In The Money

Well, it appears that we finally found a replacement for MSN Stock Screener.

After testing Yahoo’s JAVA Stock Screener, there were some fundamental problems such as the Equity to Debt Ratio not working. I emailed Yahoo! to let them know that it is not working. Strange that this problem was not picked up earlier and has me questioning if anybody even using Yahoo’s Stock Screener?

I tested TSOC’s screens at Stock Screen 1-2-3, and found that they work. The biggest negative with the site is that you need to register (but it is free) and the interface reporting is pretty cryptic. Still it was nice to see an excellent return using the site’s Screen Backtest feature.

Its a testimony to the power of TSOC’s system, which is only one small aspect of the entire course. Please note that this is not a guaranteed result since the market has skyrocketed since the credit crisis, the filtered 60 stocks were used in the back test, and it required weekly balancing. As the saying goes, hindsight is twenty-twenty.

Unfortunately, these things happen with internet based apps. The Stock Options Course depended on the free and fabulous MSN Deluxe Screen which was recently closed down. On November 4, 2009, the entire MSN Money Investment Toolbox which included the highly-regarded Deluxe Screener was retired.

Other stock screeners have been trialed and nothing has come close to the flexibility of the MSN Screener & Toolbox. In terms of best free replacement, the following are being suggested:

1) www.stockscreen123.com – Free Member Site.

Good aspects: Allows many screening variables similar to MSN and allows users to enter formula to screen; The data source is same as MSN (Reuters); Export screening results into Excel at once instead of only the 200 capped by MSN; Allows saving screens (not exporting).

Bad aspects: Limited to only 25 column stats and many criteria available for screening cannot be displayed as column info.

2) http://screener.finance.yahoo.com/fscr/us/launch.html – A Java App

Good aspects: Allows real time screening; Allows many variables to be used for screening;  Export results into Excel with results capped at 200 like MSN; Allow saving screens (not exporting).

Bad aspects: It does not display any column stats that are not part of screening; It does not allow formula to be entered for screening or displaying results.

Other stock screener websites have been tackling the same problem:

http://www.stockscreening101.com/msn-stock-screener.html

The eBooks will be updated with the new information in the near future. We’ll let you know in a future blog when these are ready for distribution. Past customers can contact us for a free upgrade to the new documents.

Purchasing stocks carry with it risk. Your money could be lost if the company goes out of business. You could lose money if the company is losing sales.

What if you could own a ticket that would allow you to purchase a company if it did well? Would it not be kind of like having insurance policy that you could exercise if the conditions were right?

Film or theatrical producers often buy the right – but not the obligation – to dramatize a specific book or script. That is what a stock option is.

A stock option is the right to buy (call option) or sell (put option) a specific number of shares of a company, at a certain price, by a specified date.

They add a delay effect to the normal direct purchasing and selling of companies. This delay if used wisely, can give you added advantages as an investor. Because of this, Options are very sophisticated financial instruments and should only be done once you have a working understanding of the stock market.

Options Help Limits Losses

Consider this for a moment; two men invest in the same stock. One man invests $10,000 and he hopes the stock will rise. The best outcome could be that the stock doubles and the downside is that it goes bankrupt.  He could make 100% profits or lose 100%.  He either gains $10,000 or loses $10,000 or anything in-between.

The other man invests in the same stock but with proper options. He only risks $1,000 because the options allow him to purchase rights to stocks without having to outright purchase all of them. With these options, if the stock doubles, they will be worth 10 times what he bought it for.  His upside is 1,000% gain or $10,000 while his downside is only $1,000 or anything in-between.

Two men invest in the same stock.  Both have the same upside potential while one of the men has 10 times the risk. Now this was just to illustrate that high profit does not have to mean unacceptable risk, thanks to Options.

Leveraging with Options

Lets say you have the opportunity to purchase an option on IBM. It would be written something like:

APPL Oct 100 Call at $2.00.

This is a call option. The company associated with it is Apple Computers, trading as APPL on the stock exchange. The strike price is $100. If you own this option, you can decide to buy Apple stock at $100 per share, even if it should be trading at $90 or $110 per share.

The cost to buy this option is $2.00 which is multiplied by the number of shares which is in multiples of 100. This means the lowest amount you could spend would be $200 (100 shares x $2.00) plus your broker commissions.

Each option has an expiry date, in our example, it would be the one month away. If you do nothing and your option expires, you lose your $200 (plus commissions). This may seem like a loss, but it would be better to lose $200 instead of being forced to purchase 100 shares of Apple at $100 or $10,000 only to find that it is now trading at $90 per share. This would result in an automatic unrealized loss of $1,000 and you now have tied up $10,000 of you capital into a stock waiting for it to go up.

Options can also be shorted just like stocks can be shorted. If you believe that a stock will go down in price, but don’t want to pony up the total investment, you can buy an option with a strike price being lower than what it is currently trading at.

It gets complicated, and requires a leap of understanding, but as you can see, if understood and used wisely, stock options can help you immensely in your investment strategy.

Whenever you invest, you are taking a risk. The goal is the manage it and not avoid it.

Every good investor knows that he should set aside some of his portfolio for long-term, lower-risk investments.  The other portion can be used for medium to higher-risk investments depending on your financial circumstances and other life factors.

Allocate Wisely

A good rule of thumb to follow is:  Allocate 50% of your portfolio for the long-term, lower risk category no matter how great a speculative short term pick may appear.

This will take discipline, but on more than one occasion it will probably save you in no small way.

Most of the systems and strategies you find on the Internet are high-risk, high-gain where you can be wiped out in a single transaction.

Take a risk! I do, but only with a certain percent of my funds. You should do the same.

So let’s say for example that you choose to invest in long-term, lower-risk stocks with 50% of your portfolio.

Let’s start by defining what a good long-term stock is. Some will call them large-cap stocks, other’s call them Blue Chip stocks.

Blue Chips will be the common stock of a nationally known company that has a long record of profit growth, dividend payments, and a reputation for quality management, products, and services. Some examples would be International Business Machines, General Electric, and DuPont. They are relatively high priced and have moderate dividend yields.

There is no true master list of Blue Chip stocks. That is because the definition of what is and isn’t a blue chip stock varies greatly. Essentially though, its a consistent top performing stock.

Look to such indexes as Dow Jones Industrial Averages and Standard and Poor’s 100 Averages to see such lists.

The problem is that you may invest in long-term, lower-risk stocks that stagnate for years on end.  Yet, even such stocks have their ups and downs and the profit you see (or don’t see) can be exacerbated by current market conditions.

Your entry time could be poor and you may have to wait years to see a break-even point on such a stock.

You still need a proven strategy with so-called “stable” investment stocks.

Buy and Sell Wisely

To get the most gain out of the stocks you buy and help to minimize your risk, you need to employ one of the tools used by professionals, which is Technical Analysis. You will use some Technical analysis to help you determine the price to buy in and the price to sell. Technical analysis is merely putting a stock through a mathematical formula.

When you employ this tool properly, you can get many times the profit you currently get or others get with the old ‘buy and hold’ strategy.

Each technical indicator is made to tell you something slightly different.  Some will tell you the momentum of a stock, its trend strength, volatility limits, how much its diverging from previous price patterns.

Some of these indicators, while good, are for short-term action.  Others are more geared for long-term action.  So just because someone swears by an indicator, it doesn’t mean that its the right indicator for you in a certain application.

The indicator that we have become familiar with is called the Stochastic oscillator. This indicator is a momentum indicator that is based on closing prices of a stock that doesn’t take into account wild daily fluctuations.  It bases the current close against previous closes to indicate buying pressure or selling pressure.

Simple use of this indicator can make you lose money quick should you not understand how to properly use it. If you have ever traded using momentum indicators, you know that many false signals can be created. Whipsaws or false movements that quickly reverse in the indicator create further problems. The more people try to compensate for the weaknesses in the indicator, the worse it seems to get.

That is until development of the K-39 Theory, also called the Last Stochastic Theory. This theory will guide you in how to ignore those false signals and take advantage of the built-in momentum of the stock.

This way you can find ways to trade the best Blue Chip stocks and know when are the better times to buy and sell. You will then have the bluest of the blue chips thanks to this method.

You do not need to be an accountant or a financial wizard to handle your investments. There are some basic principles to follow, known as the KISS principle. KISS is generally know to stand for “Keep It Short & Simple” but I think the acronym can also apply to investing:

K – Keep invested

I – Invest in stocks

S – Self-direct your investments

S – Small investments possess an advantage

K – Keep invested and don’t become discouraged

There are lots of people who enter the stock market, get burned, drop out, and then hand their finances over to a broker or mutual fund seller. That is the wrong thing to do. Losing money in the stock market is all a part of learning how to invest.

I have lost thousands on bad investments but I have also made more thousands on good investments. I still come out ahead because the good investments are that much better and I have invested wisely. The worst thing I could do is become discouraged and drop out of the market.

Investing is like any skill. It takes practice and knowledge to master. You need to keep investing and learning. The trick is to start small and increase your investments as your mastery develops.

Consistent contributions are critical especially if you are depositing into a retirement account. Every contribution will help reduce your taxes payable and all of your gains are allowed to grow tax-free.

I – Invest in stocks and instruments related to stocks

The best place to park your money is in stocks. There are thousands to choose from but for long term planning it is best to pick sold big capital stocks that are the basis of your long term plan.

You can invest in mutual funds but be prepared to get poorer results. Diversification is taken to the negative extreme in these financial instruments and the fund has to overcome its own hefty management fees before it can even turn a profit for you. You can find better results by investing in a few sold companies and in Exchange Traded Funds.

Stocks come in five basic varieties. You want to avoid the last one and invest in the others depending on your investing philosophy.

a) Blue-Chip Stock – Solid companies whose steady profits allow it to pays out dividends. These should make up a majority of your stock portfolio.

b) Growth Stock – Typically technology or biotechnology companies that grow and expand. Rarely do they pay out dividends because they plow their profits back into the expansion.

c) Value Stocks – Companies that the market has undervalued. The market is not always rational and sometimes these companies make great buy-out opportunities for other firms.

d) Mad Money Stocks – Very speculative stocks that are not making any profits but have a product you believe in. Depending on your investing constitution, set aside 0-10% of your portfolio for some speculative fun.

e) The Dregs – Companies that are losing money, revenue, and leadership. Avoid these unless you are interested in betting against their decline in what is called ‘shorting’.

Some investment firms will value stocks by the size of the company in stock value. That is useful to tell you how big a company is, but it would be like valuing the denomination of dollar bills – a $100 is always worth more that a $20 bill – so what? Two companies might trade for $100 but in actual fact the worth of the company behind the stock price is like a $100 bill in US money and a $100 bill in Mexican money. They are not worth the same amount.

General Motors is one of the largest publicly traded companies but should not be considered a blue-chip. GM has had declining revenues, has debt problems, and faces very stiff competition from the Asian automakers.

S – Self-directed accounts ensures lower trading costs and control

Get a self-directed/discount brokerage account. Do not go with a stock broker if you have every intention of taking control of your financial future.

This allows you to both save money and act in contrarian ways when the rest of the market is panicking. It is possible to double your money on stocks that everyone has given up on. The fact is most investors operate on fear and emotion. You can win in the stock market if you are one of those people who blink last.

S – Smallness can be an advantage in the investing world

Not having millions of dollars is an advantage you can leverage to your benefit. Large institutional investors like pension plans and mutual funds cannot enter the market without hurting some of their investments. You on the other hand, can purchase stocks at great prices without driving up the price. You can also get out of a stock investment without worrying about driving down the price.

Having millions of dollars to invest has its own set of headaches, one you likely want to experience, but until then, you should take advantage of your smaller size as an investor. Nimbleness has distinct advantages in the stock market. Enjoy it while you are still small.

There you have it: the KISS principle for the investing world. Hopefully, you will be inspired to take control over your investments with these principles.

My first investment was in mutual funds which is what most people invest in because the mutual fund industry is very effective at promoting its products. There is a certain sense of security knowing that everyone else is also buying mutual funds.

Unfortunately for the most part we have been sold a product that does what it says but does not deliver what you need.

Yes, mutual funds do invest in the stock market.

Yes, mutual funds do diversify the risk over hundreds of stocks but…

No, most mutual funds do not give you the returns you need.

Diversify and Die?

Mutual Funds will give you built in diversification. Some of them invest in entire stock market indexes, others invest into a combination of stocks and bonds, and some invest into other company mutual funds (which are called Fund of Funds, yikes!).

Diversification of your investment money is important. You should never put all of your money into one company. Because you have no control over how that company does or how other investors react to the company’s news, it is best to hedge your dollars by spreading the risk around.

Yet it is possible to over-diversify. Because mutual funds have so much money to invest, they struggle with finding good companies to buy. To keep to the rules of diversifying the portfolio, they cannot invest usually more than 5% of their assets in one single company. This results in lots of dollars being invested into companies you would never consider.

Mutual Funds have to buy lots of mediocre or bad companies because they need to diversify and do something with the billions of dollars they have. It gives the fund shareholders the impression that their money is being invested and the fund managers gladly charge you a healthy management fee.

Active Management is an Expense

Professional management of millions of dollars does not come cheap for most mutual funds. You can expect to pay 2% up to 8% for some specialized funds. These means that if you make 5% return, you would have actually have earned 8% if the Management Fee is 3%. That means that the Mutual Fund has to earn 3% before they can even pay you.

Dollar Cost Averaging is not a benefit if you are getting poor returns. Believe me, I invested consistently for fifteen years directly into various mutual funds. I bought over $125,000 in mutual funds with the biggest dealer and ended up with an averaged return of a criminal 2.05% a year!

It makes far more sense to contribute to a money market fund where there are no fluctuations and then use that fund to make your investment purchases.

Mutual funds do have the advantage of providing liquidity. You can sell and have your cash within a couple of days. But the question is begged why are you pulling out? Investment money is money you should not need right away.

Mediocrity is the Name of the Fund

The sad fact about Mutual Funds is that most them rarely beat the market. It is estimated that only 1.3% of American Mutual Funds will beat the S&P 500. Mutual Funds are investment products and should not be seen as a complete investing solution.

Mutual Funds that get 20% returns in one year have a poor chance of duplicating their results. Companies do a better job of providing consistent performance compared to MFs. If you buy a mutual fund that did well you have a greater chance of it doing poorly the following year.

But just like the stock market where most of them are not worth investing into, the same thing exists in the mutual fund industry. There does exist a small segment that does capture decent, but not market-beating returns. If you want to delegate some of your investment dollars to the responsibility of another, then mutual funds are the way to go. But when doing so, you need to lower your expectations.

The Best Solution: Take Control

If you want diversity protection, low management expenses, and equivalent to market results get Exchange Traded Funds. They should make up a decent portion of your portfolio. You can only get those by opening up a brokerage account.

But while you are opening up a brokerage account and doing dome research into Exchange Traded Funds, you might as well look into investing into stocks. It is only in the stock market where you can get market beating returns and stay way ahead of inflation and taxes.

Stop accepting the pale imitation of stock market returns through the veil of mutual funds. Invest directly and take control.

Just like there are thousands of stocks to pick, there are hundreds of stock picking systems. And more are being created all of the time.

But just like most stocks, most of them are not worth your time.

This article will tell you what is wrong with most stock picking systems and what to look for in a system that works. There are basically three fundamental mistakes that need to be avoided.

They are:

1)    Choosing a system that is too narrow.
2)    Choosing a system that is too broad.
3)    Choosing a system that is too inflexible.

Mistake #1: Picking a System that is too narrow

Some systems will base their entire strategy on just technical indicators, multi-day candlestick patterns, or some form of divergence. The problem is that all of these systems are only using two factors: price and volume.

Imagine if you were about to invest in a horse that competed in racing. Would you be satisfied with only the weight and speed of the horse?  No matter how you graphed those two variables, they are only two criteria. You should also be interested in the breed of the animal, the competition it was racing against, the jockey’s qualifications, and the horse’s age, to name just a few important details.

Most stock systems do not factor in anything but price movement and volume. These systems do not screen for overall market conditions, industry type, company specifics such as profitability, and much more.  You need to take in the factors that matters as we investing is more than finding a magical pattern that you hope will be like Midas’s touch. Finding the right stock and timing your buy and sells takes expertise and common sense.

Mistake #2: Picking a System that is too broad

A stock system should not be too broad in its scope.  Many well intentioned professionals give vague tips and broad guidelines to follow.  Why? Most are afraid of being wrong. You cannot be right all the time but this is exactly what they may try to do.  By giving too many choices they always leave themselves a back-door to rationalize, after the fact, that they were still right.

You need to covers many areas, but also recognize the need to give precise signals to buy and sell.  Is it right all the time? Of course not, but you also do not need to be to make amazing gains.  You merely need to know the secret of riding the profits as long as possible while minimizing your losses and cutting them short.

At the end of the day you want an expert opinion that is clear and precise. That is what you get if you find a system that is neither too narrow nor too broad.

Mistake #3: Picking System that is too inflexible

Most stock picking systems available now come as plug-ins to an automated piece of software. While helping to automate the process it also takes the power away from you as the investor. What happens when the market changes? Does your rigid piece of software change with it? Will you be able to detect what variables have changed and alter them to keep your profitable streak or will you keep hoping while it drains your account?

As well, all investors are different. Your system should be able to conform to your ideologies and values and not the other way around.

You need a system that adapts to you. Are you into high reward with higher risk?  You can alter this system for making a double-bagger each month while raising your risk levels.  Do you prefer to buy and hold winning stocks for a longer period of time and squeeze every last cent from it and only trading a few times per year? Do you prefer to trade the best of the gold stocks, or high tech, or some other industry?

The best system takes the best of the stock market and fits it to your goals, comfort levels, and style.

The Solution is to Ask the Right Questions

When it comes to picking stocks you need a system, and you need a system that avoids the three mistakes. The best option is to find a stock picking system that provides to you the control and precision that you need to win the investment game.

Do some search engine research with the terms “stock picking system” and you will find lots of possibilities. You need to evaluate them by asking the right questions. Make sure you ask if the systems you are looking at provide precision and adaptability. When you find the system that answers those questions, you have found your solution.

Do you believe in Dragons?

No, I didn’t think so.

While I do not believe in dragons as actual, living beings – I do believe that they exist as three harmful things that can steal your financial wealth.

Just like the King Arthur tales of old, these dragons will steal your wealth. Yet evolution has taught these dragons to be more subtle and sneaky and take from you without you even knowing it.

Like a Knight of the Round Table you need to challenge these beasts to protect your financial kingdom. The purpose of this article is to tell you about these dragons and how you can fight them.

Meeting the Dragons

1) The first is known as “The Dragon of Taxes”,
2) The second dragon is known as “The Dragon of Inflation”, and
3) The third and most important dragon is known as “The Dragon of Poor Performance”

Why is the third dragon the most important?

Well, the first two dragons you cannot defeat. The Dragon of Taxes and the Dragon of Inflation are immortal!

You see, the Dragon of Taxes represents the government’s ability to levy taxes on your earnings and wealth. Governments are always hungry for more revenue and will happily find ways to spend your money. You may elect somebody who will reduce your taxes, but you will always pay some kind of taxes. You cannot slay the Dragon of Taxes.

The Dragon of Inflation represents the demand of the marketplace for money and the interest policy of governments. Inflation may be high in some years and low in others, but it will always erode your spending power and your wealth. You cannot slay the Dragon of Inflation.

The third dragon known as The Dragon of Poor Performance is the only dragon that you can tame. The good news is that if you manage to tame this dragon, it will help you fight the effects of the other two dragons!

Fighting the Dragons

Let’s pretend that you are a brave knight and you set out to defeat the Dragon of Poor Performance. You attack but barely escape with your life because you misjudged the dragon’s ability. You decide that it’s best of lay low and lick your wounds.

Doing this seems like a wise move except that while you are resting the other two dragons come along and gobble you up!

You see, when you get poor performance in your investments either by picking too conservatively or not picking right, the returns you do get are eaten up by taxes and inflation. Ouch!

If you invest your money into something that is guaranteed to generate 5% a year, you have just ensured that you are not making the money you could have. There are investments out there that have consistently earned 8% a year and though they may be riskier, they should not be avoided.

Should you take increased risk for just a 3 point difference in the return? Yes! A 3 point difference does not seem like much, but when you factor in the magical effect of compounding returns, it is critical to get the better return.

Let us assume you wanted to invest $1,000 for your brand new child for him/her to have as a graduating gift when they turn 18. You invest it, forget about it, and never contribute another penny. You choose an investment that gives you a return of 5%.

Scenario 1 @ 5%

Starting amount – $1,000
Years – 18
Additional contributions – $0 per month
Rate of return – 5.00% compounded daily
Total amount you will have contributed – $1,000
Total at end of investment – $2,459

Not too shabby, but we still have not figured in inflation and taxes. Before we talk about those two, let us compare the result if you had picked an investment that generated 8% a year.

Scenario 2 @ 8%

Starting amount – $1,000
Years – 18
Additional contributions – $0 per month
Rate of return – 8.00% compounded daily
Total amount you will have contributed – $1,000
Total at end of investment – $4,220

Not surprising you would earn more money, but who would have known that the 3 point difference was worth $1,761 more! Taking the greater risk does pay off.

Avoiding Investment Risk is Risky To Your Financial Health

Risk is not a bad thing. You should learn how to manage risk, not avoid it.

Taxes and Inflation are facts of life and will always erode your wealth. Since you cannot avoid them, you need to learn how to manage them just like you need to manage risk. That only way you can do this by choosing investments that generate a higher return.

Want proof?

Using the two scenarios again lets assume that the government taxes you at 25%, for every dollar you earn; you give 25 cents to the Dragon of Taxes.

Scenario 1: A 5% return x 25% tax rate = 1.25 points off your 5% return = 3.75% actual return after taxes. That is just barely keeping above inflation which has typically run between 2% and 4% a year.

Scenario 2: A 8% return x 25% tax rate = 2.00 points off your 8% return = 6% actual return after taxes. Now this is a much better spread over inflation.

Do you see what I mean when I say that the Dragons of Taxes and Inflation will gobble you up when you invest poorly? The solution comes in taming the only dragon that can help us fight the other two.

Taming the Dragon of Poor Performance

One of the simplest ways of taming this dragon is to stop investing in guaranteed investments (CDs in the US and GICs in Canada). Use them as a place to store money for short term periods while you are figuring out where to invest your money, but never use it has your main investing strategy.

Get the best interest rate you can for your short term money. It is always better to get 3% than 2% for the reasons mentioned above, but since it is a place to just park your money, you need to get your money working harder for you.

To find better investments, you want to directly invest into companies on the stock exchange. Unlike interest based investments like bonds and CDs/GICs, the stock market provides a much higher rate of return.

You may think that investing in the stock market is like gambling. And it is gambling for those who do not understand the rules. But just like a knight needs to use a sword and shield properly to fight a dragon, you need to learn how to invest to get your best returns.

Consider at the minimum Exchange Traded Funds which are wonderful instruments that capture all of the returns found in the stock market. They do better than Mutual Funds and should be the shield in every knight’s armor.

But easily, the Excalibur sword of the investing world can be found in stocks and options investing. If you want to not just tame but slay the Dragon of Poor Performance, you want to start doing some research through websites, electronic courses, and books on “Stocks and Options”.

Remember that the greatest rewards come to those willing to manage the greatest risks!

Good luck in your quest to tame the dragons!

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Thanks for visiting and happy trading.