signals, and then could cherry pick these examples for their sales pages.
Chart patterns and technical indicators are seductive because most people - especially successful professionals from other fields - think in an employee mentality - rather than an entrepreneurial mindset. In other words, they want a consistent paycheck and reliability. They want a boss to give them instructions. In this case, the trading guru gives them a well defined job - buy when this line crosses this, or sell if this chart pattern occurs. They don't want to think for themselves, take risks, and invent their own systems.
This is why many doctors, lawyers, and engineers make lousy traders and business owners.
I never consistently made money with traditional technical analysis. I only became consistently successful when I turned unconventional and developed my Stock Trading Riches system.
The Stock Trading Riches formula is technical, in that it works on price, and it is as easy to apply as a moving average or oscillator. But, it is not trying to predict when to buy or sell a position, or trying to predict the market. It's a tool for managing a position - lightening up when the position has increased and bulking up the position when it is down.
I found the secret to trading a stock is not to jump in and out. The key is to always hold core position and mathematically adjust the number of shares, depending on a formula - like STR or AIM.
Hi Dan,
My site http://www.stocktradingriches.com is back up. My hosting service fixed the issue. Sorry for the inconvenience.
Praveen
Hi dangreene,
Thanks for letting me know!
I opened a ticket with my hosting service. Hopefully they fix it soon!
Challenge: What if you could only hold 3 stocks for retirement and could not touch them for decades?
I got challenged with the above scenario.
Here are three choices for stocks that can be held through retirement for growth and income:
1. Archer Daniels Midland (ADM) - They have a good history of dividend increases, and are a great hedge for inflation, since they process agriculture and food products. In addition, they are a hedge on a weak dollar because they have substantial foreign product sales and own a lot of undeveloped land overseas.
2. American Assets Trust (AAT) - This REIT should produce a growing amount of income over the next few decades. It is a 45 year old company based in San Diego that owns a high-quality portfolio of office, residential, and retail properties on the West Coast - including California, Hawaii, and Portland OR. While the national vacancy rate is in double digits, AAT's properties in California and Hawaii are just 5% vacant.
3. Illinois Tool Works (ITW) - This company is part of the S&P 500 and has increased its dividend every year for the past 44 years. It continues to grow, year after year, by buying smaller industrial product and equipment manufacturers.
2 stock picks for the railroad industry:
1. Union Pacific (UNP) - they haven't missed an earnings forecast in 5 years, and their business is increasing as the economy recovers, and the price of fuel makes them more competitive with trucking firms. Even after a recent run-up, the stock trades at a reasonable price / earnings ratio.
2. Canadian National Railway (CNI) - CNI has the rail industry's highest net profit margin (27%) and has shorter term freight contracts than other railroads - which allow it to raise prices. CNI also has exclusive rail access to the container terminal at the Port of Prince Rupert in British Columbia. This terminal should capture more freight traffic to Asia because it is 10 days to Shanghai vs. 12 days for the Port of Los Angeles. Finally, it doesn't hurt that the largest shareholder is Bill Gates.
I own CNI, and manage the position with the "Stock Trading Riches" system.
Who Is To Blame For The United State's High Level of National Debt?
There is plenty of blame to go around for our present debt situation:
1. Under Bush, we cut taxes and started 2 wars - and Obama continued this while
adding another 1/2 war (air strikes on Libya). During WWII, the folks at home made sacrifices, such as rationing, etc. that made them feel connected to the war effort. While we no longer need rationing, we should have ended the tax breaks after 911 - when we went to war.
2. The bottom line cause of the financial crisis was Greenspan pumping too much money trying to lessen the effects of the dot com crash. Booms and busts are a natural cycle in capitalism, and we keep trying to use the government to smooth out the down cycles.
3. Finally, we have had historically low interest rates for the last few years. While responsible homeowners locked in low, fixed rate 30 year mortgages, the government is still mostly stuck with short term debt. We should have been issuing less short term bonds and lots of 20, 30, and even 50 year bonds.
Sometimes it's fun to explore the internet without any plans - just following links and "googling" interesting phrases.
This morning, I started off reading an article about an American sumo wrestler who set a world record for heaviest finisher of a marathon.
One of the comments was a joke that the sumo guy would cause a shortage in Gold Bond medical powder - in other words, a joke about chafing.
I remember hearing commercials for Gold Bond years ago so, feeling nostalgic, I googled it and went to the Wikipedia site.
From there, I learned that a lot of cool products from the past - like Gold Bond, Icy Hot, Selsun Blue, etc. are made in Chattanooga Tennessee by Chattem, a 100 year old company.
The Chattem Wikipedia entry mentioned that they are a subsidiary of French drugmaker Sanofi-Aventis, which sounds very interesting. An old time Chattanooga company owned by a French drugmaker.
It makes me think of the "Beverly Hillbillies"'s Jed Clampett mingling with a French aristocrat. So, I googled the merger.
Turns out that Sanofi bought Chattem in 2009 on December 21 (my brother's birthday). They paid $1.9 billion - offering $93.50/share, which was a 34% premium over the closing price.
From an analysis point of view, it looks like it was a good deal. Chattem is in the top 10 for consumer products in the U.S. (and has a higher profit margin than leaders Johnson & Johnson and Proctor & Gamble), but they don't have much market overseas. Sanofi is losing patent protection from many drugs, and wants the stable earnings from consumer products to make up the lost income. Also, they want a sales network to sell an over-the-counter version of Allegra in the U.S.
So, it was a win-win deal for everyone.
Finally, I saw an interesting article on the Wall Street Journal that 2 French businessmen in Brussels got charged by the SEC for insider trading on the Sanofi-Chattem deal. They found out about the deal before hand, bought options (expiring on Jan 15) on Chattem stock, and sold the options right after the merger was announced for a $4.2 million profit.
So I had a fun and educational "surf session" all because of a Sumo running (actually walking) a marathon
Bank of America Foreclosed On:
A couple who had no mortgage on their home got erroneously served with foreclosure by Bank of America. They won their case and were awarded about $2500 for lawyer fees. BofA wasn't paying, so they got a foreclosure order from court against the local branch and showed up with sheriff's deputies...
http://news.yahoo.com/s/time/20110606/us_time/httpmoneylandtimecom20110606homeownerforeclosesonbankofamericayesyouheardthatrightxidrssfullnationyahoo
I Bought Two REITS Today - AAT and CPT
REITs trade like stocks, and can be thought of as real estate mutual funds. In other words, instead of owning companies, they own real estate. They get special tax breaks, providing that they pass most of their earnings to shareholders. Because of this, REITs provide a lot of income.
I have always wanted to buy some REITs to diversify my portfolio, and I decided now might be a good time after reading an article in the recent edition of Forbes entitled "REIT Merger Boom is Brewing".
I bought two REITS: American Assets Trust (AAT) at $21.88 and Camden Property Trust (CPT) at $62.51.
AAT went public in January at $20.50 per share. It is a 45 year old company based in San Diego that owns a high-quality portfolio of office, residential, and retail properties on the West Coast - including California, Hawaii, and Portland OR. While the national vacancy rate is in double digits, AAT's properties in California and Hawaii are just 5% vacant.
Camden Property Trust specializes in apartment communities, is considered a buy because its stock price hasn't gained as much as bigger apartment REITs, such as Equity Residential. In fact, CPT makes an attractive takeover target for bigger REITS (like Equity) because of its large holdings in the Southwest and Southeast.
Are Big Institutional Purchases A Bullish Sign?
A friend of mine recently sent me a newsletter where the writer was bullish on gold and mentioned that the University of Texas announced that they now hold $1 billion of gold bars.
I responded that this is not necessarily a bullish sign. This is an old trick that traders use to get out profitably from large positions.
It might be the case that, having accumulated this large gold position, the university is sitting on a profit.
With a large position, they will need liquidity in the form of buyers if they want to sell some or all of the position without driving down prices.
So, now they announce the purchase to encourage people to jump in to the market, and their brokers will sell their gold to them
Skype: Great Trade for Marc Andreesen
This past week, Microsoft bought the internet phone company Skype for $8.5 billion. Did they overpay? Was it a good buy?
That remains to be seen. Skype continually loses money and Ebay gave up on integrating it. But, I think they may have some success if they combine Skype with Xbox and, especially, Communicator.
Many corporations (including the bank I work for) use Microsoft Communicator internally for chats. If Microsoft embeds Skype into Communicator, they could capture a big share of the voice business.
But, one thing for sure is that a big winner is Marc Andreesen (founder of Netscape) and his investment firm, Andreesen Horowitz.
Ebay bought Skype for $3.1 billion in 2005 and sold it to a group of investment firms (headed by Silver Lake and Andreesen Horowitz) for $2.8 billion in 2009.
Now, 18 months later, they sold it to Microsoft for $8.5 billion.
That's a great trade - a 204% return in a year and a half!
Will the dollar collapse?
A friend of mine who lives in Zurich sent me this article and asked about my opinion of this gloomy scenario:
http://www.swissinfo.ch/eng/business/Dollar_faces_collapse.html?cid=30012940
Here is my response:
I don’t think the dollar will collapse or stop becoming the reserve currency.
It isn’t unprecedented for a first world country to have such a high level of debt during time of war, or when preventing a depression / severe recession. The U.S. is doing both.
Under these conditions, there has never been a default as long as:
1. the currency is not backed by gold,
2) a lot of the debt is held outside the country.
Also, a bubble occurs when most people think there is no problem. Right now, everyone worries that the U.S. has a debt problem – including the government. That is a bullish sign. So, I think that the debt will be eased off. Eventually the dollar will strengthen.
Hi Neko,
I don't know if there is a minimum or maximum beta value. The article mentions, for one stock, that it had a price to book ratio of 0.22.
I would say a price to book or price to sales ratio under 1 will maximize the effect.
The one way to AIM or constant value futures contracts would be to use futures options.
I have thought about how you would use stock or commodity options with AIM or my system.
First, the main difference between a futures option and a stock option is basically the unit size. For example, a stock option is always quoted in terms of 100 shares. So, a $5 call option wold be purchased for $500. For futures options, it depends on the underlying future. So, for corn, each option point is $50 per cent.
So, let's say a 295 cent call option on corn is 5 cents in the money when corn is trading at 300 cents, and let us say the option costs 10 cents. That means you would pay $500 for the option.
Otherwise, the commodity option is like the future option. If you buy a put or call, the premium is all you would lose.
So, how would you AIM an option? I have not actually done it, but I would think you would have to do 5 things:
1. Pick the closest strike price to at the money and furthest expiration date you can.
2. Divide the amount to add or subtract by the units and round down to get the number of contracts to buy / sell. For example, if you had to buy $2045 worth of stock options, you would round to 20. So you have to add contracts that cost $20. This way, you can add different options.
3. When adding to a position, add according to rule 1. So if you initially bought July options with a strike price of $20, and now Sept. options are available, and at the money is at $15, then buy Sept $15 options.
4. As out of money options get within a few weeks of expiration, roll them over for an equal dollar value of options according to step 1 (farthest expiration and closest strike to at the money).
5. Use a BIG cash reserve - more than 50/50.
In fact, you could experiment with in the money or out of money options. In the money options have more intrinsic value, so they are less vulnerable to time decay. A deep in the money option would be closer to trading the underlying with some leverage. Out of the money gives more leverage, but is more speculative.
If you think of aim-like systems as a warehouse, where you are buying goods low and selling high, then options would be like a warehouse with perishable vegetables. Prices may go up or down, but if you hold onto any particular vegetable too long, the price will go down because it's spoiling.
So, you can increase total quantities when the price is low, and sell down quantity when prices are high, but you will need to periodically swap out old options for new options to minimize time decay.
Also, sometimes options aren't as volatile as the underlying. For example, if a really out of money option is close to expiration, and the underlying moves a lot, the option might not increase a lot if the market still thinks the option will expire worthless.
Again, these are just my thoughts - I haven't traded options using AIM or constant value. I've traded options and futures in the past with other methods and always eventually became a net loser.
When I worked at the Board of Trade, there was a trader whose wife left him because they went from an apartment to a house, back to an apartment, back to a house, back to an apartment. I've come to understand that even what we would consider "experts" eventually crash and burn.
The ones who stay in the business work on deleveraging themselves, not the other way around.
I understand the allure of the potential to make a lot through volatility, but its good to be defensive. Magazines catering to the wealthy, like Forbes, never recommend options, and they recommend futures for big accounts where you can buy contracts without margin.
Of course, it would be great if we could consistently AIM options for profits that exceed what we can get from funds or stocks.
Futures contracts expire and have to be rolled over periodically, but they don't lose value over time like options do. However, they can't be used in AIM-like systems (including my own) because you can't buy in any quantity. Instead, you are putting deposits on a fixed contract size.
For example, if corn is trading at 400 cents per bushel, one contract is for 5,000 bushels (worth $22,650) and the initial margin is about $2,000. If corn trades down to 380 cents, a contract is still for 5,000 bushels (worth $19,000) and the initial margin is still $2,000. In other words, you can't buy or sell in incremental quantities.
To rebalance corn to a constant value, you would have to be able to buy a certain dollar's worth. For example, buy $20,000 worth of corn. If it trades down to $18,000 then buy $2,000 more. So an AIM-like system would work with buying a physical commodity but not "buying" standardized futures contracts where you are putting down a deposit.
But, if you were to trade corn with no margin, you would not have any volatility because the commodities themselves are much less volatile than stocks - the volatility in futures comes from the greater than 10 to 1 margins. Since this volatility is due to leverage, not natural movement, randomness has a larger effect on price movement than with stocks - so it is harder to get an edge with futures.
I've traded futures in the past and have years of experience with them - and I've learned to stick with stocks.
Hi Neko, Here is a link to the article:
http://www.forbes.com/forbes/2011/0314/investing-malcolm-baker-stocks-google-harvard-low-risk.html
They state:
Their surprising conclusion: $10,000 invested in the riskiest 20% of all stocks, and with the portfolio refreshed monthly, would have shrunk 5.5% annually to less than $1,000 after inflation over the 41 years studied. The same amount invested in the least risky 20% would have grown to an inflation-adjusted $100,000, representing an annualized 5.8% return, or 1.6 percentage points above the S&P 500.
I Bought Colgate-Palmolive and Cirrus Logic
On Thursday, I bought Colgate-Palmolive (CL) at $80.70 and Cirrus Logic (CRUS) at $16.49.
Colgate-Palmolive was recently mentioned in an article on how, paradoxically, the lowest volatility stocks actually have the highest total returns over time. Over the last 20 years, CL had a beta of 0.6 (the general market is 1, so anything below 1 is less volatile) and a total annualized return of 13.5% (vs. 8.8% for the S&P 500).
Around the time of this article, CL was also a recent pick of columnist Ken Fisher. He admits that many see it as a boring stock, but he sees it "as a low-risk, big-cap growth stock". At $78, he said it was trading at 16 times his estimate of 2011 earnings, and thinks it will trade at a 25% premium over the market as the economic cycle picks up.
Cirrus Logic is a way to bet on Apple without paying the premium. CRUS makes the chips for iPads and iPhones. Asset Manager Jim Oberweis anticipates revenue growth of 70% over the next 12 months.
Remember that I don't do short term trading. I try to buy good long term stocks at good prices, and then let the stock trading riches system manage the picks.
$1500 Gold and $45 Silver!
The above was the title of an email I received yesterday from a friend of mine. He was reminding me that, about 6 months ago, he had predicted these prices for gold and silver.
I wrote him back and said:
Hopefully you were able to profit from your prediction - and have a plan for when to take profits.
Those two things separate an economist from a trader
Well, it turned out that he hadn't because he did not know how to trade his predictions. I told him that he could consider using my "Stock Trading Riches" system. It would actually work for more than just stocks, ETFs, or mutual funds. You could use it to trade actual metals, commodities, or currencies. In fact, just about any good.
As an example, you could take $10,000 and buy $7,000 worth of gold (or silver, or oil, or tea) and keep $3,000 in a cash reserve. Once a year, if the value of the commodity has fluctuated by at least 10%, you could rebalance. Of course, the total amount, constant value, and reserve amount can be anything you want.
While I favor strictly rebalancing a stock position, and adding new stocks over time, you may want to use the optional growth rule from my book for a commodity. This way, the constant value would grow over time as your position went up.
Gadhafi's Surprising.ly Internet Asset
In an ironic twist, it turns out that, whenever NATO, the U.S. Air Force, celebrities like Charlie Sheen, or just regular people, have been sending out links to their Twitter followers, they have been using a Libyan asset.
Many of the most popular free services for condensing links, such as bit.ly or owl.ly, are using domains owned by Libya.
Here is a link to the Wall Street Journal article about it:
http://finance.yahoo.com/banking-budgeting/article/112508/gadhafi-ly-web-suffix-libya-wsj
Like Enlightenment, Winning Trades Are An Accident
One of my favorite quotes that I share on my Tao of Simplicity blog (http://tao-simple.blogspot.com) is:
A zen master was once quoted:
Enlightenment is an accident, but some activities make you accident prone.
Yesterday, I read a blog post (http://eminiforecaster.com/blog/79.php) by trader Rob Michell, who said something similar about winning trades:
"It is impossible to distinguish between luck and skill in most cases."
"Having said that, here is another tidbit of crazy inside knowledge. Since you cannot distinguish between luck and skill a good portion of the time, the real truth of the matter is you are not responsible for your winning at all. The market is."
"I said before, you have to manage your risk and then, at some point (and here is the blaspemous statement that will make most traders cringe), a good accident happens. Accident you say?? Yes. I use that word, because it is the only one that is strong enough to remind me there is nothing personal about trading. It is all management of risk. It is a disipline."
I really like this fresh way of saying a trading truth, and that is that the market goes where it goes, and nobody can predict it 100%. No strategy or model can always pick the best times to buy and sell.
We have to think like a casino. We want to take bets were we have an edge. On any individual trade, it is an accident if we make a profit. But, if we have a trading system with an edge, it won't be an accident if we profit over time.
Hi Conrad,
I agree with your analysis. That is why, in my book, I made it an optional rule and suggested a 50% drop. Even at 50%, if it is a good stock, it will come back. But, I suggested the rule because there are many people who still feel uncomfortable buying a stock that is down.
Compared to a strict % stop loss, there is more value to reading up on stocks that are down, to see if there are fundamental reasons you don't want to rebalance them.
For example, I had 2 deep divers for many years - Lucent and Nortel. Over three years, I only had buys, no sells, on them.
When I went to rebalance them at the end of 2008, I searched for info on them. I read lots of talk about Nortel filing for bankruptcy and whether the Canadian government would prevent it.
So, I ended up keeping Lucent and replacing Nortel. Lucent has since came back, while Nortel did go bankrupt.
With my stock trading riches system - which is like AIM - I have an optional stop loss rule where if the stock drops X% from the initial purchase, you simply replace it with another stock.
AIM can work the same way. Let's say that you already have $4,000 of a stock XYZ, and AIM says to buy another $500.
If XYZ is now below your stop %, and is in danger of being a deep diver, then sell XYZ completely (thus generating a capital loss for tax purposes) and buy $4,500 of stock ABC.
Then, in effect, you are still AIMing the position (one that started with XYZ and is now with ABC).
You can also use this replacement technique if you want to get rid of a stock for fundamental reasons, or simply want to harvest a capital loss.
In fact, as I mention in my book, you may not have to worry about an ETF becoming an unrecoverable deep diver but, if you have an ETF that is down, you can sell it and rebalance into a similar, but slightly different ETF to capture the tax loss and avoid the wash rule (where you can't buy the same position back for 30 days).
Every "Stock Trading Riches" position is ultimately self-correcting, because you can always re-balance one stock into another.
The rebalancing formula is pure mathematics - it doesn't care if you plug in stock X or Y.
For example, suppose you were maintaining a constant value of $5,000 in HP and, after a particular year, your position was down to $3,000. Normally, you would buy $2,000 of HP.
However, if you lost faith in HP (for example, heard it might go bankrupt), you could choose another stock - say Target (it doesn't have to be in the same industry), sell all $3000 of HP, and buy $5,000 of Target.
You would then have a capital loss, and could say that HP was a failed investment. But, that is if you viewed the position as an "HP position".
If, on the other hand, you take the view that it is a "$5,000 slot", and HP happened to occupy it for a while, and now Target occupies it, then ultimately it is not a failed investment.
In fact, if any given position can always systematically buy low and sell high serially across different stocks, then you can't really have a losing position in the long run.
At the high level, the "Stock Trading Riches" system is about splitting your portfolio up into constant dollar slots in which stocks are rebalanced to capture dividends and capital fluctuations. The slot can outlive any particular stock.
Thanks for responding AIMster!
Tower Bob, the constant value amount is completely customizable. $2000 is the minimum size I would recommend, but you can increase it as much as you like.
In fact, different positions can have different constant values.
On page 32 of the book, I give the example of a $140,000 account having $100,000 in an S&P 500 ETF and $40,000 split between 10 companies.
The ETF gets rebalanced to $100,000, while each company uses $4000 as the constant value.
Praveen
I just restarted the affiliate program. The link is now back up at http://www.stocktradingriches.com/affiliates.html .
It explains the two ways you can make money with my book. One way is to join the Amazon Associates program and sell the physical book. The more lucrative way is to sell the ebook version.
I set up an afiliate program through PayDotCom and it pays 55% of the cover price for each sale. PayDotCom is like ClickBank and it is free to join.
Hi Sam,
My default system is to rebalance yearly, but my system is designed to be flexible so that people can design their own individual system to suit their needs.
So, in the section on variations, I say that the system can be used at any frequency: daily, weekly, monthly, quarterly, etc.
You can also use a percentage trigger, such as whenever prices move X %, instead of a time period. Or you can combine them, like rebalance yearly and if prices move 15% in between.
The spreadsheet can be used at any frequency because it calculates buys/sells based on the prices that are inputted. The spreadsheet does not care if you give yearly or monthly prices.
Praveen
I bought Tim Holding (TSU) and Timken (TKR) this morning, based on analysis by Ken Fisher in Forbes Magazine and my own online research.
Tim Holding (TSU) - is Brazil's third largest cellular carrier (with 190 million customers), but has the highest revenue per customer. It is the leading seller of iPhones in Brazil. It had a rough couple of years, but the Brazilian economy is recovering, and Tim is in a good position for growth. It is selling around one time revenue and 16 times Fisher's 2011 earnings estimate.
Timken (TKR) - is an old cyclical favorite of Fisher's. It's an Ohio-based manufacturer of anti-friction and power-transmission components, bearings, specialty steel, seals, and lubricants. According to Fisher, it's products "are basic to any economic expansion and will be throughout this one. Every downturn it gets crunched. In every expansion, it is underestimated. It should be no different this time given that 60% of its sales still come from the U.S.". It currently sells for 13 times Fisher's estimate of 2011 earnings.
Hi AIMster,
Thanks! The Aurora temple is near where I live and I've been there several times. I like it's design and architecture.
St. Charles is a very nice city.
The whole Fox Valley area has grown a lot since 1998.
Regards,
Praveen
I was included in a new Wall Street Journal Market Watch article on Bloggers: http://www.marketwatch.com/story/blogging-all-the-way-to-the-bank-2011-01-12
Thanks Tom! I really appreciate it!