"Stock Trading Riches" Spreadsheet

Yesterday, I received an email from a "Stock Trading Riches" reader who had a question about the spreadsheet (it is a free download for people who buy the book, in either format - paperback or kindle).

His spreadsheet question was:

In the "number of shares" column I notice that you are checking for a 10% price change between the current years price and the previous years price. This is ok in Year 1 and Year 2 but in the longer term you are not comparing the current years price to the initial Year 1 price. So what could happen is you could have a steady increase/decrease of less than 10% every year over a number of years (cumulatively > than 10% over a number of years) but none of them will trigger any selling/buying as the price is being compared to the prior year. Was the sheet deliberately designed this way?

My answer was:

What the basic system does in real life is only rebalance if the stock has moved 10% or more from the last time it was rebalanced. So, the spreadsheet should actually not compare the current and previous values, or the current and first. Instead, it should compare the current value with the last value where a rebalance occurred.

I don't know how to do that in Excel. So, I put the 10% check between the current and previous row just in case a value isn't 10% apart. But the best way to use the spreadsheet is to manually exclude prices less than 10%.

So, if the monthly prices were 100, 99, 95, 97, 85,... you would put in 100, 85 in the spreadsheet.

Read More

The Best Trading Systems Are Beautiful and Simple

The best trading systems are simple and minimally beautiful - at most, they only use a handful of indicators or formulas, and they implement a simple model of the market.

They don't aim to explain market behavior rigorously and precisely like an economist - instead, the model aims at robustness, where it lets you manage your risk appetite and set the odds in your favor.

The purpose is to give you an edge - like the house has in a casino game. It won't win every trade, but it will have a positive expectation where, over time, you can expect to make more money than you lose, thus letting you build your account over time.

If a trader attempts to develop a complex system that could win every trade, then that is a set-up for failure. As systems get more complex, they have more moving parts - which results in unpredictable interactions and bugs that will eventually cause your system to blow up and suffer heavy losses.

With a simple system, your ego may not be satisfied - it will tell you that you are smart enough to come up with something more accurate, so you will lose less trades - but your bottom line account balance will benefit.

Read More

Why I Renamed My Blog To "Stock Market Zen"

Today, I renamed my blog from "Simple Trading System" to "Stock Market Zen" (however, the URL will stay the same).

I did this because I think that "Stock Market Zen" better reflects my philosophy and approach to the stock market and investing.

The old title described my system accurately, but very generically. A lot of trading systems can be simple - but many of them don't rely on concentrating on the present moment, and relying on the last price instead of a moving average or chart.

Read More

How To Use "Stock Trading Riches"

I hope that my book helps you build a trading system that suits your risk-reward level.

I have exclusively used the basic Stock Trading Riches system on my portfolio for the last 6 years, and I have beaten the S&P 500 over those 6 years:

Year, Me, S&P 500

2005, +13%, +4.91%

2006, +14%, +15.79%

2007, +22%, +5.49%

2008, -40%, -38.49%

2009, +44%, +23.5%

2010, +22%, +13%

My portfolio had a cumulative six-year return of +65.66% vs. +10% for the S&P500.

Of course, my system is flexible and you can use the book's section on rule variations to customize the system. For example, you can increase or decrease the maximum cash percentage at the portfolio level from the basic 30%. You could implement the position growth rule, or the stop loss rule, you could change the rebalance frequency, or experiment with percent triggers.

You can back-test these variations on paper with various stocks and see if they improve the system in ways that make you more comfortable.

Read More

The Return of Dividends

When I was a short term trader, dividends did not mean anything to me.

When I switched to long term trading, I not only eliminated stress and reduced expenses, but I started to enjoy seeing the dividends depositing into my account like a cash register. Cha-ching!!

Historically, dividends were a big component in the total return of stocks.

Then, in the 1990's, they became only a small component of the total return, and dividends were out of favor. We were in a raging bull market, and companies were pressured to favor growth over dividends.

Investors were hypnotized by the bubble and said: "Why should companies give out dividends (which were fully taxed) rather than invest that money in growing their market share, buying back stock, or buying the stock of other high-flying companies?"

Then, the Dot Com Crash happened, Bush cut the dividend tax in half, and investors pressured companies to pay out dividends.

Since the market has been choppy for the last decade, dividends have returned to their historical place as a big part of investors' total return.

Read More

"Stock Trading Riches" is now available in Kindle format on Amazon.com

My book "Stock Trading Riches" is now available in Kindle format on Amazon.com.

Since this is a new format, it's priced for now at $2.99.

They did a good job in the conversion - I saw that the stock tables and programming scripts display well, and the links are click-able.

You don't need to own a Kindle to buy this edition. You can download free readers for PC's, Mac's, iPads, etc.

Read More

How To Understand My Method for Trading Stocks

I made a break-through when I shifted my mind-set from digital thinking to analog.

A digital system has two values (i.e. yes or no), while an analog system has a range of values. For example, a computer memory bit can only be off or on, but your oven can be set to a range of temperatures.

Normally, we trade digitally. After we buy a stock, we either hold it or sell it. So, for the trade to make us money, we only have one chance to buy the stock correctly, and then one chance to sell it correctly.

My Stock Trading Riches system is analog. After you initially buy into each stock, fund, or ETF, the constant value rebalancing formula automatically uses feedback to adjust each position (once a year under the basic rules) - buying and selling portions of your holdings. It works like a self-correcting gyro control in a torpedo.

At the portfolio level, the system uses constant ratio rebalancing to add new positions whenever excess cash builds up.

As a result, we are never trying to predict where the market it going. We profit from volatility while having a robust portfolio that can tolerate a few companies going bankrupt. No single company puts the portfolio at risk.

Read More

Bought two small cap stocks: APKT and JOBS

On Monday, I bought two small cap stocks: ACME Packet (APKT) and 51Job (JOBS).

As I mention in the market cap section of my book, I try to balance my portfolio across market caps, since companies in the different caps have different risk / reward profiles, and the caps themselves follow different cycles.

APKT specializes in session border controllers (SBCs), which provide control and security at the edges of IP networks that carry voice, video, and multimedia traffic.

This is a fast growing company, but volatile stock with quartely fluctuations. The stock was up 104% in 2010, but I bought it now because it fell 50% after it missed it's third quarter estimate (due to a large order slipping into the fourth quarter).

I don't mind volatility, of course, since I will manage the position through my stock trading riches system.

51Job, based in Shanghai, is the human resources market leader in China. They provide recruiting, payroll processing, and training to companies across 25 cities in China. The stock fell into the $40's after a peak of $70. They have $10/share in cash. According to small cap guru Jim Oberweis, the stock trades for 15 times his 2012 earnings estimate, and has expected earnings growth of 55%.

Read More

When Buying A Stock, Invest in Management

The Oct. 10 issue of Forbes had an interview with billionaire growth fund manager Ron Baron.

He listed 4 criteria for investing in a new company. He said many others look at the first three, so the fourth one is especially important:

1. The business must have growth opportunities.

2. The business must be appropriately financed.

3. There should be a competitive advantage (i.e. barrier to others from competing with them).

4. There needs to be a trustworthy leader that inspires people to follow them - who will invest in the business, even if it hurts the short term bottom line.

The example he gave was Ralph Lauren. His European franchisee was doing poorly, and Lauren realized that Europe was the next big market. He had to pay such a high price to acquire the franchisee, that it diluted the stock. In the long run, however, the move paid off.

Read More