Beating The Stock Market

It seems every investor we meet is a stock picker and always in search of the next Microsoft. The story is always the same: they are in love with their stock, and it's always got unbelievable potential. What's wrong with this picture? Statistically speaking, the odds of you discovering the next Microsoft are stacked against you. And even if you did discover the next Microsoft, chances are you would sell it before it fully appreciated.

Stop and think for a moment. Why take the most difficult route when the alternative is easier, and more probable to achieve? Why try to discover the next Microsoft when hundreds of great stocks, funds and Indices are offered on sale? Why take the risk of investing in a small and unknown company with the hope of discovering the next great stock, when great stocks are offered at bargain prices each and every year?

For the past 30 years, the GetFolio Investment Strategy has consistently outperformed the market, simply by buying high growth value-stocks. This year, as well as in every year for the past 30 years, more than half of the top 500 large caps in the U.S. will correct; a bloodbath for the amateur investor, and an incredible source of income for the smart investor.

We have been tracking value stocks for over 30 years, and to this day we are still amazed by the process. What amazes us is the predictability of events like corrections. After all, a stock correction on Wall Street is not a rare event, yet when it happens, investors react as if the end of the world is truly coming. AAPL, MSFT, GOOG, RIMM, INTC, AMZN, ADBE, CMG, CRM are all great companies, but sooner or later they all correct. That is the exact time you should be buying them.

"Buy at the time of maximum pessimism and Sell at the time of maximum optimism"

When a company announces earnings disappointment or a slow-down in growth, Analysts downgrade the stock and Wall Street freaks out and says, "Sell, sell!" To the average investor who bought the stock at its high of $40.00 and watched his stock fall to 30-20-15, this signals the end of the world. In his mind, this stock was going to 0. In panic, he sold his stock at 15, and that so happened to be the low. A few months later the stock recovered back to $40.00.

On the other side of the same trade sits a GetFolio subscriber. He is a risk/reward kind of a guy, and is in the habit of buying ONLY when there is a SALE going on. He doesn’t care about a stock when it’s at an all time high and consensus is very optimistic; he is looking at his down side. He has seen plenty of great companies crash on earnings disappointment. He has learned his lesson. Instead, he waits for a sale. When it happens, he starts accumulating, slowly building a position.

Funnily enough, after a few weeks of nervous energy the stock seems to stabilize. Other investors jump on board, and before long the stock is catching an upward momentum. A few months later, the stock is nicely recovered and Wall Street loves it again. Analysts upgrade the stock to a strong buy, raising estimates. Overeager investors come in and buy the stock at an all time high, while our GetFolio subscriber dumps his stock for a handsome profit. He is no longer interested in the stock and moves on to another "SALE".

In sharp market declines each year millions of investors dump their shares in panic for one simple reason- they fear losing it all. About one half of the 500 stocks that make up the S&P Index correct every year. Ask yourself a simple question: how many are out of business?

The GetFolio ranking system ranks all high growth stocks, combining technical, fundamental, sector timing, and (most importantly) risk/reward analysis, all into a highly accurate ranking system. The strategy guides subscribers to invest strictly in high quality stocks, or Indices, only at a time when they represent the most value, with the least amount of risk.

Is the PE Ratio the best method of deciding if a stock is worth buying? Don't bet on it: PE Ratio alone can be very misleading.

The PE Ratio is one of the most widely watched measures of valuation for both the stock market as a whole and individual stocks. Many investors use the PE Ratio to determine if a stock- or the stock market as a whole- is expensive or not. For example, the average PE Ratio for the S&P 500 index from 1950-2000 was 15.4. When the market peaked in early 2000 the PE Ratio of the S&P 500 was a relatively high 30- suggesting that stocks were expensive.

The PE Ratio (Price / Earnings Ratio) is the price of a stock divided by past or future earnings (PE Ratio = Price / Earnings). Example, if the price of IBM is $100 and the company earned $10 per share over the past 12 months, then the trailing twelve month PE Ratio would be $100 / $10, or 10.

When most investors think about stock valuation, there is one figure that springs to mind. Too often, it is the only one: the PE Ratio, also called the price-earnings ratio. While it may be tempting to substitute that for real research, watch out: the PE Ratio can be misleading. Even low-PE stocks can leave you with a queasy stomach when you later discover the reason they were so cheap. Likewise, a high PE doesn't necessarily mean a company's overvalued. There are plenty of good reasons why investors might want to pay a premium for out performance.

Putting too much emphasis on PE Ratios is especially misleading when companies miss their earning estimates. Due to these hopefully temporary problems, the average company's PE Ratios will be restated and in many cases accounting charges will also have to be taken. The bottom line is that typically these companies will show an unattractively high PE Ratio, and often will even have a loss. This, however, is usually only temporary, and typically reverses itself after a few short quarters.

A healthy dose of skepticism about web-based businesses, much less those that provide investment strategies, is a good idea. However, in the case of GetFolio, We believe we can put your mind at ease with the GetFolio Performance Guarantee. The financial industry is filled with systems and gurus who claim to accurately predict the market. Yet, no one has a more accurate long term historical track record as the GetFolio ranking system.

Over 30 years, covering both Bull and Bear markets, the GetFolio ranking system has been amazingly accurate. Time after time, the GetFolio Ranking System has accurately recognized each bottom in the market, and also recognized the most important market tops.

We offer a performance guarantee simply because we are absolutely 100% confident in the strategy, and know that the GetFolio ranking system, is money management at its best. When the GetFolio Strategy is followed properly, an investor will always beat the market, and we guarantee it. We pride ourselves on giving excellent customer service, and promote a life-long investing style that works not just some of the time, but all of the time. No ifs or buts, it is a complete money management system that is mathematically prudent.

The GetFolio performance guarantee is offered to new subscribers only, regardless of the Market Gauge position. To qualify for the guarantee, you must maintain a log of all trades taken throughout your subscription period, documented via legitimate proofs of purchases. Other than providing this performance-based guarantee, GetFolio subscriptions are non-refundable.

The only way to invest

Each year millions of investors lose money in what they perceived to be good and logical investments. In the end, it's not logic or research that causes failure. It's playing against the odds. If you are not consistently beating the market year after year, then we assure you the problem is with your Initial Position Size. The most important aspect to your investing is money management. Money management is that portion of your investing system that tells you how many units (position size) of your investment you should put in a given investment. It represents how much risk you should be willing to take or how diversified you should be.

Using the GetFolio Strategy, We have been experimenting with position sizing using real money since 1990. Initially, it was hard for us to accept the idea of investing small amounts per trade. But at the same time, we knew for sure that we were subjecting ourselves to a lot of stress by investing heavily in individual positions. Famous investment gurus such as O'Neill or Lynch -- as well as many others -- tell you to research thoroughly and invest in the 10 best companies. We say that's all fine and dandy in theory, but in reality, your personally chosen best companies will often turn into mediocre performers. You can blame the failure on poor research, but the simple fact is that billions of professional dollars are regularly invested based on great research, and despite all this, many professionals still fail.

Proper Diversification:

Today, through the use of our Position Manager, we simulate a mutual fund in our own personal portfolio. We don't look to make a fortune on any one stock, but we never lose big either; it's our overall portfolio's growth and personal peace of mind that we are after. The reality of investing, is that your ROI is simply dictated by the number of stocks in your portfolio and its cumulative volatility. Managing fewer stocks severely handicaps your success. Can you make money with less diversity? Not consistently. The reason is quite simple and mathematically irrefutable: the fewer stocks in your portfolio, the larger your position sizes inevitably will be and consequently, the larger your margin of error.

How much should you diversify?

We have a question regarding the stated results of highly diversified investment newsletters. Are these newsletters really practical for the average investor? We mean, many of these newsletters recommend a large number of stocks in order to match those results. "I would need to spend a large part of my day monitoring such a portfolio!" Hard-core investment letter types pooh-pooh this. With modern software, they say, you can review 30 stocks or more in just a few minutes. And there's a strong argument that you should do this.

Years ago, the conventional wisdom among finance academics was that you could fully diversify against stock market risk with a portfolio of only 15 to 20 stocks. As in so many other ways, the conventional wisdom has been revised -- basically because individual stocks have systematically become more volatile. Now, research suggests the diversified portfolio requires at least twice as many stocks.

Mark Hulbert's at the Hulbert Financial Digest seems to indicate that larger portfolios achieve systematically higher returns than portfolios with 10 to 20 stocks. Of course, not diversifying can result in spectacular success. The top-performing letter of 2004, according to performance data compiled by the Hulbert Financial Digest, was Fredhager.com, up 150.3 percent. But Hager achieved its success in large measure with one stock: Rambus (RMBS), a designer and licenser of intellectual property related to memory chips. Shortly after, Rambus hit an air pocket (not for the first time) when its fourth-quarter showed unexpected declines because of the cost of the litigation which is possibly its main claim to value. The stock fell more than 16 percent that day, closing at $17.85. More about Fred.

In Jack Schwager's Market Wizards book in which he interviews some of the world's top traders and investors. Practically all of them talked about the importance of money management, and position size. Here are a few sample quotes:

"Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half."

"Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical."

John was a little shell-shocked over what had happened in the market over the last three days. He'd lost 70% of his account value. He was shaken, but still convinced that he could make the money back! After all, he had been up almost 200% before the market withered him down. He still had $4,500 left in his account. What advice would you give John?

Perhaps your answer is, "I don't know. I don't have enough information to know what John is doing." But you do have enough information. You know he only has $4,500 in his account and you know the kind of fluctuations his account has been going through. As a result, you have enough information to understand his money management -- the most important part of his trading. And your advice should be, "Get out of the market immediately. You don't have enough money to trade." However, the average person is usually trying to make a big killing in the market, thinking that he or she can turn a $5,000 to $10,000 account into a million dollars in less than a year. While this sort of feat is possible, the chances of ruin for anyone who attempts it is almost 100%.

Ralph Vince did an experiment with forty Ph.D.s. He ruled out doctorates with a background in statistics or trading. All others were qualified. The forty doctorates were given a computer game to trade. They started with $10,000 and were given 100 trials in a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked for that trial.

Guess how many of the Ph.Ds had made money at the end of 100 trials? When the results were tabulated, only two of them made money. The other 38 lost money. Imagine that! 95% of them lost money playing a game in which the odds of winning were better than any game in Las Vegas. Why? The reason they lost was their adoption of the gambler's fallacy and the resulting poor money management.

Let's say you started the game risking $1000. In fact, you do that three times in a row and you lose all three times -- a distinct possibility in this game. Now you are down to $7,000 and you think, "I've had three losses in a row, so I'm really due to win now." That's the gambler's fallacy because your chances of winning are still just 60%. Anyway, you decide to bet $3,000 because you are so sure you will win. However, you again lose and now you only have $4,000. Your chances of making money in the game are slim now, because you must make 150% just to break even. Although the chances of four consecutive losses are slim -- .0256 -- it still is quite likely to occur in a 100 trial game.

Here's another way they could have gone broke. Let's say they started out betting $2,500. They have three losses in a row and are now down to $2,500. They now must make 300% just to get back to even and they probably won't do that before they go broke.

In either case, the failure to profit in this easy game occurred because the person risked too much money. The excessive risk occurred for psychological reasons -- greed, the judgmental heuristic of not understanding the odds, or in some cases, the desire to fail. However, mathematically their losses occurred because they were risking too much money.

What typically happens is that the average person comes into most speculative markets with too little money. As a result, these people are practicing poor money management just because their account is too small. Their mathematical odds of failure are very high just because they open an account that is too small.

Hundreds of thousands of hopefuls open up their speculative accounts yearly, only to be lead to the slaughter by others who are happy to take their money. Many brokers know these people don't have a chance, but they are happy to take their money in the form of fees and commissions. In addition, it takes many $5,000 accounts to feed a single multi-million dollar account that consistently gets a healthy rate of return.

Portfolio Drawdown

There are many investors and money managers who regularly take enormous risks, and unacceptable drawdown. The GetFolio Strategy has not only produced consistently high returns, but has done so with remarkably low drawdown. Once you understand the concept of controlling your drawdown, you will be in a better position to manage your money successfully. Learn to control your drawdown, and you will be successful.

In the market, when an account goes down in value, it's called a drawdown. Suppose you open an account for $50,000 on August 15th. For a month and a half, the account goes straight up and on September 30th, it closes at a high of $80,000 for a gain of 60%. At this point regardless of your drawdown, you may still be in all of the same trading positions. But as a professional, your account is "marked to the market" at the end of the month and statements go out to your clients indicating what their respective accounts are worth.

Now, lets say that your positions start to go down in value around the 6th of October. Eventually, you close them out around the 14th of October and your account is now worth about $60,000. And let's say, for the sake of discussion, that your account at the end of October is worth $60,000. Essentially, you've had a peak-to-trough drawdown (peak = $80,000, trough = $60,000) of $20,000 or 25%. This may have occurred despite the fact that all of your trades were winners. It doesn't really matter as far as clients are concerned. They still believe that you just lost $20,000 (or 25%) of their money.

Let's say that you now make some losing trades. Winners and losers, in fact, come and go so that by August 30th of the following year, the account is now worth $52,000. It has never gone above $80,000, the previous peak, so you now have a peak-to-trough drawdown of $28,000 -- or 35%. As far as the industry is concerned, you have an annual rate of return of 4% (i.e., the account is only up by $2,000) and you are now labeled as having 35% peak-to-trough drawdown. And the ironic thing is that most of the drawdown occurred at a time in which you didn't have a losing trade -- you just managed to give back some of your profits. Nevertheless, you are still considered to be a terrible money manager. Money managers typically have to wear the label of the worst peak-to-trough drawdown that they produce for their clients for the rest of their lives.

Think about it from the client's viewpoint. You watched $28,000 of your money disappear. To you it's a real loss. You could have asked for your money on the first of October and been $28,000 richer.

Trading performance, as a result, typically is best measured by one's reward-to-risk ratio. The reward is usually the compounded annual rate of return. In our example, it was 4% for the first year. The risk is considered to be the peak-to-trough drawdown which in our example was 35%. Thus, this traders reward-to-risk ratio was 4/35 or 0.114 -- a terrible ratio.

Typically, you want to see ratios of 2 better in a money manager. For example, if you had put $50,000 in the account and watched it rise to $58,000 you would have an annual rate of return of 16%. Let's say that when your account has reached $53,000, it had drawn down to $52,000 and then gone straight up to $58,000. That means that your peak to trough drawdown was only 0.0189 ($1,000 drawdown divided by the peak equity of $53,000). Thus the reward-to-risk ratio would have been a very respectable 8.5. People would flock to give you money with that kind of ratio.

Let's take another viewpoint and assume that the $50,000 account is your own. How would you feel about your performance in the two scenarios? In the first scenario you made $2,000 and gave back $28,000. In the second scenario, you made $7,000 and only gave back $1,000.

Let's say that you are not interested in 16% gains. You want 40-50% gains. In the first, scenario you had a 60% gain in a month and a half. You think you can do that several times at year. And you're willing to take the chance of giving all or most of it back in order to do that. You wouldn't make a very good money manager, but you might be able to grow your own account at the fastest possible rate of return if you could "stomach" the draw downs.

Both winning scenarios, plus numerous losing scenario, are possible using the same trading system. You could aim for the highest reward to risk ratio. You could aim for the highest return. Or you could be very wild, and lose much of your money by risking too much on any given trade.

Why is it important?

Benjamin Graham said the following:

"The one principal that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus "following the market." We do not hesitate to declare that this approach is as fallacious as it is popular".

What we find most disturbing is how inconclusive technical analysis is, and how much variation there is in analysts' opinions. Visit any technical analysis message board, and you will find heated conversations usually revolving around "support and resistance levels". And, we are not referring to investors who are new to technical analysis, we are referring to extremely experienced and well known technical analysts.

For the average investor, it is often a difficult dilemma to try and make sense out of the conflicting opinions regarding where the market is going. Is the market cheap or is it expensive? Is the market going up or down? Does the market have support at these levels or is it ripe for a fall? If you are confused about the direction of the market, you are not alone. It seems the pros are often just as confused as you are.

Now, we do not want you to form an opinion that we do not believe in technical analysis, in fact; if anything, we are a firm believer that one must respect the fact that millions of investors and professional money managers follow technical analysis. So, for anyone to ignore technical analysis, even though it has serious limitations, is a huge mistake.

Example: In a down market, a technical analyst looking at the SPX chart below will point out that the market has major support level at ~975 as tested on August 2003.

If the SPX support had not held at the 975 level, this very same Analyst would likely have pointed out the two year support level of 775 reached on October 2002 as the next most logical support level.

Most inexperienced investors will view the concept of changed support targets as a case of an Analyst not knowing his craft. The reality is that no one really knows for certain, and choosing the next level of lower lows reached in previous support levels is an acceptable practice in the field of technical analysis.

While technical analysis is far from perfect, one must always respect the fact that far too many investors and money managers follow it. So, when a predetermined support level does not hold, and thousands of investors and money managers see the next support level, it often becomes a self fulfilling prophecy.

There are many additional concepts and indicators in technical analysis that are well worth investigating. However, if you, like most investors are looking at technical analysis to tell you the absolute support and resistance levels, be prepared to be seriously disappointed. For many years, the search for Support has occupied the minds of thousands of investors and researchers. Support as most investors view it is a fallacy. Support is only a temporary stop that can be mathematically calculated. To think that there is such a thing as long term support is as naive as the belief that a company will always deliver on its projected earnings.

Technical analysis, while very useful as a short term "snap shot" type analysis, is a very limited science. By the time you get a buy or sell signal, the move is usually about 20-30% underway. We found the process of picking stocks through traditional Technical Analysis very limiting, and most importantly, difficult to rely on. Being mathematically oriented and structured type investors, we needed more stability and more proof in order to invest our hard earned money. Quite frankly, technical analysis has never showed us such proof, and today we am more convinced than ever. Technical Analysis is simply a self fulfilling mechanism. Nothing else, nothing more.

In our 30 years of research we have combined 3 concepts from traditional Technical Analysis, which we have found to be the most sensible: the Moving Average, the Trading Bands, and the RSI. From these 3 indicators we have created GetFolio Investment Strategy, combining technical, fundamental, Sector timing, and most importantly risk/reward analysis, all into what we and many others consider to be the most logical system ever put together.

"Let's look at the differences between profitable and unprofitable investors. Is it a question of experience, or are some folks just born with the talent to play the markets successfully? How does risk tie in with profitability? Are profitable investors more willing to make riskier trades?

Author Mark Douglas talks about three stages in becoming a profitable investor. First you learn how to find promising trade setups. Second, you learn how to enter and exit those positions at the right time. Third, get to a point where you build equity on a consistent basis. The secret to this third step is really no secret at all. You master the discipline required to follow your methodology, plan or system.

Investors need to make an important choice early in their careers. They can decide to follow a specific method that forces them out of the market during unfavorable conditions. Or they can master a broad range of skills, and then apply the right one at the right time. Neither approach is right or wrong, but both require paying close attention to the profit-and-loss feedback.

Most unprofitable investors rely on a poorly matched execution style, or a good one they haven't mastered yet. Very often they fail to recognize critical errors in their methodology because it was learned in a book, or through inappropriate conditioning, i.e., making money on bad decisions. Realize that profitable investors know all the weak points in their strategies and exercise damage control at all times.

You can't understand your methodology until you analyze your profits and losses. Identify its weaknesses quickly, and then decide if it really works at all. You may discover that your whole approach to the market isn't right for your lifestyle, emotional nature or long-term goals. For example, you could be a scalper with the disposition of an investor, or a daytrader who hates risk. Bad things will happen when your system doesn't match your personality.

Investors hate to think about discipline. After all, it's not as sexy as just becoming a market gunslinger. But the bottom line is that most of us don't follow our own rules. This is ironic, because the folks who ignore the reasons they lose money are the same ones who spend thousands of dollars attending investing seminars. Personal discipline is the one thing you can't learn sitting in an audience.

Discipline and money management go a long way toward becoming a profitable investor. But let's be realistic. However you invest, you must be confident in the positive expectancy of your style or methodology. This poorly understood concept refers to how much profit you can reasonably expect to make vs. each dollar risked on a trade. Gamblers know this equation as the player's edge in a casino. The problem is that most of us don't understand our strategy well enough to determine whether or not it has a positive expectancy.

System traders use backtesting to gauge the positive expectancy of their systems. Retail traders choose entry and exit without this methodology, so they need to compensate through extensive record-keeping and analysis of each trade result. Even so, they could be fooling themselves into believing they have an edge in their pursuit of profitability.

The sell side of the positive expectancy equation is more important than where you buy. Research suggests that a very profitable system can be built using random trade entry. Yes, you heard that right. It's possible to make money in the same way as a chimp who throws darts at a dartboard. But the hairy primate still has the same problem as the losing investor: He doesn't know when to take money off the table.

Positive expectancy requires a robust exit strategy. But you already knew that, didn't you? Volumes have been written about money management techniques, such as cutting your losses, riding your winners and trading adequate reward/risk. But somehow, losing investors continue to outnumber profitable ones by a very wide margin.

One aspect of positive expectancy is more difficult to manage than any pure numbers game. All investing styles experience drawdowns, and profitable ones are no exception. Investors routinely abandon profitable methods because they hate to lose money. They stop following perfectly good rules because they aren't getting the instant gratification they want from the markets.

If this all sounds like a big loop from the top of our discussion, it's meant to be that way. Losing investors get stuck in a vicious cycle. They want to profit from the market so they come up with a strategy to make money. They trade the strategy until it frustrates them to the point they abandon it and go looking for another strategy. In the process, they never take the time to find out whether or not it had positive expectancy in the first place. In other words, they don't let their methodology mature enough to watch its real potency bear fruit.

Which brings us back to discipline. Sure, it's boring to plan the trade and trade the plan. But it's the only way to break this losing cycle and get on the road to consistent profitability."

Why even the best newsletters will fail.

There are quite a variety of investment newsletters, available to investors today. Unfortunately, few investment newsletters, or any hot pick type service, deal with what it really takes to become a successful investor. You can subscribe to the "best" investment newsletters on the market, but the simple fact is that, at the end of the day, most investment newsletter subscribers will fail to match the newsletter's model portfolios.

On paper, many investment newsletters tracked by the Hulbert Financial Digest have a great long-term track record. The reality, however, is that these high-ROI investment newsletters have generally not translated well for most investors subscribing to them. Often, the tendency is to blame the newsletter, but it has been my observation that the fault lies elsewhere.

Let's face it: if to become a successful investor, all it took was to subscribe to an investment newsletter, then the word would spread rapidly, and that one investment newsletter would have more customers than any other entity on Wall Street. The reality however, is that there has never been such a success. Why? Because in the final analysis, 9 out of 10 investors fail due to two simple reasons:

1. Position Sizing
2. Investing emotionally, instead of mechanically

The majority of investors who sign up to popular investment newsletters are extremely naive. In their minds, the process is as simple as, "Just give me your recommendations and let me become as successful as you are." Unfortunately, as any money manager knows, entry points account for very little in the overall success of a portfolio. Following a successful investment newsletter's recommendations is pointless, when Position Sizing is not part of the equation. We all know that Warren Buffet is a value player, but so are millions of other smart value investors, so why are they not as successful?

Yes, there are many very capable investment newsletters, and there is a whole cottage industry of investment newsletter tracking services, whose sole job is accurately reporting investment newsletter performance. However, when real money is at stake, few will be able to match the published ROI. In fact, I would even venture a bet that most investment newsletters publishers themselves, will also fail to match their own model portfolio when real money is at stake.

Booking the DISTANCE, the biggest mistake you will make.

If KO trades in a 52 week range of $53.50-38.30, will buying the stock at $38.30 and selling it at $53.50 result in a higher ROI for your overall portfolio?

Did you know a research study done in 1991, has shown that money management explained 91.5% of the returns earned by money managers over a ten year period? In my own research I have found that position sizing plays a much larger role than the actual price paid and received for the stock. In other words, the percentage of your capital in each specific position will have a much larger impact on your portfolio, than the actual timing of your buys, and sells.

This is a difficult concept to grasp for the average investor, as we are all trained to focus on booking the DISTANCE, which is the difference between the actual buy price to the actual sell price. What most investors miss is the time factor and the opportunity cost, or asset allocation conflict. When your money is being held in a position in the "market's waiting room", waiting to make it to $53.50, what is your opportunity cost? How much are you losing while your capital is tied up in KO waiting to be recognized as a good value at $53.50, and would your money be better off used in another position?

Asset Allocation Conflict: Think of your stock portfolio as products being assembled on an assembly line. You have 20 stocks on line being worked on, but in looking at your system there are 10 more being shipped to you. You are screaming at your employees to work faster, but there is not much they can do to speed up the process. You are really upset as the 10 new stocks have arrived at your door, and now your only choice is to either pass on the new ones, or sell the old ones before they are ready. Get the idea of Asset Allocation Conflict?

Primitive Rituals

Every Friday, investors across this great land huddle together in the great electronic village to celebrate a sacred primitive ritual. Anthropologists and economists are divided as to the motivation for this tribal rite. Many simply credit ignorance and superstition. Some attribute the gathering to man's eternal search for a deeper meaning - to know the unknowable or divine the intent of the gods. Whatever the reason, the ritual has assumed importance to the participants and viewers far beyond any actual value.

The ceremony, almost as old as television itself, proceeds in strictly defined order. The high priest, resplendent in imported hand-tailored Italian robes, gives a short invocation. The invocation always ends with the introduction of a visiting priest who has journeyed from the village of lower Manhattan to pay his respects to the great one. The two then engage in a highly ritualized duet ending with the high priest clutching and choking the visitor while chanting "names, please" and "what do you like?" When the visitor has disgorged enough names he is temporarily released.

The high priest then turns his attention to a panel of elders and lesser priests. At least one lesser priest must always dress as a bull while another poses as a bear. Each makes appropriate noises for his role and offers his reading of the entrails. (Under an agreement with the Society for the Prevention of Cruelty to Animals, no animals are actually sacrificed on camera.) While the lesser priests never agree on the portents, they are not allowed to actually physically attack each other, this being considered bad form.

The remaining priests all fill familiar roles. One must mutter and fret about market volatility while another advises the faithful to buy where their wives shop. Yet another endlessly intones, "Don't fight the Fed, don't fight the tape." The high priest gives each his blessing equally, bestowing a knowing smirk upon every remark, no matter how inane.

The high priest maintains a private collection of pet elves, which on a weekly basis attempt to divine the will of the gods and share their rapturous insight through a "sentiment poll." The gods must be crazy, or at least fickle, because the result has become a contrarian's delight. So poorly have the elves interpreted the omens that several years ago the high priest had them all slaughtered in a fit of pique. He then replaced them with new and improved elves. Unfortunately, the new elves have become an even sorrier lot and must be severely concerned with their own fate.

Still smirking - after all, nobody is catching on, everybody is eating it up, and he is actually still getting paid for this nonsense - the high priest offers a final benediction. After the benediction, a very minor priestess magically appears, silent as Vanna White, and leads the group into a spotlight where they all pretend to chat as the light flickers and fades from the television. A soothing voice offers to send transcripts of the sermon to the faithful.

As the light dies across the global village, each member of the congregation finishes his communion martini and begins to meditate. Under the spell of this powerful, mind-altering drug, each becomes convinced that the gods have transmitted a unique and startling insight to him alone. Armed with this sacred "insiders" knowledge, the villager expects to trade invincibly on the following Monday, extracting economic rents from the heathens.

What's Going on Here?

We have seen the dismal results that American investors endure. While we know that the economic and human consequences are severe, we also know that reasonably simple tools and techniques are available to dramatically improve investors' returns over time. We know that the average investor is intelligent and successful in most other aspects of his personal and professional life. Though few investors are intent on self-destruction, they often behave as if they were. This is a very disturbing paradox. What in the world is going on here? Why haven't investors caught on? Why don't they get it?

If you have been wondering why the average investor hasn't got a clue as to how to meet his financial objectives, Wall Street Week may provide some interesting insight. Funded by Public Television (which should set higher standards!) and under the guise of sophisticated commentary, Wall Street Week is just about everything that can be wrong with the popular financial media.

The show is not only several magnitudes worse than a total waste of time, it is very dangerous to your financial health. The Surgeon General should require a label similar to the one on cigarette packages and advertising warning that "Exposure to this drivel has been shown to cause self-destructive behavior, loss of cognitive power, and serious depletion of financial resources."

Wall Street Week, and similar shows, begin with the assumption that "insiders" can explain and predict market behavior. Further, it assumes that these insiders would generously share their knowledge with a hundred million of their closest friends.

We know that everybody is entitled to his own prediction. Mine, yours, and your dog's all have an equal chance of coming true. But I am going to tell you a little secret. If I absolutely knew what the market was going to do next week, next month, or next year, I wouldn't share it with you. Instead, I would go out and mortgage my house to buy options and then sail away. You would never hear from me again. I wouldn't even finish this book. I'd be history!

It's nuts to believe that these guys have any idea what the market is going to do, and even more crazy to think that they would share it if they did. The show does give them a stage for shameless self-promotion, and a big ego boost. An appearance on Wall Street Week is the ultimate public relations coup for a fund manager.

The popularity of the show can certainly not be based on the accuracy of its predictions, which have been a dismal failure. There is really an undeniable entertainment value to schmoozing and kibitzing with movers and shakers. This is the Wall Street equivalent of Lifestyles of the Rich and Famous. The real problem is that people take it seriously. If you think that watching Wall Street Week is a shortcut to forming an investment philosophy or modeling an efficient portfolio, you are unlikely to be tempted to delve into a tedious and challenging study of finance.

The show dedicates itself to the highly questionable (even suspect) proposition that market timing and individual stock selection drive investment performance. Today, almost nobody on Wall Street with an IQ over room temperature really believes that, yet this proposition is still shamelessly peddled to anybody who is still buying.

In show business, of course, there is never a reason to abandon a proven formula. As long as ratings and market share stay up, you can count on next week's show looking remarkably like last week's. Notwithstanding its public funding and high-sounding purpose, PBS is just as interested in ratings as any other enterprise. Wall Street Week is a hit, so PBS isn't likely to screw it up with a dull and boring discussion about how markets work. Success in terms of ratings and market share are not related to the value or validity of the investment information and content.

So, Wall Street Week studiously avoids any discussion of the last forty years of academic research, pretends that markets are hopelessly inefficient, bans discussion of Modern Portfolio Theory and banishes heretics who promote buy and hold. Unfortunately, the popularity and longevity of the show give the impression that it must be doing something right. This success continuously validates a brain-dead investment philosophy. The net result is a Public Broadcasting (dis)Service.

Financial Pornography

If Wall Street Week were an isolated phenomena, no one need be concerned. America is, after all, notoriously tolerant of crackpots. But an examination of the rest of the popular financial media turns up little else of value, little intelligent life at all. In fact, most of what the popular financial media puts out could properly be called financial pornography! It's not only bad for your wealth, it has no redeeming social value.

We must be clear about what the media are up to. It would be a mistake to believe that they are on a collective mission to educate the American public. Rather, their mission is to sell papers, airtime, or magazines. Any educational value that might result is just a happy coincidence. Anyone who has ever watched television, listened to talk radio, or browsed the newsstand at the check-out counter might reasonably conclude that the media have a very low opinion of the American intellect.

Their general credo is that "No one ever went broke by underestimating the American public." Contrary to popular belief, Lowest Common Denominator is not a mathematical term, but a programming director's working philosophy - give 'em what they want, don't make them think, dumb it up as much as possible, and stick to winning formulas.

The media have another problem too: the relentless pressure to come up with new stories every day, every week, or every month. When I finish this book I can just stop writing, but such is not the case at Money Magazine. Next week they have a whole new magazine to fill. While there is a limited number of good ideas to explore, there is an unlimited demand to fill air time or column inches.

The media solve this problem by carefully selecting the themes they wish to cover. For instance, Modern Portfolio Theory (MPT) is considered too complicated for the great unwashed American public to follow. Not only is it sort of dull, it has a limited number of things that can be said about it and it lacks a human interest angle. All in all, it's not a subject likely to sell a lot of airtime. Worse yet for radio or television, it takes a little thought and can't be reduced to twenty-second sound bites. It shouldn't surprise you that the airwaves aren't full of stories about MPT.

On the other hand, because there is a new market closing every business day, there is an unlimited number of guys that would just love to go on television or radio to give their slant on why the market did what it did. These sources, often standing with the trading floor or even a ticker tape in the background to add color, spew catchy sound bites provided by their public relations departments. It doesn't matter whether the source is right or wrong, or even has a clue what's going on. It fills time and gives the impression of juicy tidbits and maybe even insider knowledge.

And not just any bland comment will do. Imagine if you will a source who made the following comment, "Who knows why the market went down today? Markets do that every once in a while. It's really not important to long-term investors. Investors should buy a properly balanced diversified portfolio and forget about it." How many times do you think that man will be invited back? Where is the excitement? Where is the pizzazz?

Every business day the government announces a few new economic numbers. Often these are just revisions of previously announced numbers. Each number, however, is treated gravely, as if the entire future of capitalism depended on it. Each demands minute analysis and generates the required sound bites by a highly-regarded (by whom?) source. Since no report can be considered complete without speculation, it would be unthinkable to simply report the number without an "expert" who could also provide the appropriate spin.

Hero worship is a favorite media subject. Interviewing a "successful" mutual-fund manager has all the ingredients the media loves: human interest, insider tidbits, deep insights, and pithy quotes. Unfortunately, we are going to need quite a number of heroes to fill all that time or space. If we confine ourselves to managers who have "beaten" the market for over ten years, we have pitifully few.

But, if we lower our time horizon to ninety days, the number of potential candidates expands enormously. Each will be hand-delivered in a new Italian pinstripe suit, starched shirt, and power tie with properly blow-dried hair by a suitably humble public-relations flunky. They all know the rules: pithy quotes, deep insights, groundless speculation, and insider knowledge, or you don't come back.

Few decline to play by the rules. An interview on television or radio, a comment in the Wall Street Journal, or a picture on the cover of Money Magazine, Forbes, Fortune, or Worth validates the "expert" as a real player in the business. Phones begin to ring and cash begins to flow in her direction. Careers can be made in just a few seconds. So, now is not the time to be humble. Of course, we know which way the market is going next quarter, and you can be sure our shareholders will benefit greatly. Our research (our proprietary indicators) shows that.... This market has no where to go but....

One of the dirty little secrets of the news industry is that most reporters don't think up their own stories. Instead, they are fed a constant stream of ideas and stories by the public relations flacks. All reporters and writers are showered with press releases, backgrounders, briefings, and BS by public-relations agents hired to make their clients rich, famous, and powerful. A lazy reporter can just change a few sentences in the information provided him by the public-relations agent and then hit the bar with his day's work done.

The public-relations industry isn't exactly a repository of virtue. Their mission isn't truth, it's spin. Their interest is in getting their client's story out into the media, with enough media coverage able to validate almost any loony idea. For a price, they will tell you that tobacco is good for you, citing plenty of "evidence" and "research" produced in North Carolina colleges located in little towns with names like Raleigh and Winston-Salem. Though the media and the public-relations folks generally have a well-deserved low opinion of each other, their relationship is symbiotic. Neither one could survive long without the other.

You have got to have money to afford a public relations campaign. That kind of talent doesn't come cheap. Think for a moment about who has the deep pockets on Wall Street. What kind of behavior do you think the brokerages want to encourage? Are they the organizations that will profit from low cost, low turnover, buy and hold strategies? Is their interest necessarily the same as yours? Do you think that maybe you are being had?

For a variety of reasons, bad advice is far more profitable than good advice. Take a look at who pays for advertising on television, radio, magazines, and newspapers. You don't really expect the media to savagely maul the hand that feeds them, do you?

Not all reporters are rocket scientists. It's perfectly possible to be a financial reporter without ever having taken a course in finance or economics. It's perfectly possible to be successful in the trade without having read a book on the subject within the last ten years. Financial theory has evolved rapidly in the last few years and many reporters haven't done their homework. Then again, they don't need to; it's too easy to interview heroes and put a little spin on yesterday's market close or tomorrow's number of the century. Today's reporters just need to follow the formula.

Of course, the really bright reporters quickly find that financial theory isn't newsy. There are lots of reporters out there who could teach college-level courses in finance. But they are trapped into covering the same old stories the same old way. That's what the people want, expect, and pay for. That's not only what sells, it's what advertisers pay for. In an atmosphere like this, is it any wonder that Luis Rukheyser is a household name while Harry Markowitz, Merton Miller, and Bill Sharpe are not?

Sloppy reporting and fuzzy thinking aren't just the province of a few small-town rags. I thank Weston Wellington of Dimensional Fund Advisors for sharing a few gems from his immense collection of Financial Pornography. Here is an assortment of thoughtful and useful offerings from some of the best known papers in the country.

Each of you could put together your own outrageous collection from tomorrow's papers. If millions of people didn't take this garbage seriously, it would be funny. Unfortunately, the continuous rain of dreck from television, newspapers, magazines, and radio creates a climate where investors get the impression that this is how smart players ought to plan their strategy. It's hard to ignore the most highly visible "prestige" players in the media. They must know something, right?

These kings have no clothes! There is a whole industry of hacks out there that get paid very well for filling your head with merde! Investors have got to realize that this type of commentary is worth far less than zero! You and I aren't going to reform the media, nor do we have to go on that mission. They have their program and we have ours. Their program is to sell advertising, ours is to learn something. While we don't have to buy into their agenda, we do have to understand it.

The Big Lie

One of the earliest and most successful (for a while) spin doctors was credited with the idea that if you tell a big lie often enough, people will begin to believe it. The financial advertising folks have taken that interesting concept one brilliant step further. By taking a number of absolutely true facts and mixing them with a little innuendo, they have been able to create big lies.

We don't expect advertising to be fair, objective, or impartial. In that regard advertising seldom disappoints us. While the Securities and Exchange Commission complicates the lives of financial advertisers by requiring documentation and fair disclosure, advertisers have found that they can live with this while still conveying a distorted message. You will be hard-pressed to find one outright lie. While each fact has been extensively researched and verified, it is the emphasis and spin that manages to pass on an absurd image.

For instance, suppose you advertise yourself as having the highest total return since the crash of 1987. That sounds pretty good, right? You tout your Morningstar rating and paint yourselves as the toughest managers on Wall Street, as if managers should somehow carry Uzis and have black belts to be effective. (Or, maybe they are just nasty to their office staff. Who knows?)

The ad carries a strong implication that this single fund is probably right for all investors. A viewer could even be forgiven if he began to think that it might be right for his entire portfolio. After all, what a great track record! They couldn't lie on television, could they?

But, you might fail to mention that your fund got hit harder than just about any other fund during that same crash. Or you might forget to say that you invest in stocks of very small companies, which carry the highest risk in the stock market. Or lastly, you might fail to reveal that your expense ratio is one of the highest in the industry.

I must admit, I don't know how tough the managers really are, but in all other respects there is no sense quibbling with the facts that the ad presents. I also will tell you that I think the fund is pretty good for what it is. These guys buy little companies! They get down in the weeds where few other managers will go. Given the very small companies that the fund buys, and given the lack of liquidity in that part of the market, we would expect that the fund returns would be pretty good. We would also expect the risk to be very high, which it is. So, while this might be a good choice for two or three percent of a portfolio, a little part of your domestic, small-company, growth allocation, it hardly qualifies as an all-weather fund.

I'm not sure that what the ad conveys is everything that an investor should know before he signs up or sends money. The facts are all right, but the message is distorted. So, it must be a great ad! I am not going to burden you with a few hundred other examples culled from a typical day's media. But by now you should be asking yourself if you would buy a used stock from these guys!

Of course, there is a very direct link between advertising and new money flowing into the funds or brokerage houses. If advertising didn't generate a positive cash flow for the funds, you might correctly expect that they would shortly give it up. Frequent advertising gives the impression of dependability and strength.

By now you should suspect that there is no link between an advertising budget and future performance. To the extent that advertising expenses appear in the fund's expense ratio, they add a drag to performance. To the extent that existing shareholders get to pay an expense designed to attract other investors you might consider it a tax.

There does appear to be a strong link between past performance and advertising. A large fund family always is going to have a few winners. Strangely enough, these tend to get the lion's share of the advertising budget. The impression they would like you to give is that the fund family has only winners. Of course you may care to dwell for a moment on how infrequently these winners repeat. But that's not likely to be emphasized in the ad.

Usually you will see in tiny little print somewhere hidden among the charts the required SEC disclaimer, "Past performance is no guarantee of future performance." That is the only thing you should ever believe! As they love to say on Wall Street, "You can take that to the bank!"

The seeds of all this confusion and disinformation from the media and advertisers fall on fertile soil since our minds are already conditioned to believe it. Earlier we explored the tremendous impact that conventional wisdom has on our lives. When we grow up "knowing" something, it's a great deal harder to accept change than if we were starting from ground zero.

Finance is a science or art undergoing rapid change. Most of us with finance or economics degrees minted before 1990 have a lot to unlearn. While we were going about our daily lives, they changed the whole game on us! Our natural inclination is to want to play by the old rules. And you can rest assured that Wall Street wants to continue doing business as usual.

Back To School

Finance, investments, and economics are not required by American high schools or colleges. Somehow, like sex education, it is assumed that we will pick the subject up naturally. Even new graduates may never have been exposed to concepts that they will need in order to vote intelligently on economic policy or provide for their family's futures.

Given the importance of the subject to both the political process and to the individual, I have always found this a curious, costly, and disconcerting policy. Millions of Americans think that they know a great deal more about the subject than they actually do and go through their entire financial lives blithely acting on that assumption.

What's missing here is any concern or concerted effort to get us back up to speed. A whole generation of Americans is poised to retire without nearly sufficient assets to support them and no one seems at all worried. While there is some agreement on the need to invest more, there is very little effort aimed at helping Americans to invest more effectively. The entire subject has been treated with benign neglect.

The fault lies not with the schools. Educators are willing and able to teach whatever Americans want. But a political determination must come before the school system can devote its scarce resources to any project. This is not a decision that individual teachers or school systems can make for themselves. Until the American people demand a better fundamental economic and financial curriculum, it's not going to happen. And until they do, Americans will be shortchanging themselves in an area critically important to their success.

There is an antidote to all this BS. Get to your local university or college and take a course in finance. Go to your library and borrow some current books on the subject. Subscribe to the Journal of Finance. Download a few papers from the economics and finance departments of the world's major universities. Tear yourself away from the television and get yourself down to the local Barnes and Noble, Waldens, or Borders bookstores.

You are going to have to take responsibility for your own financial education. If you think you are going to get any useful information from Wall Street Week, Money Magazine, or The Wall Street Journal -- or the ads appearing in them -- that will help you build and administer a superior portfolio to meet your long-term goals, there is little hope for you.

-Frank Armstrong

There are many investors and money managers who regularly take enormous risks, and unacceptable drawdown. The GetFolio Strategy has not only produced consistently high returns, but has done so with remarkably low drawdown. Once you understand the concept of controlling your drawdown, you will be in a better position to manage your money successfully. Learn to control your drawdown, and you will be successful.

In the market, when an account goes down in value, it's called a drawdown. Suppose you open an account for $50,000 on August 15th. For a month and a half, the account goes straight up and on September 30th, it closes at a high of $80,000 for a gain of 60%. At this point regardless of your drawdown, you may still be in all of the same trading positions. But as a professional, your account is "marked to the market" at the end of the month and statements go out to your clients indicating what their respective accounts are worth.

Now, lets say that your positions start to go down in value around the 6th of October. Eventually, you close them out around the 14th of October and your account is now worth about $60,000. And let's say, for the sake of discussion, that your account at the end of October is worth $60,000. Essentially, you've had a peak-to-trough drawdown (peak = $80,000, trough = $60,000) of $20,000 or 25%. This may have occurred despite the fact that all of your trades were winners. It doesn't really matter as far as clients are concerned. They still believe that you just lost $20,000 (or 25%) of their money.

Let's say that you now make some losing trades. Winners and losers, in fact, come and go so that by August 30th of the following year, the account is now worth $52,000. It has never gone above $80,000, the previous peak, so you now have a peak-to-trough drawdown of $28,000 -- or 35%. As far as the industry is concerned, you have an annual rate of return of 4% (i.e., the account is only up by $2,000) and you are now labeled as having 35% peak-to-trough drawdown. And the ironic thing is that most of the drawdown occurred at a time in which you didn't have a losing trade -- you just managed to give back some of your profits. Nevertheless, you are still considered to be a terrible money manager. Money managers typically have to wear the label of the worst peak-to-trough drawdown that they produce for their clients for the rest of their lives.

Think about it from the client's viewpoint. You watched $28,000 of your money disappear. To you it's a real loss. You could have asked for your money on the first of October and been $28,000 richer.

Trading performance, as a result, typically is best measured by one's reward-to-risk ratio. The reward is usually the compounded annual rate of return. In our example, it was 4% for the first year. The risk is considered to be the peak-to-trough drawdown which in our example was 35%. Thus, this traders reward-to-risk ratio was 4/35 or 0.114 -- a terrible ratio.

Typically, you want to see ratios of 2 better in a money manager. For example, if you had put $50,000 in the account and watched it rise to $58,000 you would have an annual rate of return of 16%. Let's say that when your account has reached $53,000, it had drawn down to $52,000 and then gone straight up to $58,000. That means that your peak to trough drawdown was only 0.0189 ($1,000 drawdown divided by the peak equity of $53,000). Thus the reward-to-risk ratio would have been a very respectable 8.5. People would flock to give you money with that kind of ratio.

Let's take another viewpoint and assume that the $50,000 account is your own. How would you feel about your performance in the two scenarios? In the first scenario you made $2,000 and gave back $28,000. In the second scenario, you made $7,000 and only gave back $1,000.

Let's say that you are not interested in 16% gains. You want 40-50% gains. In the first, scenario you had a 60% gain in a month and a half. You think you can do that several times at year. And you're willing to take the chance of giving all or most of it back in order to do that. You wouldn't make a very good money manager, but you might be able to grow your own account at the fastest possible rate of return if you could "stomach" the draw downs.

Both winning scenarios, plus numerous losing scenario, are possible using the same trading system. You could aim for the highest reward to risk ratio. You could aim for the highest return. Or you could be very wild, and lose much of your money by risking too much on any given trade.

Buy strength, or buy weakness? In the most concise way possible, that simple question marks a dividing line between most fundamental investors (at least of the value ilk) and most technicians (from the "breakout" camp). Given that, I ran a simple -- very simple -- test to see which strategy proved more profitable.

A subscriber sent us the below article, and we thought you might find it interesting.

The GetFolio recommendation strategy is much more complex than the simple buy weakness test described above but this simple test illustrates the proposition of extracting value from weakness vs strength.

The following 2002 Article from Richard Buck holds true to this day:

Hulbert Financial Digest, which has been tracking the recommendations of investment newsletters for 21 years, has issued its latest rankings of the best and worst performances of 2002.

The best ones are stunning. Among stock newsletters, the winners include The International Harry Schultz Letter, up 61 percent last year. Yamamoto Forecast was up 51 percent, and Ruff Times’ recommendations were up 43 percent. Among mutual fund newsletters, Growth Fund Guide was up 17 percent, Futures Hotline/Fund Timer was up 10 percent and Gerald Appel’s Systems gained 6 percent.

Those numbers may look tempting to investors frustrated with their own returns from last year. But if you’re thinking about leaping on the bandwagon of one of last year’s hot newsletters, I hope you’ll at least read this article before you do.

In the table below, you’ll see each year’s most successful newsletter, going back to 1981, along with each winner’s subsequent one-year performance.

Mark Hulbert has tracked what would have happened if every year an investor put his or her money into the prior year’s top performing newsletter.

The results aren’t pretty. Over the past 21 years, the result would have been an annualized loss of 31.4 percent a year. In the real world, that’s equivalent to investing $10,000 in January 1981 and finding that all you have left at the end of 2002 is $2.32.

Hulbert also looked back 16 years, to the start of 1988, and identified the 10 most successful newsletters since then through 2002. Their average annualized return was 14.3 percent.

Unfortunately, your chances of picking those 10 newsletters, out of all those that Hulbert tracked, would have been close to zero.

Many people "shop" for guidance by attending investor conferences. Paul Merriman has spoken at national and regional investment conferences for many years, and he’s heard presentations from quite a few popular speakers. I asked him for some names, then we looked up their 15-year track records as reported by Hulbert. The following annualized returns, which cover the period 1988 through 2002, suggest that it takes more than a great speaker to make a successful newsletter portfolio.

• John Dessauer, Investor’s World: 7.9%
• James Dines, The Dines Letter: 1.3%
• Joe Granville, The Granville Market Letter: -11.9%
• Michael Murphy, California Technology Stock Letter: -7.4%
• Louis Navalier, MPT Review: 15.3%
• Howard Ruff, The Ruff Times: 2.7%
• Bernie Schaeffer’s Option Advisor: -5.4%
• Harry Schultz, International Harry Schultz Letter: 4.3%
• Jim Stack, Investech: 4.5%

Every one of these editors is an entertaining, persuasive speaker who inspires confidence before an audience. But among these nine, only Louis Navalier beat the Dow Jones Industrial Average, which was up 14.1 percent in this 15-year period. None of the other eight came even close to matching the performance of the Standard & Poor's 500 Index (up 11.4 percent). And seven of the nine couldn’t even match the 5 percent annualized return of Treasury bills.

I hear one message loud and clear from Hulbert’s research: Chasing performance doesn’t work. If investing really were that easy, all the big institutions would do it.

The best academic research we know of indicates that 97 percent of the long-term return of any portfolio is determined by its asset allocation, the selection of what types of assets make it up. Only about 3 percent is determined by the choice of specific investments.

Ironically, investors typically focus 97 percent of their attention on trying to identify the best stock, the best fund, the best guru or the best newsletter – a quest that determines about 3 percent of their performance – while they spend almost no time on asset allocation – which makes 97 percent of the difference.

The smartest investors concentrate on what makes a difference: asset allocation. Our advice: Follow their example. Work on getting your asset allocation right and keeping your costs as low as possible.

By Richard Buck

Each and every day thousands of financial experts go to work to give you their expert opinions on how to best invest your money. There are tons of financial experts services out there, from full service brokers with excellent executions, to data services with the most up to date research information. The end result is simply information overload.

The truth of the matter is that very few financial experts truly understand the science of money management. Walk into any broker or investment advisor and have a meeting. You will find that the whole process is simply geared toward putting you at ease, or, as one broker once told me, "We are not in the financial business; we are in the relationship business."

9 times out of 10, you will end up leaving your money with the guy that makes you feel the most secure, and not the guy who is truly the most qualified. The same mistake is often repeated by most investors who often buy supposedly safe stocks recommended by analysts, as opposed to buying stocks that truly have the most potential.

It took us 13 years to deprogram our minds from the constant barrage of Wall Street's misguided expertise that on the surface seemed logical, but worked against us in real investing. If you want to be successful, you too have to deprogram and take control over your own finances.

How could I ignore such a well known financial expert as O'Neil who advocates against averaging down on a falling stock?
Let me start by saying that you would be hard pressed to find many professional money managers who do not average down on their stock purchases. A good money manager never assumes that a stock is at a bottom, and will typically build a position as the stock falls down in price. O'Neil's book is designed to alert amateur investors who regularly dump large sums of money into one stock. His advice should not be taken as a standard recommended practice to all investors; and, should be more dependent on each individual strategy and its money management elements.

How could I buy a stock at a time when Wall Street's Analysts issue sell recommendations?
We promise to start paying attention to analysts the minute someone will explain to us the logic behind why they issue buy recommendations on stocks when they're at an all time high, and sell recommendations on stocks at all time lows? Until then, with your permission, we would just rather take analysts out of the equation. We think they provide absolutely no value to investors.

Merrill Says It's Sorry

Merrill Lynch Chief Executive David Komansky apologized Friday for the now-notorious emails in which Merrill analysts disparaged stocks that they were simultaneously plugging to investors.

"The emails that have come to light are very distressing and disappointing to us," Komansky told shareholders at the company's annual meeting. "They fall far short of our professional standards, and some are inconsistent with our policies."

The messages were uncovered early this month in an investigation of analyst conflicts of interest by New York Attorney General Eliot Spitzer. In July of last year, Spitzer began investigating Wall Street brokerages, seeking evidence that their equity analysts wrote favorable research reports on stocks in order to obtain investment banking business.

Many investors got burned heeding the analysts' buy recommendations even as the shares plummeted, sometimes to zero. Merrill has already agreed with New York state to increase disclosure on its analyst equity research reports and is discussing further terms of a settlement.

Komansky's regret might reflect more than conscience in light of the potential penalties hanging over the firm. A spokeswoman for the attorney general's office called the apology "a good first step," adding: "contrition has always been a critical part of initial discussions to resolve the matter."

Merrill shares, which have lost 21% since April 8 when the discovery of the emails was made public, closed Friday up 2% to $43.38. Other brokerage shares also rose.

In addition to Merrill, brokerages currently under scrutiny in the investigation include Goldman Sachs, Credit Suisse First Boston, Morgan Stanley, Lehman Brothers, Citigroup's, Salomon Smith Barney unit, UBS PaineWebber, Lazard Freres and Bear Stearns

By KRISTEN FRENCH on APR 26, 2002 6:49 PM EDT

An open letter to Goldman's Abby Joseph Cohen

Dear Abby,

When I heard you were appearing on Louis Rukeyser's Wall Street last week as his special guest, I watched with interest, with the outside hope that perhaps you would finally apologize for making all those grandiose market calls during the go-go years.

You know the ones, Abby -- those bold and self-assured bullish pronouncements that encouraged investors to pile into every conceivable sector and stock, helping propel the market spacecraft to the moon.

Rukeyser began his introduction of you defensively, admitting he was deluged with email, protesting having you as his featured guest. With all your market calls that helped lead the lemmings out to sea, other viewers of the show were obviously still feeling the same disgust that I was for your part in frothing up the market fervor.

If that wasn't enough, Abby, Rukeyser then proceeded to make excuses for you. He said that your poor record was the result of the unpredictable terrorist activity and corporate fraud that brought the markets to its knees over the last three years.

Rukeyser asked rhetorically, how could Abby, as "brilliant" (his description) as you may be, be expected to take all of these exogenous events into account? His point was that you didn't have a crystal ball to predict these events.

Abby, the problem with Mr. Rukeyser's defense is that your market calls came before the terrorist attacks of Sept. 11, 2001. With the wealth of knowledge at your fingertips about companies and your understanding of accounting practices, I wish you had come out and waved a red flag if you knew things were getting out of hand.

You could have simply alerted the common investor to the mutually rewarding relationship between analysts and investment banking.

That's why they pay you so much every year, right? To analyze everything you can get your hands on, interpret it, and then make judgments for your employer. Abby, while you may have done well for your employer, you failed in your duty to investors.

You could have used your stature to alert investors. At the very least, you could have told us to be careful, that the market was too frothy, that we were being set up for a major bursting of the bubble. But you didn't do it. You were just one more analyst who was part of the problem, when you could have been part of the early-warning radar.

Why not at least admit that you and other analysts exacerbated the problem? I don't have to tell you how much your profession has suffered a deserved disrepute and how poor the image of brokerage analysts has become.

In the last three years, I've never heard you say you may have been mistaken. I've never heard you say your analysis may have been overly influenced by the circumstance of the times. Why not, Abby? Why no apology?

Abby, show the investing public that at least one influential analyst has the integrity to admit that she was wrong. Then maybe some others will take your lead and follow.

I will never again take your analysis seriously. You have lost your credibility with me and with millions of other investors. Whatever analytic skills or insights you possess will never again be appreciated by those who can now see that back then, you were simply a cog in the market complex, who wouldn't speak up for the small investor.

You owe us an apology, Abby. And we're still waiting for it.

Fast growth companies as a group will always outperform slow growth companies. It is not too difficult to see why.

Investors who buy growth companies are usually willing to forsake dividends in exchange for the promise of higher growth. Growth companies often need to reinvest their profits back into the business. When a growth company reaches the stage in its life cycle where it can afford to pay hefty dividends to shareholders, it is usually a sign that its growth opportunities are limited.

In order to retain the purchasing power of your investment, you need annual growth that equals the prevailing inflation rate. For the last 10 years the inflation rate was approximately 3% per annum. It is reasonable to assume that the next 10 years will not differ much. On that basis you would need 3% growth just to stay even. If you invest your money at 10%, which is the average mutual fund return for the last ten years, you will barely retain the purchasing power of your money, since you also have to pay taxes. Most investors are in a tax bracket exceeding 30%, including federal and state income taxes. Therefore, if you earn 10%, you are at best making 4% net.

Now let's see what happens if a growth company grows at 30%. First, your net after taxes is 21%. Your net after the inflation rate is 18%, which is exactly 4.5 times the net return of 4% you get from an 10% investment. It is therefore important to find investments that give you a high return. In the long term, companies growing at an above average rate will keep making a decent return on their investment in spite of temporary setbacks.

To summarize, 30% growth will increase your net 4.5 times faster than 10%. Therefore, you must go for higher returns and higher multiples. The assumption that a low multiple stock is a bargain is almost always wrong.

Take the time to build yourself an indexed growth portfolio, comprised of high quality high growth companies. Monitor it, eliminate the weak positions, and let growth do its thing. You will be a happy investor.

Perhaps you have heard some of these:

Do not average down.
Do not buy stocks trending down.
Sell stocks falling below the 200 day moving average.
Beware of a falling knife.
The trend is your friend.
The market is always right

It seems most financial sites and gurus have "Investing Rules", or financial wisdoms as some call them. Some rules make sense, but most are simply too general to be accurate. If someone wrote an article titled "The Top Mistakes Naive Investors Make", we would have no problem with such rules. However, to publish these rules as general truth for all investing strategies is inaccurate. These rules have been too ingrained in investors' minds, and they certainly do not apply when it comes to GetFolio on account of our diversified strategy. It took us years to deprogram our minds from the constant barrage of Wall Street's misguided expertise that on the surface seemed logical, but worked against us in real investing. If you want to be successful, you too have to deprogram.

The main reason people lose money in the market is simply because they take too much risk. Take, for example, the stop loss order rule. The original idea was to protect investors from losing money to bad investments. Sounds reasonable, but in reality stop loss orders have had a major impact on how investors operate. Instead of evaluating investments based on value, the concept now is, "Let's just buy it, and if it falls I will only lose 10% as my stop loss order gets hit." Likewise, option players often say, "Instead of risking $40,000, I will just put up $4,000 and if I am wrong, all I can lose is $4,000." The problem with this kind of thinking is that instead of accumulating gains, you are creating a system biased toward accumulating losses, and substantial drawdown. So instead of aggressively going after a stock, and having to use a stop loss order, why not protect yourself by starting small to begin with.

How could we ignore such a well known financial expert as O'Neil who advocates against averaging down on a falling stock?

Let us start by saying that you would be hard pressed to find many professional money managers who do not average down on their stock purchases. A good money manager never assumes that a stock is at a bottom, and will typically build a position as the stock falls down in price. O'Neil's book is designed to alert amateur investors who regularly dump large sums of money into one stock. His advice should not be taken as a standard recommended practice to all investors; and, should be more dependent on each individual strategy and its money management elements.

How could I buy a stock at a time when Wall Street's Analysts issue sell recommendations?

We promise to start paying attention to analysts the minute someone will explain to us the logic behind why they issue buy recommendations on stocks when they're at an all time high, and sell recommendations on stocks at all time lows? Until then, with your permission, we would just rather take analysts out of the equation. We think they provide absolutely no value to investors.

The below article 'Stock Market Lies' was written by Richard Gibbons, and tells it like it really is:

Value, the only thing that really matters!

The stock market is an enticing trap. It's very easy to get disillusioned, it's almost like a game in the casino where it looks so easy, you just have to try it. In reality, after you spend your quarters you realize the machine is rigged against you. The same phenomenon occurs in the market. On the surface you see stocks making huge gains right in front of your eyes. In reality, when you actually buy the stock the outcome is different. Is there more here than meets the eye?

Spend enough time studying the market, and you realize the market has a mind of its own- when your stock tanks on good news, but goes up on bad news- when analysts recommend your stock as a buy, and the stock takes an immediate dive- when CEOs go public and say all is great, and a month later all is terrible, you realize things are not what they seem. It took us 13 years of losses to deprogram our minds from the constant barrage of Wall Street's misguided expertise that on the surface seemed logical, but worked against us in real trading. If you want to be successful, you too will have to deprogram.

But will the dispelling of other poker myths (e.g., the validity of luck) improve the performances of poor players and chronic losers, thus decreasing the edge odds for the good player? On the whole, the answer would be no. A few poor players (those who would work to steadily improve their game even without the Manual) will benefit from the Manual. But most poor players are static players who will not use the Advanced Concepts of Poker or do anything to improve their game.

Why? Consider the nature of chronic losers: Most chronic losers have deeply entrenched habits that militate against the ingredients of good poker--discipline, thought, and then control. The Advanced Concepts of Poker demand intensive discipline and continuous thought--the very efforts that chronic losers seek to avoid. In fact, they build elaborate rationalizations or excuses to avoid any such discipline and thought. They play poker to "relax" their minds. Applying the Advanced Concepts of Poker would contradict and threaten their rationalized excuses for losing.

Revealing the Advanced Concepts of Poker to chronic losers is similar to revealing the logical advantages of being sober to chronic alcoholics, or revealing the unbeatable casino odds to inveterate gamblers. Few chronic losers will change their self-destructive habits when confronted with their errors....

On reading the Advanced Concepts of Poker, some chronic losers temporarily become wary of the good player and alert to some of his techniques. But in most cases, their alertness soon fades and their awareness sinks even lower because of a tranquil confidence that develops from now "knowing" the good player's techniques and from "being savvy" to his tricks, they quickly let themselves forget that his techniques and deceptions continue to extract money from them.

Yet any loser at any time can choose to use his mind to make himself a winner. The mind is the instrument required to use the Advanced Concepts Poker Winners make themselves winners by choosing to effectively use their minds. And losers make themselves losers by choosing to default on the effective use of their minds. Responsibility for the results of poker rests squarely and solely on the individual.

The most important aspect to your trading, is money management. Money management is that portion of one's trading system that tells you how many units (position size) of your investment should you put on a given trade. How much risk should you be willing to take?

Each and every day thousands of money management experts go to work to give you their expert opinions on how to best invest your money. There are tons of money managers out there, from full service brokers with excellent executions, to mutual and hedge fund managers with the most up to date research information. The end result is simply information overload.

Emulating money managers such as Warren Buffet, Peter Lynch or any other investment guru by reading their strategies is a hopeless task, simply because the real reason for their success, money management, is rarely discussed. Yes, we all know that Buffet is a value player, but so are millions of other value investors, so why are they not as successful?

The truth of the matter is that very few money management experts truly understand the science of money management. Walk into any broker or investment advisor and have a meeting. You will find that the whole process is simply geared toward putting you at ease, or, as one broker once told us, "We are not in the financial business; we are in the relationship business."

9 times out of 10, you will end up leaving your money with the guy that makes you feel the most secure, and not the guy who is truly the most qualified. The same mistake is often repeated by most investors who often buy supposedly safe stocks recommended by analysts, as opposed to buying stocks that truly have the most potential.

Don't buy into Wall street hype that rallies and declines are the result of news events. Sure, news does impact the market, but not to the extent you'd believe if you read the headlines:

Market Off on War Fears
Market Up on Hopes War Will Start Soon
Market Down on Fears War Will Start Soon

You see that nonsense every day, it's just their pathetic attempt to put a reason behind the market's movements (a reason other than the movement of money from investors to Wall Street). One day an event causes a rise, the next day a fall -- it makes no sense at all.

External events do have an impact on the market, and it's very short term. If you look at charts before Sept 11, the market was already collapsing, and the attack probably made it a more orderly decline than might have occurred otherwise.

The majority of short term strategies are of investors who look to day trading to replace their day job. Not a bad idea but unfortunately most short term traders come to the market with very little money, take huge risks, and it's only a matter of time before they crash.

In order for you to consistently make money as an investor it's important to have a winning strategy, but first and foremost you must manage your expectations. 20%-30% a year is all we shoot for in our personal investments, and with our capital we are able to live off our investments. If, on the other hand, you have, let's say $100,000 in capital, it is going to be tough to live off a 30% ROI, or $30.000 a year regardless of the fact that it is a wonderful ROI.

In trying to cut corners, short term traders use excessive margin or choose extremely volatile stocks as a means of maximizing returns. Unfortunately, the minute the market becomes difficult and goes against them, the losses are inevitable. If there is one thing we want to impress upon you, it is that there are no short cuts in money management. Probably 95% of all short term traders end up losing money. Why waste your future?

Tons of people lose serious money in short term strategies. Take for example the stop loss order rule. The original idea was to protect investors from losing money to bad investments. Sounds reasonable, but in reality stop losses had a major impact on how investors operate. Instead of evaluating investments based on value, the concept now is, "Let's just buy it, and if it falls I will just lose 10% as my stop loss gets hit". The most common statement you hear from option players is the following, instead of risking $40,000 I will just put up $4,000, and if I am wrong all I can lose is $4,000. The problem with this kind of thinking is that instead of accumulating winners, you are creating a system biased toward accumulating losses.

Stop loss order is defined as: an order placed with a broker to sell when a certain price is reached. It is designed to limit an investor's loss on a security position. This is sometimes called a stop market order.

What is wrong with the use of stop loss orders.
The main reason people lose money in the market is simply because they do take too much risk. Take, for example, the stop loss order rule. The original idea was to protect investors from losing money to bad investments. Sounds reasonable, but in reality stop loss orders have had a major impact on how investors operate. Instead of evaluating investments based on value, the concept now is, "Let's just buy it, and if it falls I will only lose 10% as my stop loss order gets hit." Likewise, option players often say, "Instead of risking $40,000, I will just put up $4,000 and if I am wrong, all I can lose is $4,000."

The problem with this kind of thinking is that instead of accumulating gains, you are creating a system biased toward accumulating losses, and substantial drawdowns. So instead of aggressively going after a stock, and having to use a stop loss order, protect yourself by starting small to begin with.

The use of stop loss orders have become quite common in the market, and again it may make a lot of sense for a short term trader with a high frequency trading system to utilize stop loss orders. To the average investor who is typically in the market to invest, it makes absolutely no mathematical sense to use stop loss orders. You either like a stock because it's a great value and are willing to ride the volatility, or just don’t buy it. Why would Home Depot be a great value at $250.00, and a risky proposition at $200.00?

You may read or do research on your own, and may think that some of the stocks we recommend have fundamental issues, or unacceptable PE Ratios. Welcome to the world of investing. All stocks that go a through a price correction have some sort of a problem; otherwise, they will not be correcting. Our advice to you is to ignore everything that Wall Street is saying, telling, implying, or advising, as things are not what they seem. Assuming you are following our Market Gauge, our X Score ranking will single out the most volatile stocks. Furthermore, use of our index scaling technique through your Position Manager will ensure that your final average position in each stock will be fairly close to the final bottom in the stock. You can take this to the bank. By using a conservative and constant IPS, as calculated by your Position Manager, you will slowly and safely add money as the stock falls in price. Although there are certainly times when a stock falls below our comfort level, in general we hope that our average pick will fall low enough to trigger 2-3 buys per stock to end up with a decent size position.

"Recommend a few good stocks to me," is probably what most investors ask their investment advisor. Unfortunately, "good stocks" often mean a huge downside risk. While in theory we all want to invest in "good stocks", the fact is that "good stocks" face huge downside risks. To us, a good stock is just a stock that hasn't blown up yet. In our experience, the percentage of stocks which have experienced train wrecks after spectacular runs is just too high to take the risk. Let's take StockScouter, which is a stock rating system that MSN used to use, and let's use PFE as an example. Now as you can see below, StockScouter has a 4 level stock rating system, and when we wrote this ranks PFE as follows:

The only possible time a company would get good rating on all 4 counts is when all is hunky dory. So, if a company is doing great, then it would get an A for fundamental, an A for Ownership, an F for Valuation, and an A for Technical. The only problem with that is that it will no longer be a "good" value stock.

Here is how it really works:

First, the stock takes a dive. - There is always a reason why a stock is taking a dive, and therefore it is not likely to score well on fundamentals.
Second, since management is close to the action, insider selling is always part of the equation.
Third, funny but true, the PE Ratio is often unreliable when bad news hits.
Lastly, when a stock takes a dive, the technical picture is never pretty.

While PFE was not considered to be a "good stock", We think it was a better risk reward ratio than most good stocks. Now that the story is out, and PFE has taken a hit, it has a better upside potential and less risk.

There are many well known investment pros who are what we call "Professional Bears", always saying the market is too expensive and ready to crash. We have been around long enough to recognize that markets not only are generally expensive, but they can stay so for long periods of time. So, the intent of this article is not to yell market top, but rather to give you a sense of perspective and how to deal with it.

Far too many investors have high expectations, and have been spoiled by the bullish 1990s. It is absolutely amazing to see how far we have advanced, and how many companies simply did not exist prior to 1990. No QQQ, no OEX, no YHOO, and even no Starbucks. Let's take a look at the SPX historical chart, which is the best long term Index to consider, and see what really happened to the market from 1970-2004.

Looking at the chart above, you can see that from 1970 to 1983, the market was relatively flat compared to the 90s. Overall, the 80's were much better as the SPX moved from 105 to 353. It's actually amazing to see the 1987 spike which resulted in a subsequent crash. We say amazing because, the spike does not look nearly as dramatic as the spike that followed in 90s. And if you look at where we are today it is unfathonable. You can see that the market went through an amazing transformation for the past 30 years. Is it any wonder the market crashed back in 2000?

Over the years we have looked at thousands of charts, studying volatility and its effect on individual stocks. Now it is one thing to study individual stocks, and another to draw conclusions on Indices. At first, we just did not have enough information on Indices. Accordingly, although our initial comments where based on our study of individual stocks, Indices have reacted in ways similar to the ways individual stocks do.

If you don't think that the market was a casino in the 1990's, then I don't know what else to call it. Tech, internet, telecommunications, all contributed to an amazing boom in the 90's. One can say that the 80s were good, but the 90s were unbelievable. The two most important factors that jump to my mind are:

1. Beginning in 1990, the number of companies in the market more than doubled by early 2000's.
2. In the 90's, the market went through the biggest stock appreciation in its history. But look at it now.

It is important to notice that the stock market crashes of 2000 and 2008, did the most damage to volatile stocks. The NASDAQ corrected from 5132 to 1108 in the prior, far stronger than the correction of the S&P.

So what do we expect from the market now?

Whether the market is expensive or not is really not the issue, as markets have been known to stay expensive for decades. We do, however, expect two mathematical concepts to materialize.

1. Regression to the mean.
2. Volatility to beget volatility.

Following the market corrections of years 2000-2002, the market rebounded sharply. Regression to the mean dictates that the market at some point will retract to the downside. The manner in which the retraction occurs will dictate my ROI expectation. If the market retracts sharply in a crash mode, then we can all expect to continue see high returns, as the market will surely rebound sharply again. However, if the market corrects itself slowly, then we are all in for a lower overall ROI for the current decade.

We expect that volatile stocks will continue to be the most vulnerable group, and conservative stocks will only decline modestly on any market sell off. We also think that the GetFolio "narrowing of the Indices X Scores" will serve as a buying opportunity each time the market corrects itself, assuming you diversify widely and control your volatility.

Suppose a crystal ball showed you 20 wonderful stocks that would appreciate by 25% in a year. Would your portfolio be up 25% in one year?

Surprisingly enough, not only will your portfolio not be up 25%, but in all likelihood it would probably be down. You see, while your entire focus was on the fact that these 20 recommended stocks were going to appreciate by 25%, you failed to realize that volatility would have a greater impact on your ROI. Each stock that you expected would make a 25% return did in fact do so, but before it did, each stock fell drastically due to negative market sentiments. In all likelihood, panic would have set in and your stop loss orders would be filled. Subsequently, you likely would end up with a drawdown for the year.

If you think the above is an unlikely scenario, consider this: with the market as volatile as it is, the average stock regularly swings 50% in either direction. With these kinds of volatility swings, you would suffer a substantial drawdown and a major cash crunch on any market sell off. In fact, the odds of you beating the market consistently is directly related to your ability to control the volatility in your portfolio.

One could easily argue that the 20 stocks listed below represented an excellent buying opportunity in 2000. We, on the other hand, will argue that the fact that these stocks represent great value should be secondary to the risk of 68.8% volatility swing. Had you bought these 20 stocks in the year 2000, your portfolio would have suffered a substantial drawdown, and we doubt you would have survived it.

We have messed up an incredible number of investing opportunities by not following proper money management routines. In the end, it was all Murphy's law in action. The stocks we were sure was about to hurt us the most, and the stocks we were afraid of went up through the roof. Sound familiar?

Today through the use of the Getfolio Scaling Strategy, We simulate a mutual fund in our own personal portfolio. We don't look to make a fortune on one pick, but we don't lose big either, it's our overall portfolio's growth, and ability to sleep at night that makes us successful.

The most important aspect to your trading, is money management. Money management is that portion of one's trading system that tells you how many units of your investment should you put on a given trade. How much risk should you be willing to take?

Using GetFolio recommendations, we have been experimenting with position sizing for many years. It was hard for each of us to accept the idea of investing 1% per trade (or less). How can anyone make any real money investing 1% per trade? The one thing we knew was the fact that we were subjecting ourselves to a lot of stress by investing heavily in each position, and we were frozen if a position went against us, because we were already in too deep.

Position sizing and buying at the wrong time will be your biggest mistakes. Buy 1000 shares of a stock and watch it go down the next day. By the time your stock would come back up, you will be a much humbler rabbit, ready to sell just to break even. Then several weeks later, the stock is 10 points higher, but you are already out of the game.

One of our first stock buys over 30 years ago was CompUSA (Ticker CPU at the time); and what a terrible buy it turned out to be. Well, we were following the stock at the time and saw it fall from $35 to $25. At the time we liked the company, so we went in and bought 1,000 shares at $25. Two days later, the stock fell to $20 and we bought another 1,000 (thinking we will just average down a great buy). A week later, we had accumulated 4,000 shares, and was almost to the point of a heart attack. The stock, obviously knowing we were in deep pain, continued to fall to $13. We were horrified and disgusted with ourselves, the stock, and the market in general. Just to get peace back in our lives we had to get out. So, we sold at $13 and you guessed it, it so happened to be the low. We took a loss of $20,000 and went into a shock for the next 2 weeks. The odd thing was, two months later the stock was back at $30.

What did we learn from the CPU experience? Absolutely nothing. Following CPU we almost regularly fell into similar traps by investing large portions of our capital into what we thought were good companies, but with the lack of money management and risk control in our approach, these investments quite often turned into large losses.

We could waste your time with a few other good loss stories, but we want to move on to the important part. The part when we finally decided that enough was enough and we were not going to lose money anymore. Now some of you may argue that losing money has nothing to do with what we want, and that the market is bigger than us, so how could we say that we are not going to lose money anymore?

This information is not about a psychological pep talk, and even though we are a believer that you do get what you see in life, the reason why we finally matured into winning investors is because we had to. After years of losses we no longer had substantial capital at our disposal, and to put it in simple terms, we had to win. As someone once said failure was no longer an option for us.

It was about that time when we finally started to understand that yes, Technical and Fundamental analysis are important, but without a sound money management incorporated into our investing we would never be winners at this game.

Luckily for us, we were always good at what we did and working hard never stopped us, and so we started reading and learning about the effect of position sizing on our strategy. We knew we had the best Technical Analysis available, but we needed more than that. We needed to make sure that regardless of what the market did or did not do, we would always be successful.