Here's the deal. If you lost a ton of money during the 2008 bear market, you've got a lot of company. And that, leads me to ask one simple question. Where were all the people advising us on how to make money in stocks? How come nobody said, "Hey, a crash is coming, you better sell your all your positions and get into cash." I'll tell you why, because the people that really move the market have billions of dollars at stake. Now compare that to what you have for your stock market investing program. My belief is that the little investor, even if you have a few million at stake, probably receives subpar investment advice. While they are telling us to buy and hold, they're selling what they know is going to sink in value and are out by the time you know what hit you. And even when you recognize what's going on, we're told to hang in there for the long term. Finally, when we can't take it anymore and finally sell, that's the bottom and you just screwed yourself and that's when the big money starts buying stocks again.
Which leads me to my first conclusion as far as how to make money in the stock market, don't buy and hold unless long term means over 10-15 years. Let's face it, I can lose half (or more) of my money on my own without any help, so why pay someone else to do it for me. And it takes a long time to make back half of your money.
The other thing that hurts us is we buy these mutual funds that are fully invested all of the time, no matter what the market conditions are. Why don't the managers look at the market and make the astute observation that maybe, just maybe they should have the fund in cash.
In search of a better way, I came across a book called "How To Make Money In Stocks" and decided to start implementing the stock market strategies he outlines. What I like about his approach is that he studied the greatest stock market winners of all time to come up with a set of rules of investing in the stock market that are more commonly know as CANSLIM. The guy's name is William J. O'Neil and he is also the founder of the Investor's Business Daily or IBD. I subscribe to this paper and I have to tell you that it is built to help you pick the right stocks.
I've been a casual reader of his paper and his work for many years now and after last year watching just about every type of investment decrease substantially in value decided to rededicate myself to one investment strategy. To me, his makes the most sense. He doesn't advocate buying and holding but in buying the right stocks at the right time.
In his book, "The Successful Investor" he outlines five steps to how to make money in stock. The first step is to know the general market's direction by following the major stock indexes to get the Big Picture. Is the market going up or going down? He goes on to say that even good strong stocks, you know the ones we're not supposed to ever sell, go down in value when they are pulled down in the market. So, step one is sounds pretty simple, only invest in stocks when the market is going up. It makes a lot of sense as well if you think about it. Kind of like a presidential election when people ride the candidates coat tails.
So, how do we determine that. By watching the three major stock market indexes, the S&P 500, the NASDAQ composite and the Dow Jones Industrial Average and making sure that these indexes are closing up in values on higher volumes. This is where a subscription to investors.com really pays off because they have IBDTv that goes over these three indexes in their Market Wrap each day. That combined with Big Picture column, and reviewing his rules of what constitutes and uptrend in the market will help you with that.
One of the things you'll notice about his techniques for how to make money in the stock market is that he is a big advocate for using charts to analyze the market. Otherwise known as technical analysis, or being a chart reader, can be intimidating to the new and beginning investor. Don't let that put you off. Take the time to do the work. He uses charts the same way that a doctor my use an xray and also a subjective tool to what the market is doing today and how individual stocks are performing. He says that these stock charts don't lie and to let the market tell you what to do rather than the so called "gurus" you see, your friends or even your broker. Emotion in investing clouds your decision making but black and white statistics are the best stock picking tips you can get. They provide the clues you need to make money in the stock market.
The second step that he recommends is to use a simple three to one profit and loss percentage plan. He compares it to the a baseball player batting .333. That if you only one in three stocks makes you money, you can do well. Keep losses small at 7 to 8 percent and let your gains go up. Once you've practiced, your stock picking average can go up so I'm putting that on my list of things to keep track of, my success ratio. How many times was I right.
I don't want to mislead you as he is direct in the book about one thing. If you want to make money in the stock market, it requires study and practice. You probably won't an expert investor right away. If you study though, and review your mistakes, you can be successful if you know when to buy and know when to sell your stocks.
The third step in make money stock market investing, is to buy the right stocks at the right time. He details very specific things that we should look for. I'll list some of the most important ones here:
- Earnings per share in the last quarter should be up at least 25 percent over the prior year.
- Earnings growth should be accelerating.
- Annual earnings for the last three years should be increasing at a rate of 25 percent per year of more.
- Sales should be up 25 percent or more and accelerating.
- The after tax profit margin should be at all time highs or near their highs and tops in their industry group.
- Return on equity should be over 15-17 percent.
This is where experience comes in. And you can only learn by doing and by reviewing your stock purchases. If you want to learn how to make the stock market make money for you, you have to study your craft. It won't be handed to you without any effort. But with a system, you can pinpoint these stocks a lot easier than you thought.
After that, the fourth step is knowing when to nail down your profits and contain your losses. He says to sell any stock that goes down 7-8% and to increase your positions when stocks go up and never when they go down. In general this means that you should lock in your gains when they reach twenty to twenty-five percent. Using the charts as your guide, you'll need to recognize when institutional buyers are getting into a stock (closing higher on higher volume) or getting out of a stock (closing lower on higher volume.)
What's fascinating is that supply and demand is what raises or lowers the price of an individual stock. The more people who want something, the more someone can charge for it. That's one of the reasons real estate prices have fell, the pool of buyers dried up because they couldn't get financing. It's the same with stocks only when the big money (the institutions like mutual funds) decide to buy a stock, it raises the price and when they get out it makes it fall. A trained chart reader like you can become, can see this buying and selling.
An additional service that his company provides, for a fee, is called Daily Graphs. These graphs are great and contain all of the information that you need like earnings, institutional sponsorship and the price and volume information you need. It might not be for the beginner stock market investor though because it costs about $1,000 a year.
The final fifth step he outlines is how to manage your portfolio. He suggests that diversification is really not protection from risk the market would fall. You need to look no farther than the mutual funds many of us were invested in that fell in value. He says that it is better to focus on a handful of stocks, no more than 5 or 10 that you can really watch.
The goal in money making stocks is not to always be right, but that when you are right, to be right in a major way. I highly recommend "How to Make Money in Stocks
" and it's the focal point of our content here at Stock Market Investing Today.
EmoticonEmoticon