People have frequently asked me how I consistently choose stocks with 20% increases in a few months or triple-digit gains in a year.
People ask me if it’s luck.
It may have been luck with a handful of stocks, but luck does not play a factor when purchasing 10 or more equities in the same year that produce over 80% returns.
The trick is to not follow the crowd, to stop listening to financial gurus, to understand an investment strategy, and then to apply it with steadfast courage.
At times, family and friends have sought my counsel, and I have provided it “Buy this security. I assure you that you will not lose any money.”
I am aware that there are no guarantees in the stock market, but if you adhere to certain tactics, you may be 90% confident that the stock will rise.
This agricultural asset was nearly ideal, and I was 99.9% confident that it would generate enormous gains. Indeed, the share price soared about 130% inside a year.
Moreover, this stock was not a dangerous penny stock that traded for less than $1 per share.
This company was trading at approximately $70 per share when I recommended it to my pals.
Listed below are the ten rules I use to develop investing portfolios with significant gains.
(1) Buy when fear is prevalent and sell when euphoria is at its peak.
Every course in investing should be accompanied with a course in psychology.
The most challenging aspect of investing is buying more when fear and panic are prevalent and selling when mania is at its peak.
Stock markets and asset classes have periodic peaks and valleys.
The majority of individuals will not invest in equities until they have climbed by at least 30%, 40%, or 50%, with the belief that they will continue to rise forever.
Purchasing when nobody is talking about a stock or during sharp corrections provides a low-risk, high-reward portfolio structure.
(2) Find out what your neighbor is up to
Observe Investment Programs on MSNBC and Bloomberg and Hear the Suggestions of Your Financial Advisor – Then, Ensure You Have Nothing in Common with Their Strategies.
If you are a member of the thundering sheep herd and continually imitate the mindless acts of others, you are almost certain to lose money or forever relegate your portfolio to ordinary or below-average returns.
Investing in asset classes and stocks when nobody is discussing them and selling them when everyone is discussing them is the surest method to amass a fortune.
This demands market timing expertise.
Is market timing impossible, as stated by all worldwide investing firms?
Learning which asset classes and individual equities are positioned for annual gains takes a little of effort, but is not very difficult.
Since time is a scarce resource for Private Wealth Managers and Financial Consultants employed by large commercial investment firms, they claim market timing is impossible because they lack the time to conduct the essential research.
Buying equities that are likely close to cyclical bottoms, as opposed to assuming that market timing is impossible and buying stocks arbitrarily, will easily add 10% to your portfolio’s annual returns.
Do you truly believe that you can get wealthy by purchasing any stock advertised on a television program watched by millions of people across the world?
If you own the same stocks as your neighbor to the right, your neighbor to the left, the talking head on television, and the talking head at your commercial investing business, then you are doing the correct things to develop an investment fortune.
If you do not seek out stocks and asset classes when no one else is, you will never make significant money through investing.
You may earn 10% or even 15% annually, but if you want to join the big boys and generate yearly returns of 25% or more, you must dive much deeper than your investment counterparts.
A few months ago, on June 25, 2007, I received this email from a major investing weekly publisher.
“Over the past week, I’ve traversed northwest Canada in search of the next great investment opportunity.
I’m up here to learn what investments everyone has made.
And after attending a Vancouver investment conference last week, I can assure you that no one is interested in gold…
In the coming years, the strongest investment opportunities will continue to be in base and minor metals.
Gold, being a nearly worthless metal with few industrial applications, appears to have reached its apex and, as has been the case many times in the past, could experience a period of sideways movement.
Then, in August, when the HUI (the primary AMEX gold index) fell sharply in response to worldwide market corrections, everyone declared that gold was no longer a safe haven and was “done.”
Now, one month later, on September 26, 2007, many people are discussing gold’s strong and swift rise.
Was the newsletter that arrived in my mailbox in June declaring gold to be dead accurate in June, but grossly inaccurate in September?
The correct response is neither.
If you mindlessly listen to talking heads that pop up in your inbox or on television, you are the only person in error.
In reality, little-discussed asset classes and stocks are neglected because less than one in a thousand investors understands them, and even the so-called experts on television have been more frequently wrong than correct.
Consequently, it is your responsibility to learn how to invest for yourself.
Buying while everyone else is talking about a company and chasing its price higher are surefire ways to lose money.
Likewise, listening to talking heads is a waste of time.
You will outperform everyone else if you learn a strategy that teaches you to purchase assets when everyone else is ignoring them.
(3) Focus instead than diversify
If you have read the preceding paragraph, you are already aware that Private Wealth Managers and Financial Consultants are in a race to acquire as many assets as possible for their separate organizations.
Consequently, this is why they apply the diversification rule for your portfolio.
Navy SEALs of the United States would tell you that during an operation exfil drill, the simplest route is rarely the safest.
Diversification is by far the simplest investment approach that tens of thousands of financial experts could ever be taught.
Diversification cannot be a complex approach if tens of thousands of consultants from diverse backgrounds and industries can apply it effectively to their customers’ portfolios with minimal training.
Diversification is the greatest investment cop-out in history.
It screams stupidity and lack of skill: “I have no idea which asset classes will perform well this year, therefore I’ll invest you in everything.”
Assume that every day, an NBA head coach looked at his roster of 12 active players and remarked, “I have no idea who the greatest players are.
Because I do not know and do not wish to take the time to learn, I will ensure that all 12 players have equal playing time in every game.
This coach is unlikely to win as many games as a coach who takes the time in training camp to identify his five best players and then plays them the majority of the minutes in every game.
This is the difference between concentration and diversification.
The coach that utilizes a diverse roster may win some games purely on pure chance, since he may have a few exceptional players who can compensate for the inadequacies of the subpar players he employs nightly.
Nonetheless, the majority of the time, the shortcomings of the weak players will hinder the performance of the exceptional players.
However, the coach who concentrates and puts his top players on the floor every night will be able to field a team with a strong chance of victory every night.
This is the reason why we focus on investing.
To offer us the greatest chance of victory.
Diversification cannot accomplish this.
Examine the leading investors in the world.
Each year, the best investors in the world concentrate their portfolios on the top asset classes.
Diversification sucks, does not safeguard your portfolio, and will never make you rich.
(4) Acquire as much information as possible about the relationship between politics and stocks.
The Federal Funds Rate (the rates at which banks borrow from each other and the rates at which banks lend to clients) was reduced by 50 basis points on September 18, 2007.
The U.S. stock markets rose that day, and the Asian markets followed suit the following morning.
The interest rate drop was certainly motivated not only by a desire to create economic stability and confidence, but also by politics.
If you do not comprehend what I mean, you have homework to complete.
In every major global economy, governments and companies have created alliances that have subsequently been dubbed “corporatocracies.”
Politics plays a significant role in all of the following: interest rate cuts, interest rate increases, the price of oil, the price of gold, the valuation of the Euro, the valuation of the dollar, the valuation of the Pound Sterling, permits to mine uranium in Australia, defense spending for national security, decisions to go to war, and the awarding of contracts to corporations.
You cannot reasonably comprehend global macroeconomic patterns and which asset classes and stocks offer the finest low-risk, high-reward chances year after year if you do not comprehend politics.
Chief Investment Officers of major commercial investment firms make bad forecasts on the future of commodity prices and global economies due to a lack of political knowledge.
If you comprehend politics, your investing returns should increase dramatically.
Learn everything you can about investing in gold.
As an asset class, gold is undoubtedly the least understood and most misunderstood in the world.
Some people believe that the physical commodity is the only method to invest in this asset and, as a result, they exclusively invest in gold ETFs that are denominated in paper.
Other gold stock investors do not comprehend the price behavior differences between juniors and majors; explorers, developers, and producers; hedged and unhedged firms; and the political risk associated with operating in different countries.
As a result, they never comprehend the risk-reward ratio of their gold portfolio, sell during steep corrections, consistently incur losses, and believe that gold investments are speculative and smelly.
In addition, they do not comprehend that short-term manipulation of the fundamental commodity prices and stock prices cannot affect the long-term outlook and performance.
Learn how to buy and sell this asset class effectively, and you will be rewarded in a way that no other asset class can.
(6) Understand why you possess everything you possess, and then be steadfast in your convictions.
Since most consumers never take the time to learn how to invest properly or are fed a plethora of false information by so-called industry professionals, their investing decisions resemble those of a shady politician.
They do not know whether to hold, sell, or purchase during market corrections, or whether to hold or sell during sharp price increases.
They do not grasp what they possess since they have permitted others to make those decisions.
I’ve always thought it interesting that people prefer to take care of the most menial tasks for their businesses themselves, or that they’ll consult 20 people before purchasing a car, yet are willing to hand over $2 million in cash to a stranger to manage.
Nevertheless, conviction alone is not sufficient.
Being incorrect in your convictions can be just as detrimental to the performance of your portfolio as having no convictions at all.
In June, July, and August of 2007, for instance, numerous housing specialists frequently predicted the bottom for housing-related companies, and many investors, like sheep, rushed to purchase shares.
Some continued to increase their position in shares of subprime mortgage companies that had fallen by 70 percent, believing they were purchasing the stock for pennies on the dollar.
The majority of these investors, instead of prospering, lost a substantial amount of money on stocks that continued to lose value, and some lost their whole investment capital on investments in firms that finally went bankrupt.
This is the path of the indolent, and it almost never ends well.
When I advise “Stand Firm in Your Conviction,” you should only do so after acquiring subject-matter expertise.
Do not blindly adhere to the advise of others simply because it appears in Bloomberg, the Wall Street Journal, or Reuters.
A person’s appearance of “authority” does not make him or her an authority.
In truth, media appearances are frequently motivated by shameless self-promotion, and the only person who will be harmed if you mindlessly listen to these individuals is you.
After you have taken the time to properly understand everything you need to become an expert in a given industry or asset class, you should not be scared to go against the grain.
You’ve taken the time to become an expert; thus, employ your expertise when managing your portfolio.
The majority of the time, you will be right when everyone else is wrong.
(7) Use Volatility to Your Advantage
Most individuals have learned that volatility means risk.
If you keep in mind that market timing within asset class cycles is possible, you can effectively mitigate much of the risk of volatility by purchasing near the troughs rather than the peaks.
In addition, it is impossible to generate a profit by purchasing a portfolio of companies with annual growth rates of 6% to 10%.
Therefore, you need volatility in your portfolio to generate profits.
In fact, I suggest including certain speculative equities in your portfolio to improve its performance.
Again, with care, achieving a respectable batting average with speculative equities is not only possible but also quite probable.
I have only been able to attain 25% to 35% yearly gains in stock portfolios by allocating a portion of my portfolio to speculative equities with annual returns of 280%, 260%, and 190%.
At the end of the day, I don’t care if I have some speculative stocks that go belly up (meaning they were stopped out at 40% losses) if I have enough stocks that earn several hundred percent and greatly increase my portfolio’s absolute return.
Like I said, make volatility your friend.
(8) Never Pay Attention to Government
Government statistics do affect market activity.
However, this does not make the figures accurate or reliable.
Indicators such as the Consumer Price Index, Housing Starts, Job Growth, Consumer Confidence Index, etc., all have an impact on the markets.
The announcement of these figures is always awaited with bated breath by the markets, which are then influenced upwards or downwards depending on whether the published numbers miss or surpass experts’ expectations.
Why would I recommend to reject these official statistics when I am aware that they influence market fluctuations?
Here is the response.
Statistics are rarely forthcoming and straightforward.
Instead, they are produced to influence markets’ responses.
During President Clinton’s administration, for instance, the formula used to calculate the CPI in the United States was significantly modified.
Ben Bernanke, the current chairman of the Federal Reserve in the United States, is rumored to be fiddling with the formula even further.
How confident are you in the veracity of this data if the CPI formula used 15 years ago would produce a radically different number from the CPI formula used now due to significant differences in how the CPI is currently calculated?
Other important government benchmark figures are not even based on actual surveys of transactions, but rather mainly rely on official estimates.
Therefore, the government just calculates the statistic to be whatever they like so that it serves their interests and steers the economy and financial markets in the desired direction.
This is why, when financial markets have dramatic corrections, everyone claims, “We had no idea it was coming.”
Ignore government figures and conduct your own research to grasp the underlying economic conditions of any market you plan to invest in, and you will never experience wealth loss due to unanticipated events.
Instead, you will witness the surprises approaching from great distances.
Especially now (September 2007), when a worldwide economic crisis is coming, it is crucial to disregard the government and prepare accordingly.
If you do, you will make a fortune while your neighbors experience “shocking” and “unexpected” stock market declines.
9) Follow the trail of money
Occasionally, as a method of validation, but not as a key strategy, investigate where the top money in your country is going.
For instance, at the beginning of 2006, you would have learned that Bill Gates and George Soros were massively shorting the dollar, an indication that you should sell any dollars you owned and diversify into Euros, Sterling, and gold.
When it comes to gold mining companies, if you discover that the best and most successful companies in the industry are purchasing 3 million shares of a speculative stock, you know that the best minds in the industry would never invest millions of dollars in a stock without first conducting extensive research.
If your own research indicates that the stock is a buy, then the discovery of this additional information is certainly reassuring.
Rule number one, however, is that you always know what you own.
Thus, you cannot just examine Warren Buffet’s equities portfolio and assume you can replicate his gains without understanding why you would purchase the same stocks he owns.
If you don’t comprehend, you won’t know whether to purchase more, sell everything, or maintain your current position during market downturns, or what to do during strong market advances.
If you do not comprehend this, you simply cannot earn money.
(10) Broaden Your Investment Horizons Across International Boundaries
Too many investors are shortsighted.
They believe that if the markets in their country are poor, they must also incur losses.
Frequently, a market may be declining in one section of the globe while growing in another.
Expand your financial horizons and you will considerably boost your chances of achieving high annual profits.
Occasionally, you won’t even need to look outside your country; simply look where no one else is.
When one of the biggest indexes in the United States, the S&P 500, lost 49% of its value between 2000 and 2003, a lesser-followed index in the same country gained 58%.
However, it was overlooked and unresearched, and I doubt that more than one percent of American investors profited from the amazing run of this asset class.
One final word
All of the aforementioned rules require a degree of originality.
Prior to using the aforementioned 10 guidelines five years ago, I rarely earned more than 10% annually from stock investments.
After implementing the aforementioned guidelines, annual returns of 20% began to appear inadequate.
Realize that investing is an art, not a science.
All the number crunching, fundamental analysis, and technical analysis in the world will not yield better results than simply being creative with the ten criteria outlined above.
Change not just your financial life today with the implementation of the aforementioned criteria, but also your views about the types of realistic and possible investment rewards.