Just Say 'NO' to Your Stock Broker

We have all heard that slogan that started back when Nancy Reagan was in Washington. It was all about drugs. Now I want to remind you this can be your slogan when you get one of those telephone solicitations from a strange broker or even your own stockbroker who is acting a little strange. By that I mean he wants you to buy something.

Currently we are in an advancing stock market and we all hope it is going to go higher and higher. None of us, definitely including me, knows for sure where it will end up this year. Barron’s, the weekly financial publication, has declared on their front page that “THE BULL IS BACK”. They are also guessing. But it makes you feel good.

It makes me wonder when I study the fundamentals of the economy how they have come to this conclusion. Unemployment just had an uptick, most companies have yet to declare a dividend, the American dollar is losing value against many foreign currencies, manufacturing capacity utilization is still low and shows no signs of increasing, balance of trade is way out of whack and on and on.

Yes, there is some good news. Many companies are “beating the estimates”. That means they are showing greater sales and profits than the brokers on Wall Street thought they would have. This is good press and usually has the effect of pushing stock prices higher. Many of these better profits are at the cost saving of laying off hundreds if not thousands of workers. And worst of all we don’t know if these profits are true. Many are profoma meaning management is guessing.

If you are one of those people who hopes the market will go back up so you can get out “even” you are going to find that hope is the most expensive word in the dictionary. But what can you do about it? You are now being given the opportunity to save what is left of your retirement account. On any stock or mutual funds you have it would be a guess to say this is the place to sell. The smart thing is to listen to the market and do what it tells you.

When any equity is advancing you want to set up a trailing stop-loss order and move it up each week as your stock advances. Suppose you bought a stock at $100/share and watched it drop to $15. Pretty disheartening! It has now risen back up to $30 and your broker has assured you it will continue to rise. Maybe. But what if it doesn’t?

Tell your broker to put in a stop-loss order about 10% below its current price. He will say you don’t need to. This is where you just say ‘NO’. Brokers don’t watch any but their biggest and most active accounts. He must do as you ask according to regulations.

Put in a stop-loss order today. Protect your retirement account with a simple ‘NO’.

INVESTMENT LETTER 3 months free at http://www.mutualfundmagic.com Copyright Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner. Copyright 2002

Short Selling for Investors

Shorts. Let’s see. If there are shorts there must be longs. Which is best? Longs or shorts?

If you are trading in the stock the stock market experts like longs better than shorts. If you are “long” that means you own stock and that is “good”. If you are short you have sold stock and that is “bad”. At least that is what Wall Street preaches. And why do they want to make you believe this and is it true? Let’s examine the facts.

Today I hear stories on the financial news and there are articles in the paper that people who are “short” driving the market down. They have sold more stock than they own and this is causing the market to collapse. I even hear that Congress is trying to pass a law that will not allow people to sell short. They are blaming hedge funds who are allowed to sell short. The basic flaw in this concept is when a short sale is initiated it must be done on an up tick. That means the stock must be going up in order to make a “short” sale. No short sale may be made to pressure the market down. That is a fatal pin in the balloon of that lie.

There are reasons people will make the sale of a stock. If you own it you may just need the money now or if it is going down you may not want to lose money should the downward trend continue. There is on old saying in the market – “the trend is your friend”. If you see a stock that is declining you may want to sell it first and when it declines further you will buy it back at a lower price later on. This actually puts a floor under that stock because some time in the futures you MUST buy it. Whoever is doing the shorting does not matter whether it is an individual or a hedge fund. They are actually doing two things that are both good for the market. They are providing a future buy to support the price at a lower level that keeps it from going lower and they are providing liquidity to the market.

When you buy long you want it to go up so you can sell it later at a profit. When you sell short you sell it now with the idea of buying it back after it declines. Both are driven by the profit motive. How can one be good and the other bad? It is like saying there is good electricity and bad electricity.

If company CEOs don’t want people to short their stock I suggest they look in the mirror to find out who is at fault. The CEO is not running his company properly and that is why the stock is declining. No outside person or group can drive a stock lower that is making a good profit. There is a good reason for the price decline.

Buying short does not put the market down. The ultimate outcome of a short sale (covering the short) is very positive for the market.

INVESTMENT LETTER 3 month free trial.
http://www.mutualfundmagic.com Copyright Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner.

Maniac Investment

Let’s first understand what maniac means. According to Webster a maniac is “mad; raging with madness; raging with disordered intellect”. You don’t know anyone like that, do you?

There is a book that is still in print today that was originally published in 1841 with the title Extraordinary and Popular Delusions of Crowds by Charles Mackay. He explains in rather horrific detail how people were caught up in the madness of buying property in the South Seas in 1720, the numismatic coin craze of 1980 and the tulip bulb trading in 1637. You wonder how people could have been so gullible to have bought a single tulip bulb or land they would never see for huge amounts of money. Could anything like this ever happen again?

I was floor trader on the commodity exchange in 1973 when the Hunt brothers drove silver from $2.00 per ounce to $54. That mania lasted a few months and quickly tanked to $6.00. I took part in that mania. I was one of the maniacs.

When it was taking place it seemed like the thing to do and very few questioned the sanity of those participating. In fact, if you weren’t part of the crowd there was something wrong with you. When there is a stampede it is best to run with the herd or be trampled to death. However, there were a few who were not mesmerized.

Today we are participating in one of those manias only now it is called a bubble and still is not being taken too seriously. Yes, it is the stock market mania. Many are still trapped in the madness of the crowd of the 1990’s who believe the “market always comes back”. They are clutching their tulip bulbs, sorry, stock certificates, and refuse to let go of them because they know their value will grow back to what it was 3 years ago. Stock owners have become mad with what – greed? fear? denial?

When something, almost anything, drops 50% in price it will take a 100% increase in value to get back to “even”. With today’s economic and world conditions that could be a long time and maybe not in our lifetime.

Years ago I heard a story about how they used to catch monkeys. A small hole just big enough for the monkey to slip his empty hand inside would be drilled in a coconut and candy and fruit would be put in it. The coconut was tied to a stake in the ground. When the monkey grabbed a fistful of goodies he would not let go even when the hunter came for him. Greed holds him in an invisible grip.

Many investors today are like those monkeys. They refuse to sell what is remaining of the stocks and mutual funds they own even though they can clearly see the major trend continues down. They became mad with greed and now fear of loss entraps them.

Until this madness is recognized investors will continue to see their portfolios become smaller and smaller. They must learn to let go.

Written 3/10/03 but still applies today.

INVESTMENT LETTER 3 month free trial. http://www.mutualfundmagic.com

Copyright Albert W. Thomas All right reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” Former 17-year exchange member, floor trader and brokerage company owner.

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many years of experience of active day trading or being the moderator of one of the largest day trading chat rooms on the Internet.

One of the biggest problems I see with new traders (and even some old ones) has nothing to do with the software or the broker they are using. Nor is the problem a result of buying too high or selling to low; or not having enough money. The problem isn't any of those things.

It has to do with not having a trading plan. A good trading plan will go a long way towards solving the problems mentioned above.

Ted Williams was once asked how he hit the baseball so much better then everyone else. He said he had no idea and that he just went up to the plate and swung at the ball. There has only been one Ted Williams and as great as he was at hitting a baseball, I don't think he would have made a great day trader with that approach. Most great hitters have an idea what they are going to do every time they step up to the plate. Traders need to know exactly what they expect every time they enter a trade.

Everyone should start out with a basic trading plan and use it. As the old saying goes, "Plan your work and work your plan". However, you also have to be ready to be flexible. That has to be part of your planning. As Clint Eastwood said as his character in "Heartbreak Ridge", "You got to adjust, you got to learn to improvise. And if all else fails, you to learn to survive!" Traders that are not able to make adjustments, improvise and survive will experience their own Heartbreak Ridge.

Your trading plan can't be one where you simply figure you are just going to follow someone else. That may be one way to get a start and a bit of experience, and it can be a part of a much bigger overall plan. But it cannot start and end there. You have to learn to trade on your own so you don't accidentally follow someone off a cliff. You have to know who to follow and who not to follow.

When I was trading I made a lot of good trades knowing who to follow and who not to follow. Yet, in the long run, I do not believe you can make a living doing that. The biggest problem in following other traders is being too far behind the trade because you are "following" and not leading. I think each and every trader has to become the very best trader he can possibly be, on his own. He needs to get there as fast as he can. Following more experienced traders can be a means to this end and can help get you started, but it cannot be the end. This takes planning.

A basic trading plan will take in your long-term goals and objectives as a trader. You'll have to decide if you want to try to make a career out of trading, or just be a part time trader. Once you have decided this you can make other decisions such as how much money you would like to make at either full time or part time trading. Your money goals have to be realistic. They can't just be, "I want to make as much money as I can". These basic decisions will determine the time and money you will have to commit.

Your trading plan should be on going, constantly evolving and eventually contain things like how many days, weeks, and hours you will need to trade to meet your goals. If it is as detailed as I think it should be, you would know how many trades per day and how much profit per trade you will have to average. Of course, these things will have to be developed over time and added to your plan as you go and as you gain more knowledge.

There are many excellent books on learning to day trade. My favorites are found at http://www.TraderAide.com/books

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and included. We do request that we be informed of where it is posted and reciprocal links will be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept nation back in late 1990's both as a trader and later as the moderator of one of the Internet's largest real time trading rooms.

Floyd is also the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, FrameHouseGallery.com and EducationResourcesNetwork.com

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How they did this or that and made a fortune and are still doing it. You say to yourself, “I’m going to follow his method and get rich”.

So you subscribe to his newsletter (they all have one, $250) and buy his course on CD Rom ($495)and next time he is anywhere near you attend his seminar with a $500 discount for only $2495. You do understand you must do exactly as he does and you try your best to follow the directions, but for some reason you still are not making money. At least you are not losing as much as you did before (I hope).

Go look in the mirror. You are not Richard Russell, Richard Wyckoff, Bill O’Neil or any one of the great gurus of the market place. Each one of them has devoted every minute of his life to understanding the market. Each one is very successful and each one has a completely different way of approaching trading. Can you copy any one of them? It is very doubtful.

These great teachers can help you, but you have to develop your own method and style of investment. Whether it is long term or short term it must be something with which you resonate. When I was a floor trader there were a thousand guys trading and I know there were a thousand different guide lines. No one had the same buy or sell signal. If they all followed a pat program they would all be buying and selling at the same time so it could not work.

I have stood in the pit and watched the same person offer to buy and when there was no seller he would then offer to sell usually at the same price. Yes, he was scalping for one or 2 ticks, but he knew what he was doing even if it looked strange. A friend of mine could arbitrage by standing in the middle of the gold pit and hit buys and sells that were off by one or two ticks because they could not hear each other due to the noise of other traders who were shouting their offers.

You can look at the basic trading style of one of the “greats”, but you must adapt it to your method. I have not seen anyone able to successfully copy a trading program exactly. You will improvise and find a slightly new approach that becomes “yours”. It then becomes part of your cellular being. It works for you and probably won’t work for anyone else.

If the programs the hype masters are selling work so well why aren’t there more rich traders? And if the programs are so darn good why are they telling you?

To be a successful trader you can’t copy cat an existing program, but you can take a basic trading vehicle and modify it your own plan. Turn that cat into your own tiger.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Building The Foundation For Wealth

You wouldn’t build your home on anything less than a solid foundation. Similarly, you can’t build wealth and financial independence without first having sound foundational principles to build upon.

I have found that many people are working on wealth building strategies such as maximizing their 401K returns, aggressive stock trading, and real estate investing without such a foundation.

Most of my clients are coming from a “one step forward, two steps back” cycle of wealth building that gets them nowhere in the long run.

There are steps you can take to make sure that you are maximizing and protecting your gains at the same time. Without these steps, you are destined to experience the gain-loss cycle which, in the end, is like spinning your wheels in the mud.

Discover how your employment circumstances affect your wealth building strategy and have more of the things you want by identifying your biggest expense and managing it without having to make more money.

Most people take gains in their cash flow to mean they can spend more on things they don’t need. It is human to want to surround yourself with the things you want to match how you feel about your new income from investments or a raise at work.

But what happens here is that you lose future earning power and you rip out pieces of your wealth building foundation because you are not putting new income to work by investing in your debt.

People talk a lot about returns on investments. Think of the return on a 13% credit debt that you pay off in 5 months aggressive debt investment. It’s NOT just 13% you are saving by investing in your debt!

Once that debt is paid off you can turn the payments you were making toward a larger debt, sometimes doubling the rate at which you are able to pay off that bigger debt. Combined, the return on your investment here is massive compared to regular stock investing!

Wealth building, in the beginning, is actually started with debt reduction and strict management. A change in attitude about your debt, from “liability” to investment, is the first step in true wealth building.

Today you should sit down and find the monthly expenses that truly don’t mean as much to you as building wealth does. See how you can eliminate some of your spending to invest in your debt in order to maximize your cash flow faster, giving yourself a raise!

Take most of what you now have available per month and turn it toward the next debt – raising the regular monthly payment by as much as you can while rewarding yourself with a little thing to note your accomplishment.

Before you take on another investment, think about the wealth you can build with the money that currently goes to debt. Once you have mastered your debt, all that money can go toward investments, savings, and living expenses that far outstretch what you are able to experience now.

The only aggressive investment strategy that has absolutely zero risk is debt investment. You cannot lose and the gains are always tremendous compared to any other form of investing.

Live your retirement years free of financial stress, relaxed and enjoying life due to automatic income streams you create through the powerful investments you can afford AFTER investing in your debt.

C.C. Collins is a respected financial strategist and investing expert. His NetWorthPublishing family of sites offers information and help with stocks, mutual funds, retirement planning and wealth building.

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with quick, short term movements, and are not in the business of holding positions overnight let alone a week or two. So the use of options has not usually been a component of their trading strategies.

Now however, some new opportunities for profit are available since many day trading firms are allowing their traders to trade options. Unfortunately, many option strategies do not apply to the quick in and out nature of day trading. Neither day traders nor swing traders are typically in a single stock long enough for the strategy of selling options for premium collection to be viable.

Since these traders often look for break-outs, and sometimes go bottom fishing to find opportunities for profit, a premium paying option might work well for them. Why? Because the trader would be buying protection from catastrophic losses. Bottom fishing and breakouts are associated with volatility, which means uncertainty and risk. However, there is a strategy that will provide the necessary protection for these traders to carry positions through overnight risk, while remaining fully protected. This would still allow also them to take advantage of the large potential upswing that was the original goal of identifying the bottom and the break-out. This strategy is called the protective put.

THE PROTECTIVE PUT

The Protective Put Strategy involves the purchase of put options in combination with the purchase of stock and works well in situations where a stock is prone to rapid, volatile movements.

A put option gives an owner the right, but not the obligation, to sell a certain stock, at a certain price, by a specified date. For this right, the owner pays a premium. The buyer, who receives the premium, is obligated to take delivery of the stock should the owner wish to sell at the strike price by the specified date. A strategically used put option offers protection against substantial loss.

The protective put strategy is a strategy that is ideal for a trader who wants full hedging coverage. This strategy is very effective in stocks that normally trade under high volatility, or in stocks that normally do not trade under such high volatility but may be involved in an event driven, highly volatile situation.

When an investor purchases a stock, they can buy the put (protective put) to provide a proper hedge. The construction of this position is actually quite simple. You buy the stock and you buy the put in a one to one ratio meaning one put for every one hundred shares. Remember, one option contract is worth 100 shares. So, if you buy 400 shares of IBM then you need to purchase exactly four puts.

From a premium standpoint, you must keep in mind that by purchasing an option, you are paying out money as opposed to collecting money. This means that your position must “outperform” the amount of money that you paid for the put. If you were to pay $1.00 for a put and you owned stock against it, the stock would have to increase in price $1.00 just to break even. The protective put strategy has time premium working against it, thus the stock needs to move to a greater degree, and more quickly, to offset the cost of the put.

When we buy a stock, three potential outcomes exist. The stock can go up, go down or it can remain stagnant. If we were to analyze the three scenarios, we would find that only one scenario, the up scenario, can produce a positive return and that’s only when the stock increases more than the amount you paid for the puts. The other scenarios produce losses. If the stock is stagnant, you lose the amount you paid for the put. If the stock goes down, you lose again- but the loss is limited. It is the limiting of loss in highly volatile situations that makes the protective put an attractive and useful strategy.

This is how it works! Imagine you buy stock for $31.00 and buy the 30 strike put for $1.00. If the stock goes down, the position will produce a loss. For example, if the stock is down to $30.00 (down $1.00) at expiration of the option, you have a $1.00 capital loss. With the stock at $30.00, the 30 strike puts will be worthless, thus you incur a $1.00 loss because that is what you paid for the put. Your total loss will be $2.00. Using the protective put strategy set a cap on your losses. The put strategy's attractiveness is that it will allow you to set loss limits!

Let’s see how that works. We’ll set the stock price down to $28.00. Since you purchased the stock at $31.00, there will be a capital loss of $3.00. The puts, however, are now in the money with the stock below $30.00. With the stock at $28.00, the 30 strike puts are worth $2.00. You paid $1.00 for them so you have a $1.00 profit in the puts. Combine the put profit ($1.00) with the capital loss ($3.00) and you have an overall loss of $2.00. The $2.00 loss is the maximum you can lose no matter how low the stock goes because the buyer of your put must take the stock at the strike price. This is the protection the put provides.

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