Learn Investing Secrets

Rather, I explained he should be asking:

* How much longer will this last?

* When it finishes how will I know & what will I do?

* How do I find out about Technical Analysis and Money & Risk Management?

* What's a Trading Plan and how do I put one together and follow it?

* How and when do I add to the stocks I already own?

* How should I structure my portfolio regarding individual stock risk, sector risk and total portfolio risk?

* What's my exit strategy for each stock I own?

* What's my exit strategy for my whole portfolio?

* How do I keep accurate records and monitor my performance?

* What am I going to do to learn more about myself and my own psychological weaknesses (many of which I may not even realise I have) that can make all the difference as to whether I win or lose long term?

'Phil' was genuinely surprised that I had taken the wind out of his sails ' luckily it was after our sailing race together, but hopefully before he loses his own financial race.

In January at http://www.prweb.com/releases/2005/1/prweb193459.htm I issued a worldwide press release to caution unprepared novice investors and traders of the potential pitfalls ahead in the market. A series of

I had the pleasure of virus invited on a friend’s yacht to sail in a race on Sydney Harbour yesterday. On board, as one of our motley crew, I met a top ranking corporate executive from one of Australia’s largest banks, who we’ll call ‘Phil’ here for the purpose of this article. later than the race ended and proper to subsistence told of my trading experience, he told me he has a large stock portfolio, many of which are speculative resources stocks. He said that he’s excited by all the money he’s making and wondering how long this has been going on?

As would be expected, ‘Phil’ also asked me for some “hot tips” for more stocks to buy. He was surprised with my reply when I told him Daryl Guppy’s standard response of “Tips are for waiters” and that I thought he was appeal the wrong questions. (Daryl Guppy is a well known Stock Trader and International bestselling engineer - see www.guppytraders.com)

Rather, I explained he should be asking:

* How much longer will this last?

* When it finishes how will I know & what will I do?

* How do I find out again Technical output measurement and Money & Risk Management?

* What’s a Trading Plan and how do I put one together and follow it?

* How and when do I add to the stocks I own?

* How should I structure my portfolio regarding individual stock risk, sector risk and total portfolio risk?

* What’s my exit strategy for each stock I own?

* What’s my exit strategy for my whole portfolio?

* How do I keep authentic records and monitor my performance?

* What am I going to do to learn more in all directions myself and my own psychological weaknesses (many of which I may not even realise I have) that can make all the difference as to whether I win or lose long term?

‘Phil’ was genuinely surprised that I had taken the wind out of his sails – luckily it was subsequently our sailing race together, but hopefully before all he loses his own financial race.

In January at http://www.prweb.com/releases/2005/1/prweb193459.htm I issued a worldwide press release to scepticism unprepared novice investors and traders of the potential pitfalls greater in the market. My wife Angela and I lost our waterfront home on Sydney Harbour in the 'Tech wreck' of 2000, so we speak from hard personal experience.

As complete novices in the market in 1999, we doubled on paper a large stock portfolio in only six months. Then in less than a year we suffered consuming losses in the tech stock crash of 2000 and beyond:

* We were set back more than 15 years financially and emotionally

* We were forced to sell our waterfront home – the very same house we had set as a goal soon in obedience to incoming in Australia as new and penniless immigrants in 1979. We began renting what I named a ‘dog box’ - as the housing market then rocketed.

* Angela was working as a retail assistant

I have a First condition Honors Degree in social Engineering that didn’t help. In fact I have since come to understand that it in actuality helped to work in contact with me. With our experience of riding some of the largest waves (up and down) in the market and having lost hundreds of thousands of dollars in the process, we know more than most stock traders in the world of the pitfalls that overhang unsuspecting novice traders and investors.

We have since greatly ascertained party exposed to the successful methods taught by expert traders Alan Hull, Daryl Guppy, Jim Berg, Dr Van Tharp and others to trade profitably and with exceptional risk control.

The forum for serious investors www.stockmeetingplace.com is the only chatroom where you will find Daryl Guppy. We recently received the following response from a fellow Australian trader Nathan Unger on that site (see below):

“...thank you for sharing. Your comments on this subject are very insightful, and rightfully so considering your near trading death experience, per se. Failure is incessantly such a difficult moniker to be branded with, for it involves us having to plead guilty that we were wrong. Of course, indebted to our mistakes means that we must swallow our pride – an undoubtedly difficult feat for many traders. Grappling with our own motives together with the psychological matrix that is the stock market is, to say the least, a embarrassing struggle.

In an most paradoxical fashion the stock market can create whelps out of us through both our losses as well as our victories. We are unnerved when we lose and must somehow muster the courage to tentatively re-enter the markets. Yet, potentially even more dangerous are the unbridled successes that often distort a trader’s perception in respect to their expertise to regulate further success – successes that work to take down the future incoming of failure.

Who would have thought that winning could with truth spring up a setup for losing – a conundrum of the worst kind? I know of no other occupation that has the potential to masquerade as both friend and foe and then make you think that you can tell the difference.

Your experience is, I believe, a treasure worth perhaps more than the sum of your losses. It reminds me of how the most seaworthy vessels have typically been known to be the ones that have weathered the most devastating storms. Yours is a stellar effort, my friend. I will most in truth be purchasing your book.

Thanks also to Daryl and Alan for their rescue and encouragement in helping to mould John’s encounter into the best trading tool of all – practical experience...”

During 2001, not long later than losing our home, we made contact with Daryl and I take this opportunity here to aver and thank him once and so for his wisdom and support since that time and also to Alan Hull and Dr Van Tharp since then. Daryl subsequently invited me to write a short signature for his regular weekly newsletter (Tutorials in used Technical Analysis) which became the first of many articles as my wife Angela and I began our search for education.

He made a strong point that by concentrating on the research needed to write the articles we would pick up good habits and through sharing with others, we ourselves would be more inclined to stick with the discipline involved in the subject since covered.

We have recently collated the articles I have written for his newsletter and they are now adaptable as ‘The Atkinson - Guppy Articles - Stock Market Educational Options for Investing Online & Online Trading - Opportunity for a Home Based Business’. Most of these articles deal with concepts and trading skills which are still relevant to readers today and include the following:

* CONDITIONAL STOP LOSS ORDERS: A real life third string midst using two brokers for monitoring stop loss orders - the true cost of slippage

* DIRECTORS DEALINGS: A snapshot study of the Australian share market to determine, if by monitoring the purchases and sales of congregation directors with their own shares, whether it is possible to obtain an insight into the future direction of the share price and hitch a ride in the right direction - or jump ship with them.

* EXPECTANCY - the net profit or loss that you can expect over a large number of single unit trades. A series of articles with thanks to the work of Dr Van Tharp, drama critic of 'Trade Your Way to Financial Freedom'

* TAKE-OVERS: A crusty overview of some of the strategies traders focus to take-overs.

* SELLING and KANGAROO TAILS: A series of articles on the recent phenomenon in the Australian share market made by computerised spontaneous conditional stop loss brokers savagely pendulous sell orders into the market, with prices often rebounding several percent within minutes

Through my writing articles and through our site, my wife Angela and I now aim to provide a ‘Road Map of Discovery to the Stock Market' to help new and existing online investors and traders find the trading education information they need to initially survive the pitfalls ahead, then to thrive in the market.

We wish you every success in 2005 and also and trust that if you haven’t done so already, you will be seeking out the answers to the questions I offered to my sailing team member ‘Phil’.

This poem was printed in Alan Hull’s weekly newsletter ‘ActVest’ for faithful Investors in March 2005 (available from www.alanhull.com) and is reprinted here with Alan’s permission.

Someone who reads the blog sent me this email:

Dear Geoff,

in your article "Should you Buy Microsoft?" on GuruFocus, you said, that it makes sense for some investors to use LEAPS instead of the stock.

After thinking long about that, I came to the conclusion, that LEAPS can be viewed as a form of leveraged investment with an insurance against a falling stock price included...So LEAPS would make sense, if you want to leverage your portfolio with relatively low risk.

I'm not endorsing LEAPS.

I think they make sense only in situations where there is a level of catastrophic risk in the underlying stock that is not priced into the option. In general, this means low volatility stocks that nonetheless can fail catastrophically if infrequently.

Like banks.

I would use LEAPS to buy a bank because there is always the risk that a bank will go to zero. In that sense, LEAPS leverage your investment and provide protection - basically an involuntary surrender - where you cut down a huge loss while still betting on a favorable outcome.

The problem with LEAPS is that they aren't long enough dated. 5-year LEAPS would be good. 10-Year LEAPS would be virtually indistinguishable from a stock in terms of a correct analysis resulting in profit. But 2 years is not long enough for a value investor. If Warren Buffett had bought Washington Post 2-year LEAPS instead of Washington Post stock in the 1970s he would have lost his entire investment. By buying the underlying stock, he had a return of 30% a year compounded over the first 10 years.

I’ve had stocks that didn’t work out for 2 years. But, boy, did they work out over 5 years. I would've lost money on the LEAPS. 

Any bet that depends on the market recognizing something within 3 years is a bet where a value investor can be completely right in terms of analysis and yet lose everything simply because the clock runs out.

Value investing is largely based on being able to hold a position until the market changes its mind. I'd say it's very unreliable to assume mean reversion in the market mood on a stock within 3 years.

The exception to this is when you're diversifying both across a group of separate bets and across a period of time. For example, if you buy one stock a month every month and turn over the portfolio every year (by swapping out one stock each month), you may average an acceptable result because you're actually making a dozen different bets on a dozen different stocks that depend on prices at a dozen different future moments in time.

That's not what you're talking about. You're talking about making one bet on one stock that will succeed or fail based on whether or not the stock reaches a certain price fast enough.

Personally, I'm not interested in LEAPS.

And I really don't think it makes sense to buy LEAPS on a stock like Microsoft. It makes much more sense to simply put a huge part of your portfolio into the stock if you believe in it so much.

This is something people overlook. The best way for most investors to leverage a good idea is simply to bet big on it. If you look at Microsoft and then you look at the S&P 500 - it's very clear that right now you're not giving up much by putting a lot of your portfolio into Microsoft because the opportunity cost is very, very low.

The risk/reward on the S&P 500 specifically - and stocks generally - is lousy right now.

I don't really get why someone would want to put 5% of their portfolio into Microsoft LEAPS instead of putting 25% of their portfolio into Microsoft shares.

I'm not exactly drowning in good ideas over here.

But different people see these things differently.

Personally, I'd opt for 25% in Microsoft shares rather than 5% in LEAPS.

I don't own any of either. And have no plans to buy Microsoft in any form.

As far as LEAPS themselves, it’s probably best to look at LEAPS as offering you the ability to do two things:

• Surrender
• Buy something else

Putting less money down only offers two real benefits.

You get to have your cake and eat it too. Or, rather, you get a return on your capital without putting all of that capital out there. And you get the chance to lose only a portion of the capital that would be necessary to buy the underlying stock.

But that’s really all leverage offers. The idea that leverage is attractive when you don’t have more ideas than money is kind of silly. Leverage only works in situations where you wish you had more cash to buy stocks than you have now.  

Looking at the opportunity cost of using capital, I’d say LEAPS don’t make much sense for most investors given today’s stock prices. They’re high. Future returns will be low. By holding cash you may have the chance to invest more in the future when stock prices are lower and returns on your investment will be higher.

So there’s strong logic behind the idea of holding cash right now (simply because there aren't better places to put it). And there might be strong logic to holding Microsoft shares right now.

But where’s the logic behind buying Microsoft without using a full serving of your own cash?

I don’t see it. There’s a big gap between the opportunity Microsoft offers and the opportunity most stocks offer right now. Since the opportunity offered by most stocks is so low, why not just use cash (and forfeit those bad options) to buy Microsoft stock outright?

If you’re buying LEAPS instead of buying the stock itself, you need to ask yourself what exactly you intend to do with the capital you’ve saved. Do you really have good uses for it? Uses that are worth the risk you are taking by greatly increasing the chance of permanently losing all the capital you put into the LEAPS?

I don’t think it makes sense to use leverage of any kind when the price of the assets you like to buy is high. It makes the most sense to borrow when the general price level of the assets you tend to own – presumably stocks – is especially low.

That’s when you’re likely to get the most bang for the bucks you invest. It’s also when the opportunity costs are highest because capital is scarce relative to opportunities.

I don’t see that right now. Capital is plentiful. Ideas are scarce.

So, if you find a good idea – like Microsoft – why not just load up on it with a big chunk of your own capital instead of making a leveraged bet?

I think most investors either have plenty of cash or plenty of fairly and – let’s be honest – overvalued shares lying around. Sell those to buy Microsoft.

Don’t buy LEAPS unless you’re sure you’ve got more good ideas that money.

You might.

I don’t.

So if I was buying Microsoft - I'd just buy a ton of the stock. I wouldn't buy the LEAPS.

Talk to Geoff about LEAPS

More Articles: