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Also make sure that you buy it at its exact buy, or pivot, point. This will keep you from chasing stocks that race up in price too rapidly and makes it less likely that you will be shaken out during sharp market sell-offs. They kept killing off patients until surgeons finally and begrudgingly accepted studies by researchers Louis Pasteur and Joseph Lister. Finding New Leaders during Market Corrections Corrections, or price declines, in the general market can help you recognize new leaders� if you know what to look for.

However, in a correction during a bull, or upward-trending, market, the growth stocks that decline the least percentagewise are usually your best selections. Those that drop the most are normally the weakest. In most cases, you should heed it. These chart breakouts continue week by week for about 13 weeks. The best ones usually come out in the first three or four weeks. Pros Make Many Mistakes Too Many professional investment managers make the serious mistake of buying stocks that have just suffered unusually large price drops.

Our studies indicate that this is a surefire way to get yourself in trouble. It later plunged. To them, it seemed cheap, and a favorable story about the stock was going around Wall Street. Also in , many people bought Cisco Systems when it dropped to 50 from its early-year high of Suppose he also missed the next cup pattern in April at Buying stocks on the way down is dangerous.

You can get wiped out. So stop this risky bad habit. Any stock can do anything. You must have rules to protect your hard- earned money. We all make mistakes. You must learn to correct yours without vacillating. Anyone who buys stocks on the way down in price because they look cheap will learn the hard way this is how you can lose a lot of money.

That was a lot in those days, when the Dow was around compared with 8, in I bought the stock at once. I knew Control Data well, and this was highly abnormal strength in the face of a weak overall market. This was another great example of highly abnormal strength during a weak market. Lorillard, the tobacco company, did the same thing in the bear market, Software Toolworks soared in the down market of early , wireless telecom firm Qualcomm made big progress even during the difficult midyear market of , and Taro Pharmaceutical late in bucked the bear market that had begun that spring.

The new bull market in uncovered many leaders, including Apple, Google, Research in Motion, Potash, and several Chinese stocks. What Is Institutional Sponsorship? For measurement purposes, I have never considered brokerage research reports or analyst recommendations as institutional sponsorship, although a few may exert short-term influence on some securities for a few days. If a stock has no professional sponsorship, chances are that its performance will be more run-of-the-mill, as this means that at least some of the more than 10, institutional investors have looked at the stock and passed over it.

They also want to know who those sponsors are, as shown by services reporting this information. They look for stocks that are held by at least one or two of the more savvy portfolio managers who have the best performance records. Keep in mind that the rating of a good growth stock mutual fund may be a little lower during a bear market, when most growth stocks will definitely correct.

The leaders in the ratings of top institutional mutual funds generally rotate and change slowly as the years go by. Several financial services publish fund holdings and the investment performance records of various institutions. In the past, mutual funds tended to be more aggressive in the market. The main thing to look for is the recent quarterly trend. When a fund establishes a new position, chances are that it will continue to add to that position and be less likely to sell it in the near future.

They are helpful to those who can identify the wiser picks and who understand correct timing and proper analysis of daily and weekly charts. Institutional trades also tend to show up on some ticker tapes as transactions of from 1, to , shares or more. This is the sustained force behind most major price moves. Much of it may also be wrong. But out of the other half, you may have several truly phenomenal selections. Your task, then, is to separate intelligent, highly informed institutional buying from poor, faulty buying.

He scours the country and international equities to get in early on every new concept or story in a stock. His Focus fund concentrates in only 20 stocks. This makes it more volatile, but Ken likes to make big sector bets that in most cases have worked very well for him.

Janus 20, headquartered in Denver, runs a concentrated portfolio of fewer than 30 growth stocks. The danger is that excessive sponsorship might translate into large potential selling if something goes wrong at the company or if a bear market begins. The heart is already out of the watermelon. Look how many institutions thought Citigroup should be a core holding in the late s and s.

This is why, since its first edition, How to Make Money in Stocks has always had two detailed chapters on the subject of when to sell your stock. Most investors have no rules or plan for when to sell. That is a serious mistake. The government-sponsored Fannie Mae collapsed to less than a dollar during the same financial fiasco.

This potential heavy supply can adversely affect a stock during bear market periods. Many funds will pile into certain leaders on the way up and pile out on the way down. No company is forever immune to management problems, economic slowdowns, and changes in market direction. Until then, Xerox had been one of the most amazingly successful and widely held institutional stocks, but our data indicated that it had topped and was headed down.

It was also overowned. But when the stock tumbled in price, it showed the true condition of the company at that time. That episode called attention to our institutional services firm and got us our first major insurance company account in New York City.

Here is a list of some of the technology stocks that were removed from our New Stock Market Ideas NSMI institutional service potential new ideas list in , when most analysts were incorrectly calling them buys. Daily marketability is one of the big advantages of owning high-quality stocks in the United States. Real estate is far less liquid, and sales commissions and fees are much higher.

In a poor real estate market, there is no guarantee that you can find a willing buyer when you want to sell. It could take you six months to a year, and you could sell for a much lower price than you expected. In summary: buy only those stocks that have at least a few institutional sponsors with better-than- average recent performance records and that have added institutional owners in recent quarters.

Institutional sponsorship is one more important tool to use as you analyze a stock for purchase. Many investors depend on someone else to help them with their investments. Do these other advisors or helpers have a sound set of rules to determine when the general market is starting to get into trouble?

And more importantly, you need to know what the market is doing right now. Is it doing just what it should be, considering the basic current conditions in the country, or is it acting abnormally strong or weak? This is the most important lesson you can learn if you want to stop losing and start winning. Are you ready to get smarter? They took the time to read the rules and do their homework so that they were prepared and knew exactly what facts to look for. But because of their asset size problems, and because they had no system, it took a number of weeks for them to believe the turn and finally reenter the market.

They relied on their personal judgments and feelings to determine when the market finally hit bottom and turned up for real. So these managers, being human, hesitated to act. Their funds therefore lost some relative performance during the fast turnarounds that frequently happen at market bottoms. This possibly fits well with the sound concept that mutual funds are truly long-term investments.

So owning them for 15 or 20 years has always been extremely rewarding in the past and should continue to be in the future. Some of your stocks can drop substantially and maybe never come back or take years to do so. What Is the General Market? The general market is a term referring to the most commonly used market indexes. Consisting of companies, this index is a broader, more modern representation of market action than the Dow.

The Nasdaq Composite. This has been a somewhat more volatile and relevant index in recent years. This index consists of 30 widely traded big-cap stocks. It used to focus primarily on large, cyclical, industrial issues, but it has broadened a little in recent years to include companies such as Coca- Cola and Home Depot.

This is a market-value- weighted index of all stocks listed on the New York Stock Exchange. His scholars went to the library, read books about fish, and then wrote their expositions. But after turning in their papers, the students were shocked when the professor tore them up and threw them in the wastebasket. Then they rewrote their assignment solely on their observations of the objects themselves. To be highly accurate in any pursuit, you must observe and analyze the objects themselves carefully.

If you want to know about tigers, you need to watch tigers�not the weather, not the vegetation, and not the other animals on the mountain. The pitcher was the object that Brock was trying to beat, so it was the pitchers themselves that he studied in great detail. The government uses wiretaps, spy planes, unmanned drones, and satellite photos to observe and analyze objects that could threaten our security.

In fact, Wall Street analysts completely missed calling the market top in , particularly the tops in every one of the high-technology leaders. The Stages of a Stock Market Cycle The winning investor should understand how a normal business cycle unfolds and over what period of time. The investor should pay particular attention to recent cycles. It usually takes two or three tricky pullbacks up or down to fake out or shake out the few remaining speculators.

Then the market will finally turn and begin a whole new trend. Bear markets usually end while business is still in a downtrend. The market is exceptionally perceptive, taking all events and basic conditions into account. It will react to what is taking place and what it can mean for the nation. The market is not controlled by Wall Street. Similarly, bull markets usually top out and turn down before a recession sets in.

Yet, some investment firms do this very thing. The predictions of many economists also leave a lot to be desired. This was the first hint that this advisor might not be as sound as he should be.

Had he understood historical trends, he would have seen that capital goods demand has never been strong in the early stage of a recovery. This was especially true in the first quarter of , when U. You should check earlier cycles to learn the sequence of industry-group moves at various stages of the market cycle. This knowledge can help you get a fix on where you are now. In early , computer companies supplying Internet capital goods and infrastructure were the last- stage movers, along with telecommunications equipment suppliers.

Dedicated students of the market who want to learn more about cycles and the longer-term history of U. Also, in , Daily Graphs, Inc. These can be very valuable, especially if you keep and review back copies. You then have a history of both the market averages and the events that have influenced their direction. In bull markets, they tend to open weak and close strong. Listening to the many market newsletter writers, technical analysts, or strategists who pore over 30 to 50 different technical or economic indicators and then tell you what they think the market should be doing is generally a very costly waste of time.

Interestingly enough, history shows that the market tends to go up just when the news is all bad and these experts are most skeptical and uncertain. When the general market tops, you must sell to raise at least some cash and to get off margin the use of borrowed money to protect your account.

Several of them may never recover to their former levels. Experience teaches that second-guessing the market can be a very expensive mistake. The markets were so demoralized in the prolonged � bear market that most members on the floor of the New York Stock Exchange were afraid the exchange might not survive as a viable institution.

You can learn to do this. Anyone can do it, if they get serious and apply themselves. Is your money important to you? To do this, you have to learn historically proven selling rules. See Chapters 10 and 11 for more on selling rules. Most institutions do the same thing. Some, such as �, � , and �, are downright devastating. In most cases, you cannot project how bad economic conditions might become or how long those bad conditions could linger. The war in Vietnam, inflation, and a tight money supply helped turn the � correction into a two-year decline of Most stocks fall during a bear market, but not all of them recover.

If you hold on during even a modest bear correction, you can get stuck with damaged merchandise that may never see its former highs. You definitely must learn to sell and raise at least some cash when the overall environment changes and your stocks are not working. The soft-drink giant chugged higher year after year, rising and falling with the market.

But it stopped working in , as did Gillette, another favorite of long-term holders. When the market slipped into its mild bear correction that summer, Coke followed along. In some instances, stocks of this kind may come back. But this much is certain: Coke investors missed huge advances in and in names such as America Online and Qualcomm. The buy-and-hold strategy was also disastrous to anyone who held technology stocks from through Take a look now at Time Warner, Corning, Yahoo!

In the battlefield that is the stock market, there are the quick and there are the dead! Sell quickly before real weakness develops. The use of limit orders buying or selling at a specific price, rather than buying or selling at market prices using market orders is not recommended. Focus on your ability to get into or out of a stock when you need to. Quibbling over an eighth- or quarter-point or their decimal equivalents could make you miss an opportunity to buy or sell a stock.

Lightning-fast action is even more critical if your stock account is on margin. Never try to ride through a bear market on margin. In the final analysis, there are really only two things you can do when a new bear market begins: sell and retreat or go short. This usually means five or six months or more. In the prolonged, problem-ridden � and � periods, however, it meant up to two years.

The bear market that began in March during the last year of the Clinton administration lasted longer and was far more severe than normal. It was the end of a period of many excesses during the late s, a decade when America got careless and let down its guard. Few people make money at it. Short selling is discussed in more detail in Chapter A stop-loss order instructs the specialist in the stock on the exchange floor that once the stock has dropped to your specified price, the order becomes a market order, and the stock will be sold out on the next transaction.

Instead, watch your stocks closely and know ahead of time the exact price at which you will immediately sell to cut a loss. In such cases, stop-loss orders help compensate for distance and indecisiveness. If you use a stop-loss order, remember to cancel it if you change your mind and sell a stock before the order is executed. Otherwise, you could later accidentally sell a stock that you no longer own.

Such errors can be costly. Normal liquidation near the market peak will usually occur on three to five specific days over a period of four or five weeks. After four or five days of definite distribution over any span of four or five weeks, the general market will almost always turn down.

Four days of distribution, if correctly spotted over a two- or three-week period, are sometimes enough to turn a previously advancing market into a decline. It takes only one of the indexes to give you a valid repeated signal of too much distribution.

You should learn in detail exactly what signals to look for and remain unbiased about the market. Let the day-by-day averages tell you what the market has been doing and is doing. When you see these weak rallies and failures, further selling is advisable. Fears of a Y2K meltdown on January 1, , had faded.

Companies were announcing strong profits for the third quarter just ended. Both leading tech stocks and speculative Internet and biotechnology issues racked up huge gains in just five months. But cracks started to appear in early March On March 7, the Nasdaq closed lower on higher volume, the first time it had done so in more than six weeks. Still, it was the first yellow flag and was worth watching carefully.

This was the second warning sign. This was the third major warning signal of distribution and one where you should have been taking some selling action. It soon ran out of steam and rolled over on heavier volume two days later for a fifth distribution day and a final, definite confirmation of the March 10 top. The market itself was telling you to sell, raise cash, and get out of your stocks.

Study our chart examples of this and other market tops. So get with it. Not too much happens by accident in the market.

It requires effort on your part to learn what you need to know in order to spot every market top. Another such top occurred in the first week of July Each numbered day on these charts is a distribution day. Here, a leading stock will run up more rapidly for two or three weeks in a row, after having advanced for many months.

See Chapter 11 on selling. Still others will show a serious loss of upward momentum in their most recent quarterly earnings reports. Shifts in market direction can also be detected by reviewing the last four or five stock purchases in your own portfolio. Investors who use charts and understand market action know that very few leading stocks will be attractive around market tops. The best merchandise has been bought, played, and well picked over.

The sight of sluggish or low- priced, lower-quality laggards strengthening is a signal to the wise market operator the up market may be near its end. Even turkeys can try to fly in a windstorm. When they raid the house, they usually get everyone, and eventually all the leaders will succumb to the selling. This is exactly what happened in the bear market. This fooled most analysts, who were focused on the big earnings that had been reported or were expected.

Why did these stocks finally cave in? They were in a bear market that had begun eight months earlier, in late Thus, top reversals are usually late signals�the last straw before a cave-in.

In most cases, distribution, or selling, has been going on for days or even weeks in individual market leaders. Other Bear Market Warnings If the original market leaders begin to falter, and lower- priced, lower-quality, more- speculative stocks begin to move up, watch out! This is simply a matter of weak leadership trying to command the market. Many top reversals when the market closes at the bottom of its trading range after making a new high that day have occurred between the third and the ninth day of a rally after the averages moved into new high ground off small chart bases meaning that the time span from the start to the end of the pattern was really too short.

At other times, a topping market will recover for a couple of months and get back nearly to its old high or even above it before breaking down in earnest. This occurred in December , January , and January A similar thing happened in early The majority of people in the stock market, including both professional and individual investors, will be fooled first.

It was an example of how treacherous the market really can be at turning points. But a few times I made the mistake of buying back too early. When you make a mistake in the stock market, the only sound thing to do is to correct it. In and , a few of these phony, drawn-out rallies lasted up to 15 weeks. Again, the daily general market averages provide the best answer by far. At some point in every correction�whether that correction is mild or severe� the stock market will always attempt to rally.

A rally attempt begins when a major market average closes higher after a decline that happened either earlier in the day or during the previous session. Sit tight and be patient. This tells you the rally is far more likely to be real.

The most powerful follow- throughs usually occur on the fourth to seventh days of the rally. The market was up 2. Occasionally, but rarely, a follow-through occurs as early as the third day of the rally.

By doing this, we are trying to minimize the possibility that professionals will manipulate a few of the 30 stocks in the Dow Jones average to create false or faulty follow-through days. There will be cases in which confirmed rallies fail. A few large institutional investors, armed with their immense buying power, can run up the averages on a particular day and create the impression of a follow- through.

Unless the smart buyers are getting back on board, however, the rally will implode�sometimes crashing on heavy volume within the next several days. When a bear market bottoms, it frequently pulls back and settles above or near the lows made during the previous few weeks. It just gives you the go-ahead to begin buying high-quality stocks with strong sales and earnings as they break out of sound price bases, and it is a vital second confirmation the attempted rally is succeeding.

It pays to wait and listen to the market. The following graphs are examples of several bottoms in the stock market between and It is at this point that you must always recognize, and fully capitalize upon, the golden opportunities presented. The year was one of the few exceptions, but that strong market in the third year of a new cycle was caused by the beginning of the Vietnam War.

Since the market is governed by supply and demand, you can interpret a chart of the general market averages about the same way you read the chart of an individual stock. These charts should show the high, low, and close of the market averages day by day for at least six months, together with the daily NYSE and Nasdaq volume in millions of shares traded. Incidentally, when I began in the market about 50 years ago, an average day on the New York Stock Exchange was 3. Today, 1. It has led to an unprecedented increase in our standard of living, so that the vast majority of Americans and all areas of our population are better off than they were before.

But our system is the most successful in the world, and it offers remarkable opportunities to grow and advance to those who are willing to work, train, and educate themselves. The charts in Chapter 1 are only a small sample of big past investment opportunities.

You have to evaluate overall conditions and events in the country objectively and let the market averages tell their own story. And you have to understand what that story is. This is the reason most professionals plot the key indexes together�to make it easier to spot nonconfirmations at key turning points.

Options traders buy calls, which are options to buy common stock, or puts, which are options to sell common stock. If the volume of call options in a given period of time is greater than the volume of put options, a logical assumption is that option speculators as a group are expecting higher prices and are bullish on the market. If the volume of put options is greater than that of calls, speculators hold a bearish attitude. When bear markets are near the bottom, the great majority of advisory letters will usually be bearish.

Near market tops, most will be bullish. This ratio can reflect the degree of bearishness shown by speculators in the market. These technicians take the number of stocks advancing each day versus the number that are declining, and then plot that ratio on a graph.

Advance- decline lines are far from precise because they frequently veer sharply lower long before a bull market finally tops. In such instances, the rally usually fizzles. In other words, it takes more than just a few leaders to make a new bull market. At best, the advance- decline line is a secondary indicator of limited value. As a rule, interest rates provide the best confirmation of basic economic conditions, and changes in the discount rate and the fed funds rate are by far the most reliable.

Bear markets have usually, but not always, ended when the rate was finally lowered. Money market indicators mirror general economic activity. At times I have followed selected government and Federal Reserve Board measurements, including 10 indicators of the supply and demand for money and indicators of interest-rate levels. For the investor, the simplest and most relevant monetary indicators to follow and understand are the changes in the discount rate and fed funds rate.

With the advent of program trading and various hedging devices, some funds now hedge portions of their portfolio in an attempt to provide some downside protection during risky markets. Most funds operate with a policy of being widely diversified and fully or nearly fully invested at all times.

So they may try to shift their emphasis to big- cap, semidefensive groups. The Fed Crushes the Economy. The bear market and the costly, protracted recession that began in , for example, came about solely because the Fed increased the discount rate in rapid succession on September 26, November 17, and December 5 of That finished off the U.

Fed rate changes, however, should not be your primary market indicator because the stock market itself is always your best barometer. Our analysis of market cycles turned up three key market turns that the discount rate did not help predict.

Independent Fed actions are typically very constructive, as the Fed tries to counteract overheated excesses or sharp contractions in our economy. However, its actions and results clearly demonstrate how much our overall federal government, not our stock markets reacting to all events, can and does at times significantly influence our economic future, for good or bad.

In fact, the subprime real estate mortgage meltdown and the financial credit crisis that led to the highly unusual market collapse of can be easily traced to moves in by the then-current administration to substantially beef up the Community Reinvestment Act CRA of Failure to comply meant stiff penalties, lawsuits, and limits on getting approvals for mergers and branch expansion.

Our government, in effect, encouraged and coerced major banks to lower their long-proven safe-lending standards. The first of these bundled loans hit the investment market in That action allowed loan originators and big banks to make profits faster and eliminate future risk and responsibility for many of those lower-quality loans. Big Wall Street firms got involved after the rescinding of the Glass- Steagall Act in , and both political parties, Congress, and the public all played key parts in creating the great financial fiasco.

The Stock Market Break. Another notable stock market break occurred in That fall, after the Cuban missile showdown with the Russians, a new bull market sprang to life. All of this happened with no change in the discount rate. There have also been situations in which the discount rate was lowered six months after the market bottom was reached. In such cases, you would be late getting into the game if you waited for the discount rate to drop.

In a few instances, after Fed rate cuts occurred, the markets continued lower or whipsawed for several months. The Hourly Market Index and Volume Changes At key turning points, an active market operator can watch the market indexes and volume changes hour by hour and compare them to volume in the same hour of the day before. A good time to watch hourly volume figures is during the first attempted rally following the initial decline off the market peak. You should be able to see if volume is dull or dries up on the rally.

You can also see if the rally starts to fade late in the day, with volume picking up as it does, a sign that the rally is weak and will probably fail.

A support area is a previous price level below which investors hope that an index will not fall. What you want to know is whether selling picks up dramatically or by just a small amount as the market collapses into new low ground. After the market has undercut previous lows for a few days, but on only slightly higher volume, look for either a volume dry-up day or one or two days of increased volume without the general market index going lower. But be careful. Something similar can happen in the early stage or first leg of a major bear market, when the index can become unusually oversold.

I once hired a well- respected professional who relied on such technical indicators. You guessed it: the market then split wide open. What you learn from years of experience is usually more important than the opinions and theories of experts using their many different favorite indicators. This index, plotted as a week moving average, may show divergence at some intermediate turning points in the market. This switch usually signals an intermediate-term upturn in the market.

This opens another window into institutional investor psychology. Either they all pile in or they all pile out. None of these secondary market indicators is anywhere near as reliable as the key general market indexes.

In pre cycles, some technicians rationalized their lack of concern with market weakness by citing the number of stocks that were still making new highs.

But analysis of new-high lists shows that a large percentage of preferred or defensive stocks signals bear market conditions. Superficial knowledge can hurt you in the stock market. To summarize this complex but vitally important chapter: learn to interpret the daily price and volume changes of the general market indexes and the action of individual market leaders.

Once you know how to do this correctly, you can stop listening to all the costly, uninformed, personal market opinions of amateurs and professionals alike. One of the great values of this system of interpreting the price and volume changes in the market averages is not just the ability to better recognize market top and bottom areas, but also the ability to track each rally attempt when the market is on its way down. In other words, you have rules that will continue to keep you from getting sucked into phony rallies.

This is how we were able to stay out of the market and in money market funds for most of through , preserve the majority of the gains we had made in and , and help those who read and followed our many basic rules.

Most successful stocks have these seven common characteristics at emerging growth stages, so they are worth committing to memory.

They should also be accelerating at some point in recent quarters. If return on equity is too low, pretax profit margin must be strong. Look for new products or services, new management, or significant new changes in industry conditions. Buy market leaders and avoid laggards. Buy the number one company in its field or space. Most leaders will have Relative Price Strength Ratings of 80 to 90 or higher and composite ratings of 90 or more in bull markets.

Buy stocks with increasing sponsorship and at least one or two mutual fund owners with top-notch recent performance records. Also look for companies with management ownership. This can determine whether you win big or lose. You need to stay in gear with the market. No one in her right mind invests that way. We are not investment advisors. We do not write and disseminate any research reports. We do not call or visit companies. We do not make markets in stocks, deal in derivatives, do underwritings, or arrange mergers.

We are historians, studying and discovering how stocks and markets actually work and teaching and training people everywhere who want to make money investing intelligently and realistically.

These are ordinary people from all walks of life, including professionals. We do not give them fish. Experts, Education, and Egos On Wall Street, wise men can be drawn into booby traps just as easily as fools. They created sophisticated derivatives and insurance programs to justify such incredible risks.

No one group was solely to blame, since both Democrats and Republicans were involved. If you really want to do it, you certainly can. Anyone can. The market has a simple way of whittling all excessive pride and overblown egos down to size. After all, the whole idea is to be completely objective and recognize what the marketplace is telling you, rather than trying to prove that what you said or did yesterday or six weeks ago was right.

Humility and common sense provide essential balance. Sometimes, listening to quoted and accepted experts can get you into trouble. Things turned out exactly the opposite: inflation broke and interest rates came crashing down.

Buying on the way down can be a very dangerous pastime. I never pay any attention to the parade of experts voicing their personal opinions on the market in print or on TV. It creates entirely too much confusion and can cost you a great deal of money. It showed that while mutual fund cash positions had indeed risen, they were still significantly below their historical highs and even below their historical averages. In fact, a strong defense can often propel a team to great heights.

The same holds true in the stock market. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong. To do this takes never-ending discipline and courage. He likes it for its many moneymaking ideas and its emphasis on risk-management strategies. I like to follow a 3-to-1 ratio between where to sell and take profits and where to cut losses. How can you tell when you may be wrong? People think that in order to be successful, you have to be either lucky or right most of the time.

Not so. Successful people make many mistakes, and their success is due to hard work, not luck. They just try harder and more often than the average person. Three of them worked. Before that, he had tried thousands of other materials, from cotton thread to chicken feathers.

Babe Ruth worked so hard for his home run record that he also held the lifetime record for strikeouts. The Beatles were turned down by every record company in England before they made it big.

Michael Jordan was once cut from his high school basketball team, and Albert Einstein made an F in math. It also took him many years to develop and prove his theory of relativity. In other words, to get the one or two stocks that make big money, you have to look for and buy ten. Which begs the question, what do you do with the other eight?

Do you sit with them and hope, the way most people do? When Does a Loss Become a Loss? The larger the paper loss, the more real it will become. You get emotional. This is a terrific advantage that you, the nimble and decisive individual investor, have over the institutions.

So use it. When the late Gerald M. Loeb of E. This is sound advice. This is a big key to your future success. She first traded on paper using the IBD rules.

This worked so well that she finally had the confidence to try it with real money. Ten years after her start, with the profits she made using IBD, she was able to pay off her house and her car. Jude Medical. I think I should have done better, but you live and learn.

In such cases, you can cut your loss sooner, when the stock may be down only one or two points. That correction actually began on August It takes a lot of time to learn to make follow-up buys safely when a stock is up, but this method of money management forces you to move your money from slower-performing stocks into your stronger ones. I call this force-feeding. In one case, you probably started off wrong.

The stock is not acting the way you expected it to, and it is down below your purchase price. In the other case, you have begun correctly. See Chapter 2 for more on using charts to select stocks. There are no sure things or safe stocks. Having the raw courage to sell and take your loss cheerfully is the only way you can protect yourself against the possibility of much greater losses.

Decision and action should be instantaneous and simultaneous. To be a big winner, you have to learn to make decisions. In the market collapse of , many new investors lost heavily, and some of them lost it all. If they had just followed the simple sell rule discussed earlier, they would have protected most of their capital. And how often do you buy stocks that double? It is a dangerous fallacy to assume that because a stock goes down, it has to come back up. Others take years to recover.

What will GM do in the future if India or China sells cars in the United States that get 50 miles per gallon and have a much lower price? Always protect your account so that you can live to invest successfully another day.

Semiconductor and other technology stocks are two to three times as volatile and risky as others. Otherwise, you could go belly-up in no time. Sell some stock, and recognize what the market and your margin clerk are trying to tell you. Yes, the stock you sell will often turn right around and go back up. And yes, this can be frustrating.

That is exceedingly dangerous thinking that will eventually get you into big trouble. Will you buy the same insurance this year? Of course you will! Did you take out fire insurance on your home or your business?

You buy insurance just in case, to protect yourself against the remote possibility of a serious loss. Move immediately to cut out possible bad decisions. Develop the strict discipline to act and to always follow your selling rules. Some people have gone so far as to let losing stocks damage their health. The moral of the story is: never argue with the market.

Yet most investors get emotionally confused and take their profits quickly and their losses slowly. You must always protect your hard- earned pool of capital. Letting your losses run is the most serious mistake that almost all investors make.

You must accept the fact that mistakes in stock selection and timing are going to be made frequently, even by the most experienced of professional investors. Would you drive your car down the street without brakes? If you were a fighter pilot, would you go into battle without a parachute?

Should You Average Down in Price? Shirking this duty in difficult periods shows a lack of courage under pressure. Everyone loves to buy stocks; no one loves to sell them.

As long as you hold a stock, you can still hope it might come back up enough to at least get you out even. Investors are always hoping rather than being realistic. Knowing and acting is better than hoping or guessing.

The fact that you want a stock to go up so you can at least get out even has nothing to do with the action and brutal reality of the market. The market obeys only the law of supply and demand. The man had a turkey trap, a crude device consisting of a big box with the door hinged at the top. A thin trail of corn scattered along a path lured turkeys to the box. Once they were inside, the turkeys found an even more plentiful supply of corn.

When enough turkeys had wandered into the box, the old man would jerk away the prop and let the door fall shut. The time to pull away the prop was when as many turkeys as one could reasonably expect were inside.

One day he had a dozen turkeys in his box. Then one sauntered out, leaving The psychology of normal investors is not much different. When you think about selling a stock, you probably look at your records to see what price you paid for it.

If you have a profit, you may sell, but if you have a loss, you tend to wait. However, what you should be doing is selling your worst-performing stock first. Most investors would sell it because they have a profit. But what does the price you paid two years ago have to do with what the stock is worth now?

And what does it have to do with whether you should hold or sell the stock? Analyzing Your Activities To help you avoid the price- paid bias, particularly if you are a longer-term investor, I suggest you use a different method of analyzing your results. Now list your investments in order of their relative price performance since your previous evaluation period.

At the end of the next month or quarter, do the same thing. After a few reviews, you will easily recognize the stocks that are not doing well. Of course, you have to keep records of your costs for tax reasons, but you should use this more realistic method in the longer-term management of your portfolio.

Doing this more often than once a quarter can only help you. Eliminating the price-paid bias can be profitable and rewarding. Any time you make a commitment to a security, you should also determine the potential profit and possible loss.

This is only logical. The Red Dress Story Investing in the stock market is really no different from running your own business.

Investing is a business and should be operated as such. What do you do about it? Certainly not! Do you do this with your investments? Why not? Everyone makes buying errors. The buyers for department stores are pros, but even they make mistakes. If you do slip up, recognize it, sell, and go on to the next thing.

Are You a Speculator or an Investor? There are two often- misunderstood words that are used to describe the kinds of people who participate in the stock market: speculator and investor.

Conversely, when you think of the word investor, you might think of someone who approaches the stock market in a sensible and rational manner. A speculator, therefore, is a person who observes and acts before [the future] occurs. They make a bet, stay with it, and if it goes wrong, they lose it all.

Keep in mind that Baruch and Livermore at many times made millions of dollars in the stock market. One of these is the very notion of what it means to invest. Learn to objectively analyze all the relevant facts about a stock and about how the market is behaving. Wide diversification is a substitute for lack of knowledge. So diversification is a poor substitute for a sound defensive plan with rules to protect your account. To be a successful investor, you must face facts and stop rationalizing and hoping.

Wall Street is human nature on daily display. Buying and selling stocks properly and making a net profit are always a complicated affair. It takes some work to become really good at stock selection, and still more to know how and when to sell.

Selling a stock correctly is a tougher job and the one that is least understood by everyone. To do it right, you need a plan to cut losses and the discipline to do this quickly without wavering.

Learn from the and experience. Those who did not have or follow any selling rules got hurt. So study it very carefully. To retain worthwhile profits, you must sell and take them. The key is knowing when to do just that.

I never buy at the bottom, and I always sell too soon. The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again. I developed many of the buy and sell rules described in this book in the early s, when I was a young stockbroker with Hayden, Stone.

When I started out, though, I concentrated on developing a set of buy rules that would locate the very best stocks. My buy rules were first developed in January , when I analyzed the three best-performing mutual funds of the prior two years.

I sent away for copies of every Dreyfus quarterly report and prospectus from to Then I calculated the average cost of each new stock the fund had purchased. After looking at more than a hundred new Dreyfus purchases, I made a stunning discovery: every stock had been bought at the highest price it had sold for in the past year.

The stocks had also formed certain chart price patterns before leaping into new high ground. This gave me two vitally important clues: buying on new highs was important, and certain chart patterns spelled big profit potential. He bought all his stocks based on market action, and only when the price broke to new highs off sound chart patterns. He was also beating the pants off every competitor who ignored the real-world facts of market behavior supply and demand and depended only on fundamental, analytical personal opinions.

They, too, produced superior results. One was managed by Ned Johnson, Jr. Almost all the stocks that the Dreyfus and Fidelity funds bought also had strong increases in their quarterly earnings reports.

So the first buy rules I made in were as follows: 1. Buy when the stock is making or about to make a new high in price after emerging from a sound correction and price consolidation period. The first stock I bought under my new set of buy rules was Universal Match in February I also got nervous and sold it too quickly. From this book, I learned that your objective in the market was not to be right, but to make big money when you were right.

Essentially, I followed up what was working with additional but always smaller purchases, allowing me to concentrate my buying when I seemed to be right. If I was wrong and the stock dropped a certain amount below my cost, I sold the stock to cut short every loss. This is very different from how the majority of people invest. Most of them average down, meaning they buy additional shares as a stock declines in price in order to lower their cost per share. The author of How to Make Money in Stocks has written down the hard-earned knowledge he gained from his own experiences as an investor.

The price charts of winning stocks from the past century have been listed out in the beginning of this book. These charts are supplemented with notes throughout in order to make them more comprehensible to readers. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. How to Make Money in Stocks pdf.