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How Can You Get Rich Buying Stocks

Many beginning investors are wondering the same question: how can you get rich buying stocks?  Well, how does a person get rich with anything?  They develop a game plan, meditate on it and then take action.  Stocks work the same the same way, although you do need to think about whether you want to make money for the short term or the long term.

Developing a Gameplan – Your First Step to Getting Rich with Stocks

If you want to get rich with stocks, you need to think about how much money you plan on investing in mutual funds.  Afterward, you need to think how much liquid cash you want on hand for stock investments.

This is a very important step, as most investors spend up all of their money when the market is good.  However, even when the market is bad there are winning stocks… sometimes even more so.  But if all of your funds are already gone, you cannot take advantage of these gold mines.

Identify a target to sell while also defining your stop loss

If you want to limit your losses, make sure you define your stop loss.  This is an arrangement where stocks are sold after hitting a certain price.


Buying Stocks for Long Term Investing

Some stocks will be profitable over the long haul.  These are the ones you want to keep in your portfolio for maybe five or ten years.  At the end of that period, you will make tens of thousands.

In addition, include a few high-risk stocks.  These are the ones that are not doing so well today, but may turn out to be profitable in the future.

Getting Rich with Mutual Funds

When it comes to mutual funds, you will want to stick with systematic investment plans.  By doing so, you can benefit from the power of leverage.   But this is assuming you back up your plan with a withdrawal strategy… selling your mutual funds after you have reached a certain amount.  You can then use the proceeds of your sale for stocks or another type of mutual fund… ones that are fixed income.

Gold Investing

Gold has always been a valuable commodity.   And even now it can make you a millionaire if you play the game right.  To do so, you must realize that gold and stocks run opposite from each other.  Therefore, you should invest in gold mining stocks.  Gold ETF is an example.  It is a gold-based mutual fund specifically designed for the commodities investor.

Consider Being Contrarian

A good investor does not always go with the flow.  Warren Buffet is an example.  Unlike many investors in the 90s, he did not put his money on Internet-bases stocks.  As a result he did not lose like so many others during the dot com crash.

Two additional concepts every investor should know:

Power of Compounding

Compounding occurs when you reinvest the interest you gain from your previous investments.  For instance, if you invest one thousand dollars, and you receive ten percent interest on the principal, you will get one hundred bucks interest in a year.  If that interest gets reinvested, the next year you would end up with $1,110, allowing you to earn $10 more in interest.   If you can stick to this plan, you would double your funds every 8 years.

Even Albert Einstein commented on the power of compounding.  He felt it was mankind’s greatest idea, as it allows him to accumulate wealth in a systematic way.   Indeed, if Einstein thought compounding was a decent strategy, there must be something to its magic.

The concept becomes even more effective when you remain disciplined.

In any case, to get started with compounding, set up a series of accounts where fixed amounts get deducted from your account.


Dollar Cost Averaging

When you use a fixed amount to pay for an investment, you are engaging on a unique type of averaging.  In the investment world, it is known as “dollar-cost.”   People that engage in this strategy spend more when stocks are down and less when they are not doing well.  For example, say a person invests $500 each month for $50 stocks.  During their first purchase, they buy ten shares.  If the stock rises to $62.50 next month, you would only purchase 8 shares.  But if the stock falls to $41.67, you would get twelve shares, (minus the transaction fee).

Setting up regular investing mechanisms is relatively easy.  It does not matter if you are investing in stocks or mutual funds, as the dollar-cost strategy works the same.  If you use the strategy for stocks, you can apply it to individual shares or more unique arrangements.  The exchange-traded fund is an example.

So, how can you get rich buying stocks? Use your head and develop a strategy that meets your financial goals.   Most importantly, never invest more than what you can afford.  While stocks can be very lucrative, they are still a gamble.   Do not take this gamble if you cannot afford to lose what you put in.  In other words, view your stock investment funds as “fun money.”  If you have no problems spending your funds at a restaurant or even on a vacation, then that amount should work well with your budget, (as you are not expecting a return).  By using this approach, you will not be disappointed when or if the market fails.  And when it is successful, you will feel even more proud of yourself, as no other “fun” purchase can generate extra income.

Investing in Gold The Wise Way

If you’re anything like me, then you’ve been eyeing the buzz around investing in gold. We’re certainly not alone. Gold is a hot topic right now, and thanks to continued Fed and Congressional action (not to mention the disaster that is Europe right now), it looks like it will continue to be for quite some time.

This shouldn’t be surprising. Gold is up an astonishing 400% in the last decade – over 60% in the last year alone. Currency values are plummeting. The stage is set for continued inflation. Investing in gold has made more than a small number of fortunes recently and everything is in place for that to continue. Now is the time to learn about this form of investing so that you are prepared.
It should also come as no surprise to you that the key to investing in gold is not simply going out and purchasing some any way you can, waiting a while, and then selling it any way you can. If it was that easy everyone would flock to gold investing and those fantastic returns would disappear. No, the actual purchase is the easy part. Knowing what form to use when making a gold investment, how and when to buy gold at the best price, how and when to sell gold at the best price, and how your gold investment is helping you achieve your goals is the tricky part.

Investing in gold, like with any other investment, can be approached foolishly or wisely. Investing the wise way is what I want to help you with. Most people wouldn’t just go out and purchase any old stock without some research, and those that do will seriously hurt the returns they can see from their investment. Gold is no different, and blindly investing in gold can reduce your returns dramatically.

Through this site I want to provide you with the tools, advice, and information you need to make better gold investments. Before we do that, however, we’re going to need to know what those goals are.

Investing in Gold The Wise Way: Goal Setting Drives Strategy
Most of us don’t have the money to buy gold just for the fun of it. Instead, we’re investing for a reason. We have a goal. Some need to maintain the value of assets accumulated over long careers. Others want to set themselves up for high growth so that they can retire early. Some might set aside money that needs to grow enough to pay for a child’s college tuition.

Whatever your goal is, if you don’t want to rely on blind luck then you need to let that goal determine your strategy. Successful investors have a plan – a method – for making sure their gold investments work for them instead of against them. They understand that planning strategy are necessary for success. These things are important for any investment, but are especially important when investing in gold.

Gold can be purchased in a variety of forms, each of which has its own set of benefits that make it the right investment for certain goals. Unlike those working with most other financial instruments, those investing in gold need to concern themselves with storage and handling, liquidity when it comes time to sell, and even whether to purchase physical gold versus a gold ETF or stock in a mining company. These decisions can’t be made intelligently until a goal is identified.

Before you continue reading, put some thought into your goal for investing in gold. Then, read the list of how to buy gold below for tips on matching the different purchasing options to your goal. Really consider what properties an investment needs to have, such as security or liquidity, to meet your goals.

Ways to Buy Gold and the Goals They Are Best For
Coins and Rounds
One of the most common methods of investing in gold is the gold coin or gold round. Coins and rounds are physically the same. The main difference is that coins are legal tender and rounds are not. Gold coins also tend to have some sort of collector’s value while the vast majority of rounds only represent the value of the gold itself.

For those investing in gold the goal is to buy gold as close to the spot price as possible, which makes rounds generally a more attractive purchase than gold coins. That said, if you can find gold coins close to the spot price then it is probably a good buy. The American Gold Eagle, American Gold Buffalo, South African Krugerrand, and the Canadian Maple Leaf are your best choices for true coins close to spot.

The bottom line: Coins and rounds are fantastic for investing in gold. They are real, physical gold that you can hold in your hand and keep in your safe or safety deposit box. The importance of that can’t be overstated. They are small enough to be useful for barter and liquid enough to readily sell for cash. Because they can come in fractional ounces they open up gold as an investment for those with smaller budgets. Coins more so than rounds suffer from a collector’s premium, but that premium can be a boon later if it appreciates in value.

Gold Bars
Gold bars can be split into two broad categories for the investor to consider: small and large. Small bars act in every way like gold rounds. They are not legal tender, are sized for liquidity and barter, and have a relatively small premium over spot. Small gold bars are sometimes marked in grams instead of ounces or fractions of ounces.

Then there are the large bars. These are the bars people imagine when they think of Fort Knox. Large bars are minted in standard sizes of 100oz and, more commonly, 400oz for use as “Good Delivery” bars on professional gold exchanges. “Good Delivery” doesn’t mean that everything else is “Bad Delivery”, it just means that the mint that created the bar is a known, monitored agent in the market. This means those bars can be bought and sold more or less remotely without verifying authenticity. If you’re slinging around half a million dollars for a large amount of gold, you really want to know that the bar is as pure as the stamp says it is.

The down side of large bars is that the bigger the bar, the fewer buyers there are available. The up side is the bigger the bar, the lower the premium over spot. For individuals investing in gold, there are specialized bullion vaults that let you buy into their stock at lower weights. These vaults do most of their selling on large bullion markets with 400oz Good Delivery bars so you get the benefits of access at lower budgets with smaller premiums. They can be a good deal, but usually you don’t physically receive the gold so it’s not for everyone.

The bottom line: Small gold bars, like coins and rounds, are a fantastic investment for those who want the security of physical ownership mixed with better liquidity and conveniently valued denominations. Larger bars, either bought personally or through specialized vaults, provide the best prices possible. The convenience factor is lower compared to non-physical ownership and this form of investing in gold is also not available to the majority of IRAs.

Gold Bullion ETFs
Gold Exchange Traded Funds (Gold ETFs) are stock-like securities that let people investing in gold buy into a trust managed by the ETF. The ETFs actually own gold, and typically keep it in bank vaults used on professional exchanges (the Fort Knox-like vaults full of 400oz Good Delivery bars). Liquidity is extremely high, but returns are chipped away over time by built-in management and storage costs.

The bottom line: This is a good investment vehicle for those with existing brokerage accounts who like the idea of investing in gold but don’t want to mess with delivery and storage. It is obviously not a good investment for those investing for the purposes of hedging against financial disaster or who want the security of having the gold in their physical possession.

Gold Mining Stocks
Instead of physically investing in gold, you can gain exposure to gold through mining company stocks. While this has benefits, mining stocks have their own set of issues that add to the complexity of the purchase. Mining companies have to contend with politics, environmental legislation, falling new discoveries, and rising extraction costs. There are certainly good deals to be had out there if you can find the right company, but compared to investing in gold directly this is a whole other creature entirely.
The major benefit of gold mining stocks is taxation. Gold mining stocks can be held inside retirement accounts and are taxed at the normal capital gains rate.

The bottom line: For investing in gold I would choose a different route, but for investing in a company (who just happens to be in the business of mining gold) this can be a worthwhile sector to consider. This is also a good investment for those who want exposure to gold inside an account that physical gold can’t sit in, like most IRAs. Like Gold ETFs, this is not a good investment for those concerned with hedging against disaster or who are looking for physical possession of gold.

Gold Certificates
Certificates are a special vehicle for investing in gold issued by mints, banks, and other entities. These come in two varieties, allocated and unallocated.

Allocated gold certificates are a simple certificate of ownership. You purchase the certificate from a bank, which provides you with a reference to the bar(s) that are allocated to you. For example, you could buy a gold certificate giving you ownership over the 100oz bar #1000 in their vault. When you buy gold certificates you don’t have to worry about transport and storage of anything other than the certificate, though this service comes at a price in the form of a premium over spot built in to the certificate price. All in all you are giving up flexibility for convenience.

More common today are unallocated gold certificates. In these cases, there is not a specific bar of gold with your name on it. Instead, you are effectively paying the company now for delivery of gold later. The company now has a liability on its books because it owes you gold. It is fractional reserve banking, except with gold instead of dollars. Because of this you run the risk of losing your entire investment if the company goes insolvent. This introduces unnecessary risk in your gold investment. If you are investing in gold you should steer clear of any unallocated certificates as they introduce unnecessary risk into your investment.

The bottom line: Investing in gold through unallocated gold certificates is just a bad idea! Allocated gold certificates are better, but are outclassed in convenience by gold ETFs and outclassed in security by physical ownership.

Bar Charts

Bar charts are a bit of a technical subject. Although this does come under the heading of technical analysis (no pun intended), we’ll try to keep it simple. If you learn how to use it well, you’ll be that much more at cause over emotional news, analyst recommendations, etc.
When we say bar charts, we mean the “price and volume” of a stock’s chart. A stock’s price displayed on a chart with the volume for that day, week, etc. Like this:

The vertical bars represent the high and low of the price for that day, week, etc. The horizontal slash represents where the price ended at for the day, week. Etc. But you already knew that, right?
The volume bars at the bottom of the picture represent the total amount of shares traded for that day, week, etc.
Both the price and volume have moving averages that look like this:

These lines give you an idea of what the average price (or volume) of a stock is relative to the last 10 days, 50 days, 200 days (or weeks), etc.
Here are the basics of how to interpret these two pieces of data on bar charts; both volume and price:
When price goes up and volume goes up, it indicates strong buying demand.


Volume is a footprint left behind by the institutional investor. After all, it takes millions of dollars to move tens of thousands of shares to increase the volume and price of a stock.
Notice how the volume of the huge up day in this graph looks like it’s more than double the average volume. That’s institutional buying power at work!
When price goes up and volume is average or below average, it points to mild, tepid buying.

There is some buying taking place, but the institutional investors aren’t rushing in to buy the stock. If they were, they would leave their volume footprints.
Likewise, when price does down and volume is average or below average, it indicates mild, tepid selling:

On the other hand, when you see the price go down with heavy volume, watch out!

The institutional investors are hitting the exits, and hitting them fast.
As discussed in Stock Breakouts, volume also plays a key role in breakouts. When a stock’s price is breaking into new high grounds coming out of a sound area of price consolidation, you want to see massive volume. The bigger, the better.
Come on, you know this one. Right! The institutional investors!
When you see daily or weekly volume 354% above-average on a bar chart, someone managing lots of money is very interested in that stock.
In addition to these tidbits, look to see “tight” price areas. Like this:

When we say tight price areas, we mean small price variations from high to low on a daily or weekly bar chart. The price bars look shorter than the usual daily or weekly bar. This tightness points to quiet accumulation by institutional investors. Wide and loose price areas point to erratic buying and selling, and isn’t the best indicator in the world. Like this:

*Digression Alert*
Have you ever played a game of Spoons? It’s a card game where you sit around a table passing cards to the next person, in a circle. There’s a set of spoons in the middle of the table. There is one less spoons than there are players, so that one player will be left spoon-less at the end of the game.
As soon as someone gets four of a kind, he or she grabs a spoon. Once he/she snags that spoon, all hell breaks loose as the other players scramble and scratch their way to spoon-ownership.

We’re going off on this “Spoons” tangent (aside from the fact that we’re avid Spoons players) because it can be compared to tight and loose price areas on bar charts.
A tight price area is like the calm and collected Spoons strategy. Once you have four of a kind, you silently take one of the spoons while no one notices. That’s what the institutional investors are doing. Silently collecting up shares when no one notices.
A wide, loose price area on a bar chart is like the feverish scramble of all of the players after you slam your first on the pile of Spoons and yell at the top of your lungs “I’VE GOT A SPOON!” When the whole market is aware of the stock, emotional buying and selling enters in, which forms wide and loose patterns.
So there you go- you now know more about price and volume action- AND Spoons!
As mentioned in Stock Bases, you want to see a dry-up in volume in the lows of a base. This means that most, or all of the selling has taken place and is now exhausted.

As you can see in this picture, most of the volume in the tight price area is below average. When the stock breaks out the area of price consolidation, the volume kicks in.
Monitoring price and volume action is a good hedge against emotional news and market analysts. It gives you a factual picture of what is happening with the stock. Use it to your advantage! Your portfolio will thank you.
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Return to Technical Analysis from Bar Charts

Long Term Investing

The Easy Way to Invest

Long term investing is really the best and easiest way to invest. You just keep putting money into the market as you get it, and over time you discover that it has turned into a rather decent amount. You can buy a good no-load mutual fund or try your skill at selecting individual companies to invest in. And then you just wait, counting on the fact that the long term trend of U.S. stock market has been up from the beginning.

The History of Long Term Investing

The New York Stock Exchange was founded on March 8, 1817, so it is close to 200 years old, and shares have been going up ever since. There is a reason for this, which is that shares appreciate when companies are productive and make money, and generally that is what happens. Generally. On average.

Of course, stock prices didn’t go up in a straight line. There was the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, the Panic of 1893 and so on right through the Great Depression and up to the Great Recession of 2008.


The Problems With Long Term Investing

You see, there are two problems with long term investing.

First, it’s long term. That would be all right but, as a rule, people don’t have all that much time to invest. As Keynes famously said, “In the long run we are all dead.”

Second, it isn’t straight up. So even if you have a fairly lengthy horizon – 10 or 30 years, maybe to retirement – you might buy in at the top and wait for many years just to get even.

What an investor needs is some way to know, “This is a pretty good time to get in” and also, “This is a pretty good time to get out.” Doing that is called “market timing,” and Bumblebee Investing is dedicated to coming up with those market times.

Trading the Market Indices

Let’s look at how Bumblebee tries to do that.

The way I use the term, “investing” (as opposed to “trading”) means putting up money or other assets with the idea that it will be used to create a product that can be sold and generate a return to you, the investor, as a reward for putting the money up in the first place. Why you deserve a reward is that you took the chance – risk – that you would lose some or all of the money you invested.

The reward you get is money. The money you get is in the form of dividends and of the increased value of your shares if and when you decide to sell them. Where do dividends come from? From profits. What makes your shares more valuable in the future? The profits that are not distributed as dividends but are reinvested – profitably – by the firm.

Stock analysts try to determine what a company’s shares are worth so as to know whether the price they are currently trading at is a “good buy” or otherwise. Though the analysis can be very complicated, what the analysts are always trying to figure out is simply how profitable is company XYZ now and in the future. If you know what a company is earning now and what it would earn at any time in the future, there is nothing else necessary so far as investing is concerned.

At Bumblebee Investing I am not particularly interested in the present and future profits of individual companies. That is really hard to figure out for any one company, let alone hundreds and thousands of them, and there are people who are much better at it than I am. Fortunately, it is possible to invest without analyzing any one company. Instead, we can invest in all of them at the same time.

The way you do that is by buying shares of a mutual fund that follows the market up an down, or by investing in an index Exchange Traded Fund (ETF) for the S&P 500 Index, the Dow Jones Industrial Average, or the Nasdaq Composite Index, or by trading the corresponding index futures.

Market Timing

And it turns out that investing this way makes market timing much easier.

What happens with a major stock index is that the uncertainties associated with individual tend to cancel out, leaving you with a representation of the direction of the overall market. And while it is quite difficult to correctly evaluate individual companies, the direction of the whole market can be predicted with some accuracy.

This is because individual companies operate inside of the general economy. If the economy is good, companies (as a whole) make profits. If the economy is bad, companies make much less profit or even go out of business. Therefore, the stock indices will follow the economy.

It is often noted that the stock market commonly signals recessions by turning down. This is because the market is sensitive to the state of the economy. But the market, because of the various psychological factors of traders, lags behind the economy a little. It is always waiting for confirmation.

Many years of very short term trading have convinced me that profits are made by not waiting for confirmations. So while the market waits for confirmation in the economy, the Bumblebee Investor gets out near the top and in near the bottom on the basis of early signs. If the call is wrong, well, you just reverse your position with a small loss — sometimes that happens, but it’s just part of the game. The small losses are offset by the much bigger profits when you are right.

The Smart Investors 3 Step Guide

As investors, we all want to beat the market, but most people have a hard time doing it, let alone doing it consistently. In this 3-Step guide, we explore some simple techniques that will give your portfolio the edge in 2012. Following these 3 simple rules, we will take control of your portfolio and position it to beat the market.

So what do smart investors do differently than the rest?

Investors who consistently outperform the market are actively engaged in the management of their portfolios. It is not enough to build a portfolio and walk away from it; rather, it requires constant review and fine tuning. The reason lies in the flow of new information.

The Basics

First, let’s understand some basics about the flow of information. The market is a pricing tool, which takes into account all available information every second of every business day. As new information is received, the market digests the information and makes a decision as to how much each company is worth, given the newfound knowledge. As the market goes through cycles, each time reassessing what companies are worth, prices adjust to the appropriate level. This constant fine-tuning by the market allows it to allocate more capital to the companies that will give investors the highest returns, and less to those companies that are expected to underperform. These instantaneous cycles that shift funds between companies, make the market both diversified and efficient, and enables it to get a healthy return.

Smart Investor

How can you beat that?

Sure, the market sounds intimidating – and it is – but there is one fact that gives investors a fighting chance. The market holds all invested money, which is more money than could possibly be allocated to just those companies that are doing well. Some of the money will inevitably remain with the companies which will underperform, and because of this, the gains will be offset by losses either partially or completely. If this wasn’t the case, it would be next to impossible to beat the market.

Investors who consistently outperform the market recognize the relationship between the flow of information and price, and constantly review their portfolios to make sure they are allocating capital to the stocks with the highest potential return on investment. Further, they are able to concentrate their investments into the securities that will outperform the market, whereas the market must allocate capital to all companies – the good ones and the bad ones.

To beat the market, investors need to be able to identify those stocks that will provide the best returns. However, any analysis is bound to be wrong for the simple fact that it is an estimate of things to come, and most of us are not in the business of predicting the future. Using this analysis, the investor will make a decision as to whether to invest in a company, and if so, how much. When an analysis is wrong, it may often be the difference between outperforming the market and falling short.

To beat the market, it is not enough for us to analyze companies. Incorporate these three simple rules into your investment strategy to give your portfolio an edge.

The Steps

Keeping a comfortable Margin of Safety is crucial to wise investing.

The First rule is to maintain a Margin of Safety. The concept is simple with an example: If the analysis estimates XYZ stock is worth $10 and you decide to maintain a 10% Margin of Safety, then you should invest in the XYZ stock at a price no higher than 90% (100% – Margin of Safety) of the price determined in the analysis. In the example I gave, this means 90% of $10, or $9. By applying a Margin of Safety to our analysis, we are allowing for error in the analysis. If an analysis has more uncertainty, a higher Margin of Safety should be used.

The Second rule is to Dollar Cost Average. This sounds complicated, but is not. In fact, if you have a 401k or an IRA, you are probably already applying the technique and didn’t know it. Dollar Cost Averaging is a concept based on a simple fact that successfully timing the market is almost impossible to do. One study showed that in order to produce successful returns, an investor would have to time the market right approximately 80% of the time. Dollar Cost Averaging allows us to invest our money at a fair price by contributing a fixed amount of money over time instead of trying to time the market. Learn more about Dollar Cost Averaging here.

The Third and final rule is to keep those commission costs low. The more times you make trades, the more fees you have to pay. For example, to invest $100, you may be required to pay a $7 commission on the trade. This fee is what a company will charge you to cover their costs and to execute the trade. For an investor to recover this cost, the stock would have to gain over 7%, and that’s just to break even. To breakeven and beat the market, this position might have to earn 15% or more! So, how can we lower our commissions? It’s simple, invest larger amounts, and invest less frequently. If you are scratching your head right now, don’t worry.  If you think that this rule is somewhat contradicting to our Dollar Cost Averaging rule above, you are correct. What we can take away from this observation is that it is important to strike a balance between the two rules where you are comfortable.

Investors who consistently outperform the market are not doing anything secret, they are simply investing their money in smart ways – they are “Intelligent Investors.” By applying these three simple rules to your investment strategy, you should be able to give your portfolio an edge.

To Drip or Not To Drip

Earlier this week I was speaking to one of the guys at work about true DRIPs and how they can be a great way to build a position in a company, especially when you are just starting out and when your portfolio is on the smaller side. I wrote about DRIPs and SPPs in an earlier post, but my co-worker had some additional questions about synthetic DRIPs and when (or if) to use any DRIPs at all.

True DRIPs (also called real, classic or authentic DRIPs) are dividend reinvestment plans provided by a company to current shareholders as a way to directly buy additional shares. These DRIPs are handled through a transfer agent such as Computershare or Canada Stock Transfer, with no need to deal with a brokerage. Rather than pay out the dividends in cash in the form of a cheque sent to your house or deposited into your bank account, the company provides additional shares (which includes whole and fractions of shares) which they add directly to your account. For example, if your quarterly dividend is $100 and the current share price is $40, you would receive 2.5 shares. On the next dividend payout even the fractions of shares generate more dividends, thus compounding the growth. Many companies offer a discount off the current market price when purchases are made through a true DRIP, which helps your position grow even faster.

Not To Drip

Synthetic DRIPs work much the same way, with a few notable exceptions: they are sponsored by the individual brokerage you deal with and they can only provide whole shares. In this case any cash remaining from a dividend after purchasing whole shares will be returned to your account to do with as you please. Using the same example from above, if your quarterly dividend was $100 and the current share price was $40, you would receive 2 shares (totaling $80) and the remaining $20 would be placed in your account. Though your total number of shares will grow a little slower with a synthetic DRIP, it does have some advantages that true DRIPs do not. Because synthetic DRIPs are held with a brokerage, you can drip them inside a TFSA or RRSP, sheltered (or at least deferred) from taxes. Be sure to ask your brokerage whether they honour any DRIP discounts as well, as some will give you the same discount off the market price for your synthetic DRIP as offered through the true DRIP.

There can be some fees associated with DRIPs, and you need to be aware of these before you start. In Canada almost every true DRIP is free once you’re set up. However, to enroll most companies require at least 1 share to be registered in your name, and the cost for this tends to range from $30-$50. On the flip side, most discount brokerages in Canada will do a synthetic DRIP for free. You simply need to phone in as ask them to DRIP your shares of Whatever Corp and they take care of the rest. The list of companies that brokerages offer DRIPs for can vary widely however, so you may wish to take this into consideration when choosing where to hold your accounts.

If you wish to true DRIP a US company it adds a whole new challenge. According to the US Securities and Exchange Commission any foreigner purchasing stocks must do so through a US bank or a foreign bank that has a branch located in the US. Don’t confuse this with a Canadian account that trades in US dollars. The account needs to actually be either physically in the US (opened at a US branch even if you do your banking online up here in Canada), or more conveniently for many of us, through an online US bank. Synthetic DRIPs for US companies can be handled in Canadian based accounts, but currency conversion fees will eat into your dividends, and this will happen on each DRIP transaction. If this seems too complicated you may decide simply to invest the dividends somewhere else.

The question of whether or not to bother with DRIPs is up to the individual investor, both in how much effort you want to put in, as well as how strongly you feel about your holdings. I’m a big fan of DRIPs (gotta love the set-it and forget-it style of investing!), but they may not be right for everyone.

There is a fair amount of work involved in true DRIPs, especially in setting them up. Application and anti-money laundering paperwork needs to be filled out and submitted for each company you plan to DRIP. True DRIPs are held in taxable accounts as well. Though they are taxed favorably in Canada (usually much lower than your marginal tax rate), if you have the room in a TFSA or RRSP you could shelter them there. This is exactly what I do – build my position as quickly as possible through true drips, then transfer them into my TFSA in order to shelter all future growth, and start a synthetic DRIP from there.

As I mentioned above, using a synthetic drip is much less hassle. Simply call up your brokerage and tell them you would like to drip every stock in your account. Assuming a synthetic drip is possible through your brokerage, and that the dividend amount is at least enough to buy 1 whole share, they will start the drip and you can sit back an watch the new shares roll in each quarter. There is really very little involved with synthetic DRIPs.

I was trying to come up with a reason why an investor would not want to DRIP their shares of a specific company, and I could only really see one: If you would like to do something else with the dividends, such as invest in a different company or product. The dividends are, of course yours to do with as you please and you could choose to use that money to invest in whatever else you like. You can even withdraw the cash to spend instead of investing (keeping in mind any penalties and tax considerations depending on the account you hold them in.) This is exactly what we Drippers will do when we retire – use the dividends as income.

My plan basically involves buying strong, solid companies that I’ll hold and build my position with for many years, hopefully into retirement. That means I’d rather use each dividend as efficiently as possible to buy more shares of the same company. Assuming I’ve chosen the right companies and they still fit within my investment plans, I’m going to want as many shares as possible and dripping (either true or synthetic) helps the whole process move along faster. For me dripping is a no-brainer, and quite a bit of fun to watch as my number of shares increases each quarter.

What about you? Do you DRIP every stock, pick and choose, or just let the cash roll in?

Happy Dripping!

Why I Stopped Diversifying. And Why You Should Too.

If you’ve already read tons of stock market reading materials, I’m sure you’ve already come across of the recommendation to diversify your portfolio. Invested in 10 to 20 great companies so that you’ll have a margin of safety. What do they mean by that?

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If you’re invested in 20 companies, and one of them would screw up, you still have 19 left. That way, you protect your capital. It’s even written in the bible that you should diversify, because you can never tell what can happen. Great strategy, aye?

But why am I discouraging you from diversifying?

Warren Buffett once said, “Wide diversification is only required if investors do not understand what they are doing.”

I’m sure for most of you who read this for the first time would feel a bomb explode in your heart. That’s okay. We all had our days. As for me, I was never guilty of diversifying, BUT…But was guilty of being ignorant. As I’ve said, we ALL had our days.

In this post, I’ll share with you why I never diversified, and never looked back.

1K, 10K, 100K or 1M doesn’t make a difference.

I’d like you to think of the day when you were investing for the very first time. Maybe some of you have an initial capital of 25K, while most have 5K. With that in mind, I’d like to ask you two questions, specially to those who are doing EIP:

Diversify chart

How many companies did you buy when you started out?
How and why did you come up with that choice?

If I have to answer those questions: I invested in three companies, and I know they are the best of the best, that’s why I invested in them.

Most people do this:

They only have 5K so they invest only in the best companies out there. Let’s say, those were SMPH and MBT. Suddenly, when they already had 100K, their portfolio multiplied quicker than a gremlin on a rainy day.

This is my belief: SMPH and MBT are great companies when you had your 5K, and still remains great when you had your 100K. And would probably still be great when you will have your 1 million. When I earned 133% in one year, ALI was the only company in my portfolio.

Choose one: Invest your 500K in 10 crappy companies or in 2 of 3 blue chips? Warren Buffett, again once said, “You only have to make a few good choices in order to get rich.”

Save yourself from all the headache.

This varies from one person to another. In my whole investment career, I’ve only had at most 5 companies at a time in my portfolio. Why? Because if I go higher, I won’t be able to monitor them properly.

When I say monitor, I’m not referring to just looking at its current price, target price, trend, etc. That’s only half-baked monitoring, and won’t do for me. I read news, target profit, future projects, reported earnings, current challenges, etc (COL Financial provides these items everyday).

For those of you who can pull this off with 10+ companies in your portfolio, then I salute you! Maybe for some of you, this is the reason why you resorted in subscribing in the truly rich club. So that someone will just prompt you to either buy, sell or hold. Maybe. Just maybe.

Minimize, if not totally remove your risk.

You may not believe it, but yes, you can minimize your risk by not diversifying.
Imagine these companies in your portfolio:

JFC: Chinese business facing challenges.
CEB: Downgrading on negative airline industry outlook.
AP: More challenges seen in 2013.
EDC: More challenges ahead.
FGEN: Hydro plant to disappoint this year.
SMDC: Bloom to replace SMDC in PSEi
SCC: landslide could potentially disrupt mining operations.

While these companies face these challenges, they remain good companies with great long-term fundamentals. But can your fear handle it? When these news broke out, share prices dropped faster than you can say I’m going to sell!

Had you chosen your companies very carefully, you could have spared yourself with all the heart attacks.

Quality versus quantity.

This has been a never-ending debate, thus this topic does not need any more explanation. It’s a personal choice that I go for quality companies over quantity.

Why invest in SMDC if there’s SMPH or ALI?
Why invest in EW, SECB, PBB if there’s BPI, BDO and MBT?

In every sector, there’s always the bigger shark that just eats the rest for snack.

You never go wrong with quality. Besides, most beginners that I know go only for quantity because a stock is matunog. Can’t blame them, it’s easy to go with the crowd than against it. On second thought, it’s not that hard, isn’t it?

Lesson from my mother.

If I were to name my greatest mentor, it would be my mother. I learned not to diversify from her. Did you know that she only invested in one company? That would be her employer. Talk about confidence.

You see, my mom works in the finance department of a giant that have been in the business for more than 100 years. Being part of the finance dept, she had access to budgets, earnings, target profit and future projects. She knew what her employer can pull off. That gave her confidence.

She was able to do many things (which I will not mention in this post), and was able to help other people outside our circle because of that one investment.


Clearly, a non-diversified portfolio can also give you great benefits. And in my book, it has better benefits than a diversified portfolio. Since one has both advantages and disadvantages over the other, neither is superior. It still depends on your own strategy, goals and emotions.

What did I miss?

For those of you who don’t have a diversified portfolio like me, I’d like to know how you’re doing. Were there times that you’re influenced by the mob and jumped to another stock? How many companies do you have today?

If you have a diversified portfolio, are you doing it for the sake of “safety”. Is it worth it?
Do you have companies in your portfolio that you wish to dispose? What’s preventing you from doing it?

Did I fail to mention other benefits that a non-diversified portfolio might have?

Introduction to Trends, Support and Resistance

Many traders use only technical analysis as their tool kit for trading, no reading of company news, what the company does, no looking at the economy or any other factors.  Just what has happened in the past with relation to the price and volume (the amount bought and sold), with a view of predicting the future.
I personally don’t believe in using only technical analysis as I don’t feel you can predict how a company’s share price will perform based solely on a few technical indicators and complex formulas.  That said there are a handful of techniques I do use in order to identify trends, support and resistance.
Trends look at the overall direction a share price is moving in. Support is where the price of a share should / could / maybe will have difficulty falling through. The price could bounce or be prevented from falling further. Resistance is the exact opposite to support and it’s where a share price could face difficulty pushing through or getting past. These three can be an important factor when making a decision on when to buy or sell shares because you may not, for example want to buy a share when it is near a perceived resistance level as you may be concerned that the price will not increase much further.  You may however want to buy near levels of support in the hope that the support holds and helps to propel the share price higher. I for one want to buy a share when it’s trend is going up rather than down!

Types of Support / Resistance
The are two ways in which support or resistance levels can be estimated.
Historical – these types you gauge by looking at things like previous price highs and lows. Predictive – these are levels of support or resistance that are estimated based on technical indicators, some of which we will take a look at below. Historical Support
As you can see in the example below, CELLO has been supported by the 83p price in 2014 on three occasions in the last year.  On the third occasion it dipped slightly under 83p but as you can see it did in fact bounce up almost straight away. In my opinion the nature of support is that the more times it’s tested, the more likely it is to break but when the lows are not quite as low as the previous lows, it can be seen as a good time to potentially buy.

Example 1 – Historical Support. Graph source: ADVFN

If a support level does break it can then flip to become a new resistance level where the price struggles to break through again.
Historical Resistance
Conversely to historical support, is historical resistance. This can form when a share price has hit a level and fallen back again. It’s possible that this level becomes resistance for any future tests. The example below shows how the FTSE 100 has faced resistance in the 6900 area for the last 3 years.

Example 2 – Historical Resistance.  Graph source: ADVFN

Predictive Support and Resistance
As I’ve already mentioned, there are a multitude of techniques, theories and formulas which look to predict future price action based on historical price and volume. I use a few techniques but only a tiny subset of what is out there. Mainly because they don’t all correlate with each other, some I have no idea how to use and if it’s so complicated that I can’t understand it, I’m not going to be able to meaningfully use it!
In the blog I will gradually cover all the techniques I use and others that I have come across which seem sensible but for now I will stick to a couple of simple, easier to understand techniques to get started with.
Trend Lines
The easiest predictive technical analysis to understand (for me anyway) are trendlines. They are not only the simplest for me but also my favourite. I love buying into a stock when there is a seemingly obvious upward trend. This can of course change and sometimes if you’re unlucky, it can as soon as you decide to buy but I feel like my chances are better if it is already trending upwards.
Take a look at the National Grid (NG.) Example 3 below. It doesn’t take much science or expertise to see that between 2010 and 2014 the company share price has pretty much gone in one direction. If you were to decide you wanted to buy into National Grid, one of the techniques you could use to time an entry would be by looking at support and resistance trendlines. Ideally you won’t want to buy near the top of what’s known as the channel, as the price has more potential to bounce down from this towards support. It’s around support you where you’d ideally want to buy in. The way you use trend lines is to extend them into the future to see where future support and resistance may lie.

Example 3 – Trend Lines. Graph Source: ADVFN

You’ll note that this is certainly not an exact science and history isn’t always going to repeat itself.
Tips when using trend lines:
Look at more than one time frame and make it appropriate for your style of trading/investing – in Example 1 the 5 year trend shows one trend but it’s possible for there to be trends in different time frames. For example if you’re a day trader you’re not going to be interested in a trend line for 5 years, or maybe not even 1 year or 6 months. You’ll be looking at trends for 1 minute, 5 mins up to 1 hour. These intra-daily trends are going to be very different to any monthly or yearly ones. The steeper the trend line, the less likely it is to hold true for very long for both support and resistance. A trend requires at least 2 points, but the more points which hit a trend, the more validity it holds. The trend line doesn’t need to hit all points, you may get the odd spike up or down out of the trend due to short term volatility but that doesn’t necessarily invalidate the trend. Don’t try and look for trends where none exist – generally it should be fairly obvious if there is a trend, so don’t try and look for something that isn’t there. Avoid buying near the top of the channel. Consider buying near the bottom of a rising channel. Remember a trend isn’t likely to last forever and some may only last a matter of minutes or days (depending on what timeframe you are looking at).Well that about covers the basics of trends, in my next technical analysis post I’ll cover the basics of Moving Averages, which are a little more complex but still fairly easy to understand.

Growing the Trading Account without Following the Rules

A lot of newbie traders have not enough money when they first start trading and all of them have at least heard about the money management. A part of them understand that the money management is important, but they think that it doesn’t concern them. Some traders don’t put enough money in their trading accounts because they don’t want to risk more than a certain amount. Other traders may understand that all the building parts of the trading are important, but still can’t manage to follow all the trading rules. They say that they will grow the trading account and then they will follow all the trading rules.

I’ll grow my trading account and then I’ll follow all the trading rules

I used to think this way because I was afraid of losing the money I worked hard for. I was thinking that it would be easier for me to risk the money made by trading.

Grow trading

It happened to me in the first year of my trading career, when I believed everything that I was reading in the trading books. I found two trading methods in a book I was reading, one of them was a news trading method. I believed that this method was very good and I even believed that risking 10% of the trading account was a good money management for that system. So I said that would build the trading account, using that method, and later I would use the other method for trading and making money. After a couple of consecutive loses I was down 40% of my account. I didn’t have the confidence to continue trading that method. I learned the lesson; I learned that I should never trust the method just because it’s described in a book. I learned that I should test a method before starting to trade real money. I also understood that I should risk less per trade. But I continued to search for holy grails that would give me only winning trades.

Buying a lot of cheap goods

When we are in a shop we may easily buy different things that don’t cost much. We may not need all that goods, but just because they don’t cost much we buy them. So we end up buying a lot of things because when we think about the single piece it doesn’t affect our budget so much, but if we sum all the amounts we realize that we’ve spent a lot.

The same thing happens when trading. Let’s assume that our profit target is $100, but we see only $50 potential profit we think that this time we will take only $50, because we are afraid to take a loss and we prefer a sure profit instead. This may be fine if it’s our last trade in our trading career, because as we don’t know where the price will go we can decide to take profits. It may also be fine if we do it once, because $50 will not make the difference. But if we continue to do it systematically we can discover that this is the cause of our failure as traders. You can read more about this in the article Exiting a trade is as important as entering it.

Preserving the trading capital

Successful traders suggest first to concentrate on preserving the trading capital while gaining experience and then to concentrate on making money. I agree with them. But this affirmation shouldn’t be misinterpreted.

This year it happened to me again to want to grow the trading account, before starting trading it with more trading methods. This time I tested the strategy, but when I was in a trade I closed it prematurely. My profit target was $100 but as soon as I was seeing $50-60 of profit I closed the trade. I was saying that I was doing this for growing the account size. How can we preserve capital, while gaining experience? Personally I was using this excuse to exit the trades prematurely.

This time I remained profitable, but my profit would be bigger if I closed the trades at the targets and not led by emotion.

Giving up an addiction

I think you’ve heard a lot of times phrases like. “This is my last cigarette”, “Today I’m eating the cake, but I’ll start a diet tomorrow” and of course “I’ll build my account and then I will follow my trading rules”. It’s time to start growing your trading account. You can do it only by following your trading plan. If you don’t follow it, why do you have one?


To preserve capital, don’t enter the trade if it doesn’t meet your criteria or if you are not sure about the chart formation. But once filled, follow trade management rules, don’t close it prematurely and don’t give it more room.

If you realize that you are not able to follow your rules on a series of trades, try to change them. Test how the method behaves with the trade managing rules that you are able to follow. If you are happy with the result you may trade that way. Otherwise, if you will see that not following the rules leads to losing money, you will be motivated to start following your trade management rules.

Define the rules for growing your trading account and use the rules that are compatible with it. Try scalping instead of trailing stop. This way you can have minor drawdowns. You have to test the trading system and see what works best for you based on the money you have in your trading account.

Choosing the Right Time Frame to Trade

One of the main problems of a beginner trader is the lack of money. The problem they should face is choosing the right timeframe for trading. But as you know the markets change. Sometimes when the volatility changes you have to adapt the trading strategy or to change the timeframe you are trading on.

Vulnerabilities of using fixed stop loss and take profit

I think the most vulnerable trading method is using the fixed stop and profit target. Assuming a trader feels comfortable risking a certain amount of money on a certain timeframe. When the volatility increases the trader should decrease the timeframe or he should change the trade management or stop trading for a while.

Lower timeframe doesn’t necessarily mean more money

There are different opinions about the lower timeframes. Some traders affirm that the intraday movement is just a noise. Other traders affirm that intraday moves can be exploited to generate more profit. The charts look the same as on bigger timeframes. I always had the opinion that trading the lower timeframes you can make more money, because you can find more opportunities. But when you trade the one minute chart you may realize that the price is moving too fast and you can’t manage to take all the signals that a trading system generates. Unfortunately, most of the times, you will not be able to enter the trades that move fast in your direction. Keep in mind this when testing the trading system.

Lower timeframe doesn’t necessarily mean better opportunities

Some traders think that on the lower timeframes they can make more money, because there are more opportunities. It’s obvious that the same system will give more trading opportunities on the 1 minute chart than on the hourly or daily chart. But when you test a method on two different timeframes you may realize that on the lower timeframe there will be more losing trades, because you may find more choppy situations. You will have to use more filters to achieve better results.

Lower timeframe doesn’t necessarily mean lower risk

Lots of traders choose to trade lower timeframes because they think that on the lower timeframes there is lower risk involved. This is true partially. The trade will require a lower risk in terms of money but if you make more trades and if it happens that all of them are losing trades. You will have a bigger lose. For example if your risk on the daily chart is $1000, but the risk on the 10 minutes chart is only $250 you may think that it’s better for your account to trade on the 10 minutes chart. If you will have 4 consecutive losers you will lose exactly the amount you would have lost if you traded the daily chart, plus the commissions. Take into consideration that in this example I assumed that you traded one contract on the daily and on the 10 minutes chart. If you risked the same amount in percentage, so the risked amount per trade was $1000, than four consecutive losers would give you a $4000 lose. I’m not encouraging you to risk more per trade and trade the daily charts. You can use the micro account if you trade FOREX, you can reduce the number of shares if you trade stocks or you can find a filter for your setups. This way you’ll increase the percentage of winning trades and you will make fewer trades, so instead of doing five trades a day you may do only five a month, this way you will reduce the risk and will improve your results.

A profitable trading system on a daily chart isn’t necessarily profitable on intraday charts

Lots of traders fail because they simply try to apply on lower timeframes the rules they find in trading books, that where meant for the daily or weekly charts. Most likely they will not work on the lower timeframes, especially if the method is based on some indicator and not on the price action. But newbie traders will try to trade using that rules without even testing them. Someone do it to reduce the risk, others because they believe that they will make more money, others because they are not patient and they want more action. Just because the chart looks the same, it doesn’t necessarily mean that the system will give you the same number of winning trades. So it’s a wise thing first to test your trading method before using it on other timeframes.

The spread and commissions

On the lower timeframes there may not be enough volatility for you to make money if you take in consideration the commissions or the spread.  The movement looks the same, but the amount of pips is very different. Choose the optimum exit strategy.


In my opinion, a valid reason to trade the intraday charts is if you can’t afford to risk the amount required on the bigger timeframe. This can be dealt with easily by using a micro account FOREX broker. You should trade on the timeframe that best fits your temperament and is compatible with you risk tolerance.