Category: Prudent Investment

October is a perilous month in order to trade stocks…

The other dangerous trading months are July, January, September, April, November, May, March, June, December, July, and February.

Mark Twain made this well-known observation around 1894. It appears the actual creator of Tom Sawyer and Huck Finn did not hold stocks within high regard.

Twain made a lot of money from his writing. But as an investor he was much less successful. Several failed endeavors lead to bankruptcy. Perhaps this particular explains his cynical comments on stocks.

One thing stands out to me. Twain singles out October for a special mention. As well as he’s not alone. The 10th month of the year has a track record of trouble.

There is some substance behind the fear of October. This particular month has seen some of the biggest market crashes. The three large ones were in 1929, 1987, and 2008.

So should we be fearful of a crash each October?

Well it’s interesting. Humans have a tendency for selective thinking. We notice events that support our beliefs, and we filter out those that challenge them. Psychologists call this confirmation bias.

Yes, Oct has seen some big drops. The media reminds all of us of this each year. This builds upon the notion that October is really a risky month. But could it be more so than any other 30 days?

Well, there is only one way to find out — let’s have a look at the data. I’m going to start with a table. This shows the average monthly performance for the S&P 500 since 1950.

Month	Average return	Percentage of up years
January	0.9%	60%
February	-0.1%	57%
March	1.1%	65%
April	1.4%	68%
May	0.1%	57%
June	-0.1%	51%
July	0.8%	54%
August	-0.2%	57%
September	-0.7%	45%
October	0.7%	62%
November	1.4%	66%
December	1.6%	75%

Source: Moneychimp.com

October isn’t therefore bad. The average return associated with 0.7% makes it the seventh most profitable month. Actually, October has been up 62% of times — that puts it in fifth place.

Now let me split it down a bit further. There is more to an typical than a single number. The composition of this figure could be reveling.

October’s worst results were in 1987 as well as 2008 — the market fell 21.8% and 16.8% respectively. These are far from the typical result. They are outliers — statistical long shots.

We also need to consider the upside. This is an important part of the story.

October’s best results are 16.3%, 11.1%, and 10.8%. The only other month to have three double-digit gains is January. Most months don’t have any double-digit gains at all.

The other point to make is the size of the actual returns. October’s 16.3% rise in The 1974 season is the biggest of any 30 days. The closest figure is 13.2% in January 1987.

An explanation for this strength is that October follows the seasonal fragile months. Take the gains of 16.3% and 10.8% for example. Both followed sharp Sept sell-offs.

You could call October the actual rebound month. The next few weeks could be interesting.

It’s funny how we only hear about October’s crashes. Hardly ever does anyone mention the actual rallies. And that’s confirmation bias in action — focus on one side, and filtration system the other.

The message is clear. It can make no sense to sidestep October.

Seasonal swings

You may remember a study I wrote a few months ago. It was about an age-old market adage: Sell in May and go away. The idea is to avoid the period between May and Oct.

Let me briefly recap…

The saying dates back to a bygone era. It was a time when the nobility ruled the market…and their sociable calendar had a big affect on stocks.

You see, May had been the start of the summer social period. There was sport to watch as well as lawn parties to attend. The marketplace lost its most energetic players.

With the big money on the actual sidelines, trading volume would dry up. This had a inclination to increase volatility. The safest bet was to sell and are available back at the end of the season.

Have an additional look at the above table. You will notice there is a strong seasonal pattern. November to April is actually noticeably stronger than May to October.

So forget about avoiding October. What would happen when we avoided May to October all together? Well let’s perform some testing to find out…

The first chart is probably familiar. It uses Quant Trader‘s entry and exit methods.

Take a look…

Click to enlarge

 

The start date for the test is 1 November 2005. There is no allocation for the seasonally weak May to October period. The system deals month in, month away.

This strategy performs well. Certain, there are pullbacks along the way. But profits regularly hit new highs — something the All Ordinaries hasn’t done.

Now let’s do an additional test. This time I’ll create a change. The system will only purchase between November and April. It will then exit just about all positions at the end of April every year.

To be clear, this strategy only operates six months of the year. This sits out the May to October periods.

Okay, are you ready for that results? Let’s have a look…

Click in order to enlarge

 

This is quite amazing. Excluding May to October removes a lot of the volatility. Profits increase in a smooth series of steps.

Go back to the first chart. Look closely at the big corrections. You’ll see they mainly occur during the seasonally weak several weeks. The years 2007, 2008, as well as 2011 are a standout.

But there are other things to consider. Some of the May to October periods are strong — namely 2009, 2012, and 2013. Missing these holds profits back.

I have one more graph for you. This is what the two strategies look like side-by-side…

Click to enlarge

 

The azure line is the strategy that trades year-round. ‘Sell in May and go away’ is the red line.

It appears selling in May can reduce volatility. But it comes at the expense of higher profits — it is a trade-off.

Selling in May is an fascinating concept. This 10 year snapshot suggests it has merit. But personally, I believe trading whenever an opportunity arises is the best strategy.

October isn’t such a scary 30 days when you look at the facts. Continually be a little skeptical when somebody only tells you one side from the story.

The seasonally weak months are now behind us. It won’t surprise me if the 2015 low is in place.

Until next week,

Jason

Editor’s note: Quant Trader’s algorithms possess detected a number of new opportunities. They are trending higher, and have the potential to run a long way.

You’ll be familiar with a few of the companies. But many are less well known. These are often the ones with the greatest benefit.

The seasonally strong months are now here. Take the next step…see what Quant Trader could do for you.

Looking forward into 2016, there will without doubt be further periods of volatility ahead — much like we saw in 2015. The important thing, though, is to approach the market with a good focus on what you want to achieve for that year.

While investors need to be careful, too much negativity can lead to missed opportunities. One way to start the entire year is to compile a list of shares you’d like to own. And…be patient. You only need to look over a price chart to see how far some shares can swing in any provided year.

I haven’t yet met anybody who can regularly pick a marketplace bottom, or a top for instance. So, if you pick an entry price, make sure you also have an exit price prior to placing your trade. That is, an end loss order.

To kick issues off in 2016, I’m going to run through some of the different ways that investors can manage their trades. By manage, I’m talking about risk management. So let’s check out some of these different stop loss methods now.

A review on risk management

First, a quick review on just what a stop loss is. A stop loss is a pre-determined point that once brought on, exits you out of a industry. You don’t sit there and mull it over. Nor is it something debate. Once it hits that level, then you’re out.

Though ordinarily a price level, you can also use additional points, like time, or a price to earnings (P/E) ratio, for example. A stop loss helps to manage your risk through setting out the maximum you’re prepared to lose on any given trade. However, in setting your stop loss, you needs to give your trade enough ‘room’ to move.

Now let’s look at some of the more popular strategies.

Fixed amount

One of the most common ways to set a stop loss is a straight proportion. For example, a trader might choose that they’ll put a stop loss level 10% below their entry cost. If they had $2,000 allocated to a trade, then they might exit the trade as soon as it drops $200 in worth.

However, you can see that 10% doesn’t give the trade much room to move. A decent correction is likely to knock you out of the trade. Determining what percentage to use often comes down to how long you plan to hold the industry for.

A long term investor (somebody that might hold for seven, eight or more years) might use the wider stop. Something like 25% or even 30%. Again, the idea is to provide the trade enough room to move while still giving you an exit point if the trade goes against you.

One thing to be aware is that this percentage is not an isolated number. It needs to be used in conjunction with the amount an investor allocates to any provided trade. If an investor made the decision they wanted to limit their own risk to a fixed amount for each trade, then a volatile stock will require the stop-loss to be further away than a much less volatile stock. This will figure out how many shares they buy.

For example, if stock A is actually volatile and trading at $10, a trader might decide to use the 20% stop loss level from the entry price. That’s $2 below the entry price. If they wanted to risk $1,000 per trade, then they would buy 500 shares.

That’s calculated by the risk quantity ($1,000) divided by the stop-loss amount ($2 — that’s 20% of $10), to provide you with 500 shares.

Now, if stock B is also trading from $10 but less volatile, a trader might use a 10% stop loss underneath the entry price. That’s $1 underneath the entry price. Again, if they wanted to risk $1,000 for each trade, then they would purchase 1,000 shares.

That’s determined by the risk amount ($1,000) divided by the stop loss quantity ($1 — that’s 10% of $10), to give you One,000 shares.

While these are simple examples, they do show you that there’s a relationship between the number of gives you buy and the underlying unpredictability.

Slippage

One thing you need to always be aware of is slippage. Just because you place a stop loss level in a specific price, it doesn’t mean that you’ll always be filled at that price. You have to think of a stop loss as a ‘trigger’.

Once the stop loss price is hit, it triggers your exit trade into the market. If there are no buyers at that level, you very well may get filled at a lower price than you anticipated. While there might be less chance of this happening with a big blue chip stock, it’s something you need to be conscious of. Especially with smaller, more speculative stocks.

For example, let’s say an investor has a stop loss at $6.50 and the share price closes tonight at $6.60. If the marketplace opens tomorrow at $6.Forty, then their stop loss is actually triggered. In effect, the order has become ‘live’.

However, they won’t get $6.50 since the price never traded there. Instead, it will be filled at the first available price on the market. In this example, it might be $6.Forty. Or, it could be lower. Your own exit trade needs to be matched up with a buyer before the trade will go through.

Some brokers will help you to limit the maximum amount of slippage you’ll accept before not putting the trade. If any doubt, give your broker a call and ask how them how their trading platform works.

Trailing stops

A trailing stop loss is simply as the name implies. Instead of the stop loss level remaining fixed at the same level, it shadows the price movement from the underlying share. As the stock price moves up, also does the stop less degree.

The most common way to do this is to maneuver your trailing stop at a set percentage level behind the proportion price. While you might start with the percentage you set your stop loss from, it doesn’t mean that you have to stick with it.

If the actual chart shows that the price is starting to flatten out or change direction, a trader might decide to tighten the stop-loss percentage to trigger an exit. That is, to lock in a profit. For some, this can give a clear cut way to manage their trades. It stops them from trying to guess when you should get out of a trade. In effect, it takes the emotion from the decision.

These strategies revolve around the cost of the stock. But the cost isn’t the only thing to make use of when working out your exit strategy.

Other exit strategies

Quite often an investor might find that, if a stock doesn’t go in their path to start with, then it might not go their way at all. Probably the trend they bought into has lost momentum. That is, just as they buy into it, the stock starts to trade sideways.

One way to manage this is by using ‘time stops’. A time stop takes you from your trade after a fixed time period. The time frame you choose will depend on your own trading strategy. For a day trader it might be as short as Half an hour. For a trader working on a weekly time scale, it might be a single day, or they may make use of the open of the second day as an exit trigger.

It might be that they haven’t lost any money at all. However, there are only a lot of trades they can do from any one time with their account. So, they want to avoid tying their money up in a industry that isn’t going anywhere.

And obviously, there is always technical analysis. It might be something as basic as a five day moving average crossing over a 30 day moving average.

As you can see, there are a multitude of different exit strategies you can use. It might be based on fundamental data — a trader might exit once a stock exceeds a certain P/E ratio. Or even, if a dividend yield begins creeping up to what appears like an unsustainable level, then this could trigger an exit.

Whichever technique you use, a stop loss is a really important tool to help you keep your cash when the market requires a turn for the worse.

What’s ahead for 2016

As I wrote at the beginning of this update, I think 2016 may throw us more unpredictability. In doing so, the market will also give us more opportunities to buy into high quality stocks at better costs than you could in a runaway bull market.

It’s a year that will reward the patient investor.

I’m really looking forward to getting stuck in to the markets in 2016. Here’s wishing that it will be a prosperous year for everyone.

Regards,

Matt Hibbard,

Editor, Total Income

Ed Note: This is an edited extract from a Total Income update. To find out more about Total Income click here.

From the Port Phillip Posting Library

Special Report: You probably already feeling that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent regardless of what happens in the next 12 months. In this special report, Sam unveils the simple principle behind that success. And you’ll also discover their top three small-cap picks with regard to 2016, which could bring you gains as high as 338% over the next 12 months. (more)

‘Then and now’ comparisons are fascinating.

I’m constantly amazed to see how times change — or don’t change. It could be a city skyline, or community values. No matter what the setting, the contrast is always interesting.

A few years back, I tracked down an original picture of my house. The picture dates back to 1906 — the year of construction.

I’ll never forget seeing the picture for the first time. Yes, it was my house — the windows, chimneys, as well as gables were unmistakable. But the setting was unrecognisable.

The photo shows the initial family standing in front of their new home. You can see buggy monitors in the then dirt road, and a long forgotten adjoining house sitting to the side.

It was like seeing an old buddy, but with a completely different existence to what you knew.

Images such as this captivate me. I imagine the period of the original photo. I wonder what the people were thinking. I’m wondering what it would have been like to be there on that day.

Pictures are just one way to help to make comparisons. Another contrast is to look back at statements concerning the future. Some are hopelessly wrong. But others get close to the mark.

Have a read of those next few paragraphs…

‘Imagine the coin toss…but one where you’re playing with a Packed COIN.

‘In other words: a gold coin that falls in your favour more often than not. Meaning the average winning payout is not 1-to-1…but 2.5-to-1. You have a $2.50 payout for a win…but only stand to shed a dollar if you lose.

‘Let me personally ask you: would YOU be keen to play? I don’t know about you, but I’d line up around the block to play which game ALL DAY LONG.

‘This is the Quant Trader advantage.

‘This 2.5-1 loaded coin is very similar to Quant Trader’s back-tested results over time.

‘When you average 38.5% with regard to winners and only 17% for nonwinners, you can do very well in the long run having a 53.4% strike rate. The typical hypothetical payout rate has been 2.59-to-1.

‘Are you beginning to see the clear and present advantage of this kind of trading?

‘It’s a bit like becoming told that there’s a certain live roulette wheel in the corner of the on line casino that’s got ten more black numbers than red figures.

‘Statistically, it’s telling you that, with time, you can’t help but make a lot of cash!‘

Quant Trader email — 15 November 2014

This is part of the original promotion for Quant Trader. This appeared a few days before reside signals began. All the outcomes at that stage were from back-testing.

I make use of back-testing all the time. It’s the best way I understand to test how a strategy is prone to perform in the future.

The idea at the rear of back-testing is simple. We want to test if your system worked consistently previously. If it does, then there’s valid reason to believe it will continue to function.

Back-testing doesn’t provide certainty. However it does indicate if a technique has merit. It’s one of the great advantages of system trading. It can save years of learning from mistakes.

Proof is in the pudding

So how does the back-testing compare 12 months later?

First, here are the performance numbers from back-testing. Fundamental essentials ones in the excerpt above. This is our ‘then’ period…

Average profit	38.5%
Average loss	-17%
Percentage of winning trades	53.4%
Payout ratio (dollars won for any dollar lost)	2.59:1

These are good numbers. The question is whether real life can live up to the past.

Okay, let’s wait and watch what ‘now’ looks like…

Average profit (just about all open & closed trades)	29.0%
Average loss (all open & closed deals)	-13.5%
Percentage of winning trades	51.3%
Payout ratio (dollars won for a dollar misplaced)	2.26:1

(As of 25 November 2015)

This is a great result. The live signals are in line with the back-testing. The system is doing exactly what it is supposed to do.

Now, let me clarify a few things about these numbers. The first table shows the outcomes of all closed trades. It covers the period from 1 January 1993 to 31 October 2014.

The second table is from 17 November 2014, the day reside signals began. It includes just about all open and closed trades. I’m including open trades as they currently make up the majority of signals.

You’ll notice the average revenue is lower for live signals. This is partly because many positions are still open. Some may move a lot additional. This would increase the average over time.

I also expect the average reduction will ultimately rise. The numbers from back-testing include a number of big bear markets. The future will also have its share of downturns.

But differences aside, the live indicators are meeting the standard set in testing.

Betting with the odds

I have 2 charts to show you. The first is the All Ordinaries…

This is what the last Twelve months looks like. It hasn’t been a classic year by any means.

Now let me show you how Quant Trader‘s trades are tracking…

As much as I like statistic, nothing can beat a good graph.

The chart exhibits Quant Trader‘s hypothetical profits over the same time. As always, there is no allocation for costs and dividends. It also assumes $1,000 upon every signal.

Quant Trader doesn’t get this right every time. In fact, close to half the trades have historically lost money. And that’s okay. It’s part of the strategy.

The aim is to trade stocks which meet the selection criteria. We then let the good trades operate, and cut the ones that don’t. That’s how the system makes money.

Quant Trader doesn’t offer certainty — I don’t know any method that will. There’ll be times when the indicators fail. That’s the reality of trading.

But I do know this. It’s a system with a long and consistent track record. That’s the easiest way I know to put the odds inside your favour.

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s note: Did any of your stocks strike new high this week? Chances are the answer is no. And that’s understandable…the All Ordinaries is still displaying a loss for the year. But some stocks are surging. They could create a big difference to your portfolio.

Take HUB24 Limited [ASX:HUB] for instance. You’ve probably never heard about this stock, but a week ago it hit a 4 and a half year high. And that is good for Quant Trader’s members. You see, Quant Trader has signalled this stock three times since July. The signals are now up 134%, 95%, and 62% respectively.

Anyone could possibly get gains like these. It’s all about having the right strategies. You can learn more about these here. Look for Jason’s article. The title is ‘It’s an Eagle’s World’.

At the end of year I like to reflect. Reflect on the year that is ending. Remember all the things that continued. We often forget major occasions in our own lives, not to mention major world events.

Of program it’s hard to document each and every major event in 2015 as well as rank them. Putting the most important first and then working down isn’t an easy task — unless you are Google.

You see, Google Developments is one of the most fascinating tools on the internet. You can go to the site and see what is ‘trending’ on Google right now. You can also see what was trending last week, recently and last year.

And every year Search engines has a look back to see what individuals were searching for. It’s a pretty good tool to see what was important to people throughout the year.

Here are the most significant things according to Aussies in their Google searches in 2015.

In Feb the ‘Oscars 2015’ was the most important thing on Aussie minds. Over 406 zillion searches.

• Feb/March: Cricket World Cup (323M+ queries)
• April: Nepal Earthquake (85M+ searches)
• May: Princess Charlotte is born (105M+ searches)
• June: China Crisis (12M+ searches)
• September: Australia’s new Prime Minister (22M+ queries)
• Sept/October: Rugby World Cup (246M+ queries)
• November: Paris under attack (897M+ queries)

That’s a lot of searches, and some substantial global events. Of course, Search engines goes much deeper with its research analysis than just major occasions. On the site you can drill down and find other top lists for searches.

For example, the most popular research starting with the phrase ‘What is…?‘ was ‘What is Netflix?‘

Considering Netflix [NASDAQ:NFLX] launched around australia in 2015, that’s no great surprise. And I’m sure the head honchos at Netflix are delighted with that gem of information.

But there is something else on another checklist I found particularly interesting. It had been the 10th most popular search for ‘How to…?‘

How to make money

According to Search engines, Australians are particularly interested in how to make money. A little deeper and you find this flow onto other how to make money searches.

These consist of how to make money online, how to make money quick and making money.

What I also found incredibly interesting is the increase in interest for ‘How to Make Money’ over time. You can clearly see in the graph below this is a subject many Australians want to know about.

Source: Google Trends

So how do you? How do you earn money? Well is surprisingly easy. And I’m going to tell you just how, right now.

First off, you make money by performing a service for someone or selling someone something that you own. In other words this is called using a job. That is the number one easiest way to make money.

But if you’re looking to make money outside of your job, there’s a simple premise you ought to get used to. Investment. To make money with time in excess of your salary and wages, you need to start to commit.

Now that can be in a range of various things. You could invest in property, cash, wine, classic cars, actually collectibles like vintage The exorcist figurines.

Investing in stocks

But for me the best way to invest is in the stock market. Purchasing shares in a company. And when that company is successful then your chances are their stock cost will rise, increasing the value of your investment.

If the company does very well…then you could see your initial investment double, triple, quadruple or even increase 10-fold.

Investment is one of the best ways to make money a high level salary and wage earner and wish to set up your financial long term. Of course it can be scary as well as intimidating if you’re a newcomer into it.

That why here at Money Morning we try to take the difficulty out of it. We are here to provide you with the information you cannot find in the mainstream papers or news. We look from investments and uncover firms that the big end of town don’t see, don’t understand and don’t know about.

These companies are the kinds that are great for investment. These companies, with excellent products, innovative services as well as aspirational leaders, are the ones that can move from zero to 100 in the blink of an eye. And also the shareholders in these companies are the ones that make money — and make it quick. These are the kinds of companies that I spend my days hunting for in my paid newsletter, Australian Small-Cap Investigator.

So if you’re thinking about how to make money, then look no further. Keep reading Money Morning. Or if you happen to be for a while and are looking to go ahead and take next step then think about registering to one of our investment services. Give it a try, see what you think — and hopefully you’ll be on the right path towards producing some money.

Sam Volkering,

Editor, Australian Small-Cap Investigator

From the Port Phillip Publishing Library

Special Statement:You probably already sense which stocks might be in for an additional bumpy ride in 2016. However that doesn’t have to mean that you need to miss out on making great cash. Because, according to small-cap analyst Sam Volkering, certain stocks could increase hundreds of percent no matter what happens in the next 12 months. In this unique report, Sam reveals the simple principle behind that success. And you’ll also discover his leading three small-cap picks for 2016, which could bring you gains as high as 338% within the next 12 months. [More]

How much insurance cover do you have?

I did a stocktake over the weekend. It turns out my loved ones has nine policies. You can include an extra couple if you consist of indirect cover.

Our insurance addresses everything from home to business…life to health. There’s something for everybody.

This level of cover doesn’t arrive cheap. The combined cost is thousands of dollars annually.

Some may state this is over the top. They could dispute the odds of the sky falling in are low. And they’d be right. The worst outcome rarely happens.

But sometimes the longshot gets up. This is where insurance pays its way.

You can insure just about anything these days. The key is deciding how far to go.

I have a strategy for making this decision. I call it the ‘what if’ test.

This is how it works. I ask myself what if the most detrimental was to happen. If I am prepared to live with the monetary outcome, I do nothing. But if not, then I insure. It’s as simple as that.

Let me provide you with an example.

Insuring a six figure bonus

Investment banks have a reputation for paying big bonuses. My former company — Bankers Trust — was no exclusion. Six figure bonuses were common. Some were higher still.

My most profitable year in the bank was 1998. A number trades had done very well. And I was on track for the greatest bonus of my career.

But there was a problem.

The markets had been on edge. An economic crisis was unfolding in Russia. Also it was sending shockwaves around the world. There was a real fear stock markets could fall hard.

Rumours had been circulating that my company was in financial trouble. A number of big bets on rising markets had gone south. There is a sense that the bank might not see out the year.

The collapse of a high profile hedge account didn’t help. This place extra pressure on a unstable situation. My concern had been the bank would go under when the markets sold off. That would be end of my bonus.

Insurance companies will give you cover for many things. Regrettably, bonus cover is not one of them. I had to tailor my own insurance package.

So I got creative. I purchased put options on high priced stocks. The logic was that if the markets crashed, my personal put options would rise in value — and cover the likely loss of my bonus.

It was an imperfect hedge. However it was better than nothing. For a few thousand dollars, I had a lot of safety if stocks took a dive.

Well, a crash didn’t eventuate. Bankers Trust made it through the 12 months. And I got my bonus.

The options were a write-off…they run out worthless. But that’s okay. It is a good year when you don’t need a payout on your insurance.

But my fears were real. My employer didn’t last considerably longer. Deutsche Bank took it over the following year.

Insurance is a key technique for managing risk. It’s your backstop for when things don’t go to plan.

Quant Trader offers two inbuilt insurance mechanisms. The first is the exit stop. Think of this as basic cover. It gets you out when a inventory falls. The money you shed is effectively your insurance coverage excess.

The next level of cover is more exotic…and it isn’t for everyone. This is short selling. The aim is to make money once the market falls. This should act as a buffer for losses on long trades.

The figures that count

Last week you saw the performance of long trades. Now I’ll consider the shorts. This will give you a obvious picture of how Quant Trader‘s insurance strategy is tracking.

But first, have a look at the next chart. It’s the All Ordinaries over the period Quant Trader has been giving live signals…

There are three distinct periods:

1. Stocks sell-off into mid December
2. There is a strong rally into the April high
3. A five month (and keeping track of) correction kicks in

Now check out the overall performance of Quant Trader‘s short trades.

>

This exhibits the hypothetical performance associated with Quant Trader‘s short signals. It assumes $1,000 on every short signal. There is no allowance for costs.

Again, you can see the three periods. The insurance policies are working hard in periods 1 and 3. This requires the pressure off losses through long trades.

Period 2 shows a loss. This is when the market is actually rallying. Shorts will typically be considered a drag on performance during these occasions. That’s the price of insurance.

Let me say that Quant Trader is not a standalone technique for trading short. The system makes most of its profit via buying shares. So don’t be concerned if you’re not comfortable with shorts.

But shorting is a worthwhile strategy for some investors. It takes the edge off lower periods. This tends to smooth out performance over time.

Most people insure their own car and house. A sizable majority also have private health cover. But fewer people think about cover for their share portfolios.

Insurance isn’t a free ride. I’ve paid much more within premiums than I’ve collected over the years. And that’s a good thing. Insurance coverage is a plan for the worst. It’s something I hope not to call upon.

Until next week,

By Jason McIntosh

Editor, Quant Trader

Editor’s note: If you don’t understand which stocks to brief, then Quant Trader can help. The system’s algorithms are constantly scanning the marketplace for vulnerable stocks. It will then issue a sell sign, and calculate a unique stop-loss.

Just a few days ago, Quant Trader identified a high profile chance. This stock was a shining star of the bull marketplace. Its shares soared by over 300%. But now the trend is gloomier. This market heavyweight has potentially a long way to fall. There is still time to get short…but hurry.

You can learn more about Quant Trader here.

I’ve come up with a new way to buy stocks. You could almost contemplate it a game. I call it ‘Stock Showdown’.

The rules of the game are this particular:

I present you with two stocks. I’ll give you some information about these stocks. Once you’ve seen the information you have to choose which one you’d like to put your money in. Simple.

There’s 1 catch though. I won’t tell you who the companies are. You have to make your decision purely based on facts.

This way there’s no emotion attached to your choice. No bias, no preconceived ideas. You’re purely making a sound financial choice.

Sound like fun? Great. Let us play.

First off, both of these stocks are ecommerce companies. Both of them are involved in everything from online shopping in order to mobile services and impair computing. They’re almost identical.

There’s a good chance you might guess that these companies are. But let’s play anyway.

Stock Number One

The first stock has a market limit of US$155 billion. They trade at a P/E Ratio of 23.04.

In the company’s 2015 financial 12 months they had revenues of just over US$11.9 billion. Their price of revenue was around US$3.73 billion. That gives them yucky profits of US$8.2 million. Net profit is US$3.8 million.

And finally the company has US$19.Seventy four billion in cash as well as total shareholder equity of US$29.67 billion.

The current stock price is US$59.95

Stock Number Two

The second stock has a market cap associated with US$250.7 billion. There is no P/E ratio for this company and you’re going to see why.

This company’s most recent full financial year they had income of US$88.9 billion. Their cost of revenue was around US$62.7 billion. That gives them gross profits of US$26.Two billion. This company didn’t have a net profit. They had net loss of US$241 million.

Finally this company has US$17.4 million in cash and complete shareholder equity of US$10.74 billion.

The current share price is US$536.07.

Decision time

So, which stock can you buy?

If you had to choose can you buy the stock that’s making money or the stock that’s dropping it? With so much uncertainty in the markets right now exactly where would it make sense to invest?

Stock number 1?

There’s a pretty good chance based on those numbers you’d choose inventory number one.

But let’s look at the stock price of number one over the last year.

Source: Google Finance

And what about the price of stock number two?

Source: Google Finance

Hang on that can not be right? Can it?

The stock that’s performing better financially (stock one) is down over 36% within the last year. The stock that’s performing worse financially (inventory two) is up 61% over the last year?

I’ll tell you which two businesses these are and why they are important in a moment. But here’s what the Financial Times had to say about them:

‘[Stock #1] return on invested capital is 8 per cent; [stock #2] is actually minus 3 per cent. Actually at a slightly slower pace, [stock #1] revenue is growing at Forty per cent against [stock #2] 17 per cent. It is [stock #2], though, that right now commands a premium valuation: it’s enterprise value is Twenty times next year’s predict earnings before interest, tax, depreciation and amortisation compared with [stock #1] from 19 times.‘

None of it really makes sense. If you look at the details stock number one comes out on the top. But the market doesn’t seem sensible at the moment. And that’s a problem.

‘Stock Showdown’ would be to demonstrate that, in the market, sometimes the reality just aren’t good enough.

Kings of ecommerce, east versus west

The two companies are Alibaba Group Holdings [NYSE:BABA] and Amazon.com Inc. [NASDAQ:AMZN]. Alibaba is inventory one, Amazon is stock two.

Now if you had known the stocks at the beginning of my small game would your decision have been the same? Or would have chosen Amazon over Alibaba? If you do choose stock one, would you now choose stock two?

If so, why?

That’s a question you should always ask yourself when investing in any kind of inventory, why?

In this case, if you’re trading based on pure fundamentals then you’d go with Alibaba. The facts don’t lie. Alibaba is a better stock. They’re the actual kings of ecommerce in China. They are a large company. And their leader, Jack Ma, is a pioneer associated with technology and commerce.

But if you are investing in hope, potential as well as promise then you’d probably opt for Amazon. It might become lucrative. It might become the biggest company in the world, one day. Amazon may be the King of ecommerce in the US and Western countries. And their leader, Jeff Bezos, is also a pioneer of technology and business.

Of course when you look at both of these companies you’re also comparing the East versus the West. And the recent slowdown in China, has dragged on the price of Alibaba. But even with which in mind, the facts don’t lie. Alibaba is an excellent stock. But the market doesn’t seem to think so.

This is indicative of the markets right now. They don’t seem to make sense. They are driven more by sentiment than fact. That causes a problem as an investor because it makes the market unpredictable.

But unpredictability also means there’s room for chance. Right now Alibaba is 37% down from its opening price when it outlined late September last year (it comes down to 10% down from its IPO price).

However it’s a whopping 51.8% down from its peak of $120 through November last year when the organization carried the same excitement that Amazon has now.

That’s opportunity. And that’s the kind of thing you should be searching for in any market you choose to purchase. Look for companies that are strong. Companies that make money, have solid fundamentals but are out of favour for no legitimate reason. Those are the kinds of stocks you want in your portfolio in the long run.

So take ‘Stock Showdown’ as well as apply it to any stocks you want. It’s a fun game and it might also make for some fantastic investments.

Regards,

Sam

How often do you stop and take stock of your career, relationships, or life in general?

New Year’s Day time is a popular choice for self-reflection. It’s a opportunity to consider what went nicely…and not so well. Others make use of a traumatic event as the driver. Bad news is often a spark in order to re-assess our course.

I take stock regularly. It constantly jogs my memory to be grateful when occasions are good. This mental weigh-in also keeps me focussed when things turn south. We went through a particularly tough period in the late 1990s. The actual markets were volatile and fear was rife.

Two downturn had swept through the market. The first hit came from the Asian Financial Crisis. Hot on its heels was the Russian debt default. Many thought a big collapse was imminent.

Yes, the markets did fall — the Dow misplaced a quick fire 20%. But the negativity didn’t last. Stocks were back at all-time highs within a few months. This period is merely a footnote in history for most. Although for me personally, the impact was far reaching. It was a time I had to stop as well as take stock.

Let me explain what I mean.

Financial crises are nothing brand new. They are part of the economic period. And each time it’s the exact same story. A once high flying investment bank arrives crashing back to earth. The implosion of a financial juggernaut is a headline event. But this time I wasn’t reading about it…I was living it. The financial institution under siege — Bankers Trust — was my employer.

I began 1999 as a senior investor at a top firm. By mid-year, it was all over. I was from a job for the first time in my profession. Banks across the globe were tugging back risk. There was a glut of traders. Jobs were scarce. It was a time when many people left the industry.

Taking stock of the situation was important. It put things into perspective. Sure, I didn’t work. But I knew I had valuable skills. It was just a matter of getting a way to use them.

Looking past the instant gloom was the key. It provided the emotional boost in order to stride forward. Bankers Trust’s demise felt like the end around the globe. But it was actually a golden opportunity. This was the dawn of the highly creative period in my career. Redundancy was the nudge I needed to go out on my very own. I haven’t looked back since.

Challenging times… for some

The recent market sell-off is also an opportunity to take inventory. You’ve no doubt seen a number of trades go backwards. Several have probably hit their exit points. This can be emotionally screening.

I received an interesting email this week. It’s from a member who’s already taking stock of what the correction means for Quant Trader. Here’s what he says…

‘I have just finished my monthly review of the actual Quant portfolio. I joined from the get go and after 10 months I have to say I am impressed!

‘Some feedback on numbers…

‘As this was a bit of an experiment for me, I didn’t put all my cash into the project.?I have been trading primarily long signal 1s.?It required some time to set up a CFD account to start on the shorts, however i am now trading them also.

‘I have compared the various opportunities I have over the same some time and can report the following.

‘All Ordinaries down about 4.8%

‘Blue Chips down about 11.5%

‘Speculative Portfolio (used mainly from PPP recommendations after which own research) up 12.2% (at one point this was upward 46% but last month has hurt it!!)

‘Quant Trader (excluding trading costs and dividends)

• Up 11% (open wishes)
• Up 14.8% (open + closed wishes)
• Even (shorts)

‘Forex Trading – actually

‘So all up, I would say QT and PPP in general are doing pretty well given the market and unpredictability.

‘I have now gained enough confidence in the approach that I is going to be allocating another 5-10% to the project.’

Member, Dom

This correction is proving to be Dom’s ‘redundancy’ moment. He’s using a setback being an opportunity to access various methods. There’s nothing quite as revealing as a receding tide.

The outcome of this exercise speaks volumes. Dom is more confident. As a result, he is allocating more capital to the Quant Trader strategy. I believe this will result in a better return over time.

I’m likely to add to Dom’s analysis. This will give you a clear view of how Quant Trader is tracking.

Let me say this particular. The stats I’m going to show you are below their high point. And that’s fine. A method that needs ideal conditions to show its results is not worth trading.

Slicing and dicing the actual numbers

The following figures are for the period 17 November 2014 to 17 September 2015. That gives all of us 10 months of live signals to analyse.

The very first table shows the average revenue for long trades.

	Average Profit/Loss	Average Days within Trade
Open long trades	13.5%	159
Closed long trades	-3.7%	155
All Ordinaries	-4.8%	307

Now let me split this down further. This particular table separates open deals into profits and reduction. It does the same for closed trades.

	Average Profit/Loss	Average Days in Trade
Open profits	27.9%	171
Open losses	-6.9%	141
?
Closed profits	15.7%	196
Closed losses	-12.9%	136

The first thing you may notice is that profits are bigger than losses. Every trader wants this. But many lack a highly effective strategy to get it.

Quant Trader‘s approach is straightforward. It lets profits operate, and it cuts losses. This particular naturally leads to average earnings being higher. You won’t accomplish this by taking lots of small profits.

The other thing to note may be the average holding period. You can observe profitable trades have a greater average than losing types. And that makes sense. If a industry isn’t working, you get away.

Okay, let’s put all this into a chart. I much should you prefer a visual to a table.

>

This exhibits the hypothetical performance of Quant Trader‘s long signals. It presumes $1,000 on every long trade. There is no allowance with regard to costs or dividends.

Now let’s consider the All Ordinaries over the same period.

The two graphs tend to be broadly similar. That’s what I expect. The undercurrent of the Just about all Ordinaries will always be a key factor. However that doesn’t mean you can’t beat the market.

A strong strategy can make a big difference. This is when Quant Trader comes in. The aim is to hold strong stocks and cut weak ones. That is the foundation of outperformance.

Anyone can make money in perfect problems. But handling the tough occasions is the acid test. To date, I think it’s fair to state Quant Trader is holding its own.

Until in a few days,

By Jason McIntosh

Editor, Quant Trader

Editor’s note: Are any of your shares up 100% in the last 10 months? Chances are the answer is no. The All Ordinaries is lower, so normally many ASX stocks are lower as well. But that doesn’t mean there aren’t any opportunities — you just need to know where to look.

Quant Trader’s top five open trades are up between 303% as well as 109%. The system’s algorithms determine stocks on the move. It then allows its winners run. Click here to find out how you could buy stocks like these for your portfolio.

Development, development, development.

You can see it happening everywhere. All around the world, and right here in Australia too.

I understand there’s a lot to worry about. There usually is.

But just take a look at what’s happening in the property markets. You will see why the outlook we have at Cycles, Trends and Forecasts is so positive.

Make no mistake either — there’s big money included here.

You can see it in what’s begun in central Melbourne — not to mention what’s on the drawing board — to get an idea.

It’s almost unbelievable.

Source: The Age

Here’s a further flavor.

The ‘ultra wealthy‘ Deague family began construction on the $330 million apartment project within Box Hill, Melbourne a week ago. According to the Australian Financial Review it will have the tallest tower outside of the CBD on completion within 2017.

According to the paper,

‘Box Hill, the suburb 14 kilometres of eastern of the Melbourne CBD with a big Chinese population, has turned into a suburban high-rise hot spot with more than Twenty projects underway.’

A little further southeast of the city, Amstel Golf Club within Cranbourne is selling its land to a property developer and moving elsewhere.

The Age believes that it is a $40 million deal. The current course will make way for housing estates.

And it’s not just Victoria…

Up in New South Wales, two airports were put up for sale within Bankstown and Camden in May. The vendor received bids rumoured in order to well exceed the $200 million figure. The initial expectation had been for about $195 million.

The Australian Financial Review reports that Bankstown is the fifth most popular airport in Australia. There was ‘huge interest’ in the offer, according to the paper.

Here’s the actual probable reason:

‘Bankstown is going to be one of the big winners of big ticket spending on major road and rail projects by the?NSW government. It is also adjacent to a development proposed by Bob Ell’utes Leda Group which could open up more opportunities for Altis should it buy [the] airport.’

See what I mean here? There are so many opportunities in property as well as stocks that spring from all this.

Do yourself a favour and check out what they are here.

The boom no one’s watching

I wrote an article last week on the boom I don’t think many people are following. It’s on the Oriental, especially Chinese, travel growth. You can check the article out on the actual Money Morning website.

But for a quick overview, you can get an idea from the projected demand for pilots. That’s because of this graph from the Wall Street Journal….

An estimate for the quantity of tourists to come out of China is 200 million within 5 years.

I mention this now since i received the following feedback from Cycles, Trends and Forecasts editor Phil Anderson,

‘I got back to the UK tonight. I spent one and a half hours in the passport queue and was thinking about this very thing. I have absolutely no idea how airports and security are going to deal with this. There is not an airport terminal in the world that has planned for it.‘

And this, from Revolutionary Tech Investor‘sSam Volkering working in london,

‘Mate of mine flies with regard to EasyJet over here, he’s about a 12 months off becoming a Captain. He or she was telling me that the Oriental (Chinese) airlines are poaching ‘Western’ Captains much in the same way the Middle-East air carriers were over the last couple of years.

‘He reckons the money being thrown around is insane as in approaching a mil a year. And one of the main reasons they’re recruiting Western Captains is to reduce their insurance premiums.

‘Also because the regular of training in Asia is pretty poor compared to the West they convey these experienced captains onboard to help train up their own First Officers and trainees. Then they can also claim to possess Western pilots, when in all reality the bulk of them are not.‘

And here’s this from senior British pilot whose title I’m not at liberty to say…

‘I know a lot of Far Eastern airlines cannot get enough aircraft pilots to operate all the routes they want to expand onto. Certainly the actual south-east Asian area is growing like crazy.’

Like I said prior to, there is so much to be positive about. Start here to capitalise on these opportunities.

The myth of America’s decline

If you’re interested in what’s happening in China, I urge you to listen to the interview I did with Shaun Rein. It is free on The Daily Reckoning Podcast. Shaun is based in China, as well as runs a successful research home.

You can check it out here on iTunes or Android right here.

Shaun Rein is Episode Twenty one.

The latest is with a man called Josef Joffe. He wrote a book by what he calls the ‘myth’ of America’s decline.

I called him or her up to chat more about that idea. What he says is quite true. Ever since the 1950s America has been written off. There’s always already been a contender that’s considered on the threshold of dethroning the united states from its perch.

In the 1950s it had been the Soviet Union. In the Sixties it was Europe. Later it became Japan. Today, states Joffe, it’s China.

That’s not to say China is about to collapse. But the All of us still has a lot going for it. Its economy is still about double China’s in term of GDP.

In fact, one of the points we make in the latest issue of Cycles, Trends and Forecasts is that a slowing The far east will have little effect on the US.

He had a lot more to say around the current balance of power in the world.

As above, check it out right here on iTunes or Android here.

Cheers,

Callum

From the Port Phillip Publishing Library

Special Report: The End of Australia Vern Gowdie’s new book is known as The End of Australia: The Real Story Behind Australia’s Economic Collapse and What You Can do to Survive It. We are mailing free copies of this guide to anyone who requests one online. It does not make for pleasant reading. But the idea is the fact that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s happening…what happens next…and what you should be doing about it now… (much more)

Never before have grades been so important. They are the yardstick by which we measure ability. It seems you can’t get anywhere nowadays without good grades.

I was speaking with a friend the other day. She works at a big multinational in Sydney. It turns out, a university degree is the bare minimum to get a job interview — although a Masters would be better.

Now that’s a tall order. It automatically culls a big chunk of the populace.

So are grades really the be-all and end-all?

Well, Google says no. Laszlo Bock is Google’s Senior Vice President of people operations. He says that grades on your own are not a good predictor associated with career success.

Google instead hones within on something called understanding agility. This is essentially an individual’s ability to adapt. These flexible thinkers can move outside their own comfort zone and learn from mistakes.

And you know what. A 2011 study ranks learning agility as the best indicator of achievement — outscoring both IQ and education. So maybe the highest score isn’t the best guide after all.

I lately read a fascinating study. It centred on cadets at the West Stage Military Academy. And again, grades are in the heavy of it.

You see, entry levels are a key input in judging who’ll make it through. But it turns out there is a better predictor — the ‘Grit Test’. It essentially measures persistence and resilience.

The findings were amazing. Cadets with high Grit scores were most likely to complete the gruelling program. It was regardless of their academic levels.

And it makes sense. You don’t have to be the school dux to excel. But you will not make it big by quitting after an early setback.

So once again, high grades aren’t the best indicator of success. There are more factors to consider. Only then can you make a precise assessment.

The idea that high levels predict success has importance to trading. You see, many people believe good traders have high win rates. These people view the strike rate as a key measure of success.

Let me personally give you an example. It’s from a conversation I had a few years back at a wedding.

I got talking to a guest about buying and selling. He was working at a telco. But his goal was to be a trader. I was working at Bankers Trust at that time, and my new buddy wanted to know all about this.

One question sticks in my mind. He or she asked me what my hit rate was. In other words, he was asking what rates of my trades made money.

My answer was about 35% to 40%.

I remember his response vividly. He said ‘Oh, that’s honest‘

I paused as it were. Then it struck me. He or she though a low strike rate was bad. In his mind, I was confessing that my trading career was in tatters. We had a serious disconnect.

I then added some key information. This made all the difference. I explained my average winning industry was more than three times my personal average loss. This intended I was actually a very profitable trader.

But I can understand the misunderstandings. The internet is full of ads for every type of trading services. Many claim to have exceptional strike rates. This plays on the thinking that ‘high grades’ equal success.

Have a look at the following table.

	Trader A	Trader B	Trader C	Trader D
Strike rate	86.9%	67.1%	62.3%	60.4%

Suppose you want to hire a trader. Whose CV can you look at first?

Most people might go with trader A. Again, it’s that natural tendency to link a high quality with success. But that’s only part of the story. Let me add some more information.

	Trader A	Trader B	Trader C	Trader D
Strike rate	86.9%	67.1%	62.3%	60.4%
Profit	$62,182	$80,267	$104,587	$126,369

Trader A is no longer the surface of the class. It’s trader Deb making the most money.

These aren’t the random set of numbers. They are actually from some back-testing I did last week. My aim was to test two exit methods — taking profits and allowing winners runs.

All I did had been modify Quant Trader‘s exit algorithms. There were no changes to the admittance or risk management methods. The test period is between 1 January 2009 and 10 July 2015. Each industry is for $1,000. And there is no allocation for costs or dividends.

Here’s the final table. It shows the results from four situations.

	5% take profit	20% take profit	100% take profit	Let profits run
Strike rate	86.9%	67.1%	62.3%	60.4%
Profit	$62,182	$80,267	$104,587	$126,369
Number of trades	2577	1007	605	551
Ave profit per trade	$24	$79	$173	$229

The first two strategies are similar to how many individuals trade. Locking in an earlier profit typically leads to plenty of small wins. The problem with this is that it caps profits.

The third strategy gives profits scope to run. It then takes revenue if a stock rises through 100%. The final example is Quant Trader. Earnings are let run until the inventory hits its trailing quit.

Now, you may be thinking the 5% take profit strategy isn’t that bad. It appears to make good money. And you get plenty of winners to boot.

But there’s a catch

Look at the number of trades whenever you take 5% profits. Now consider the average profit per industry. This strategy may well lose money following brokerage.

And don’t forget, these tests use Quant Trader‘s entry and danger management strategies. Many investors don’t have a robust method for either.

The 20% take profit strategy is a little better…although it’s no stand apart.

It’s only when we let the those who win run that things get interesting. The number of trades drop, and profitability rises. The longer holding periods are also more prone to result in dividends.

I have one last thing to show you. The following chart brings all the numbers to life. This graphs the hypothetical performance of the four strategies.

There is no doubt about it. Letting those who win run makes a huge difference. Certain, you’ll have a lower strike price. But that’s okay. A high hit rate is not a good predictor of success.

Trading isn’t about becoming right more often…it’s about earning money.

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: Are any of your stocks up 89% in the last nine months? Chances are the answer is no. The All Ordinaries is lower, so normally many ASX stocks are down as well. But that doesn’t mean there aren’t any opportunities — you just need to know where to look.

Quant Trader has just locked in a good 89% gain on a stock known as Pro Medicus [ASX:PME]. And there are open positions along with even bigger gains. Click here to find out how you can buy stocks such as PME for your portfolio.

All investors say they want to make money.

But the truth is, most of them don’t.

They’re not interested for making money.

They’re only interested in being right.

Trouble is, in their mission to be right, they often end up being wrong.

That can cost them cash. Sometimes, a lot of money…

We’ve been favorable on this market for years.

When other people said it was too risky, we told you to buy. When others said you should sell, we told you to hang inside.

Those were the right decisions.

Now we’re issuing a this caution. You should prepare for a market accident. You’d think that after phoning this market right for most of the past seven years, investors could be glad for the warning.

But they are not. They hate it…as well as we’ve got the hate postal mail to prove it.

This isn’t a ‘fake’ crisis, it’s a real crisis

Take this particular email from subscriber, Chris, as an example:

‘Two years of buy purchase buy and now you are saying sell sell sell and all I am getting is loss after reduction.

‘You have now successfully stopped me personally investing in any shares a person recommend.‘

That’s just one example.

It’s obvious that some folks would prefer it if we didn’t warn them about a coming market accident.

They would prefer it if we kept on saying buy, buy, purchase, even though we believe the market is actually heading for a major fall.

And we aren’t just talking about one of those half-baked corrections the mainstream has cooked up over the past few years.

If we thought it would be one of those, we would tell you not to worry. But this is potentially more serious than that.

And although it’s still early days for this crash, so far we’ve got it spot on.

Check out this chart from the S&P/ASX 200 index. We’ve circled the date where we informed Tactical Wealth subscribers to buy two specific stocks which would profit from a falling market:

Source: Bloomberg

We’ll ask you: If a person gave you that advice, would you be grateful for the guidance, or would you reject it?

Implementing a ‘crash protection’ strategy

It’s logical to want to market at the top and buy at the bottom.

Every buyer knows that’s what you should do.

But, when it comes down to putting the theory in to practice, many investors prefer to stick to their guns.

They prefer to hold on to prove that they’re right instead of doing what’s right — in cases like this it means taking out ‘insurance’ to protect your wealth in the event of a market accident.

We’ll be clear on this. We aren’t saying that you should sell every stock you own. You should continue to hold stocks, especially if they’re having to pay you a nice dividend.

You should continue to speculate too. We’ve seen over the past few weeks that many small-cap as well as microcap stocks are holding up nicely, despite the recent fall.

But that shouldn’t stop you from taking measures to protect your portfolio.

That’s the reason why we recommended two specific ‘crash protection’ stocks in this month’s Tactical Wealth. One of those shares has gained 16%, and the other has gained 6.4%. Within the same timeframe, the S&P/ASX Two hundred index has dropped Six.9%.

We don’t know about you, but to all of us that seems like a pretty good method to achieve some peace of mind whenever stocks are going through a volatile period.

It’s OK to be wrong

But here is the bottom line. We don’t know for sure in the event that we’ll be right about the Sept or October crash.

And simply because we don’t know, that’s why we are taking precautions with our personal wealth, and why we recommend you take precautions with your wealth too.

Oddly enough, we hope we are wrong about a crashing market. We hope that the crash indicators that we’re seeing are just a fake alarm.

If they are, great. You will still own stocks in your profile, and you can easily get out of the actual ‘crash protection’ stocks we’ve recommended in order to Tactical Wealth subscribers.

Discover what they are here.

Like just about all insurance policies, it doesn’t come without some cost. By securing even part of your profile, you’ll forgo some increases if the market doesn’t accident.

But again, that’s just part of the deal with insurance policies. You take them out on the off-chance that you’ll need to make a claim…but in truth, you hope you’ll never have to.

The brief message here is, don’t worry about being right. Pay more attention to building and protecting your prosperity. And if sometimes that means changing your investment approach, then so be it.

It’s better to be incorrect about something and keep your wealth, rather than becoming wrong and it costing you a fortune.

Cheers,

Kris

The letters ‘GFC’ have global acknowledgement. And rightly so. It was one of the biggest financial meltdowns of all time.

Some resources say that 45% of global wealth had been lost by March 2009. Trillions of dollars increased in smoke. Many people lost everything.

The social cost had been overwhelming. Global job deficits were close to 27 zillion. Around 250,000 of those were Australian jobs. It had been a time of hardship and low self-esteem for many.

You can be sure of this: the actual GFC is a crash people will talk about for years to come.

But not today. I will tell you a story from an additional crash. It was only 7 years earlier. Yet it already draws a blank with regard to younger traders.

What I’m talking about is the Dotcom era. This is one of the great boom/busts of our time. And it drew in retail traders for the first time.

I remember watching a current affairs program of the day. It was profiling a brand new age trader — an everyday mum. Her classic line was ‘I can make $10,000 while making the kids’ lunch‘.

Then there was the actual host of a popular early morning breakfast show. When the accident finally came, he had to take the day off to ‘attend to his portfolio’. It was speculation gone wild.

Many were hailing it a new era. They said it was different to other booms. The thinking was: technology would forever boost growth. Old school stock analysis was supposedly obsolete.

But you know what. It had not been different — it never is actually.

You see, markets move in large recurring cycles (my friend, Phil Anderson, has an excellent service about cycles). The problem is that most people just focus on the immediate past. They just don’t see the overall patterns.

Let me personally tell you a story about one of these simple people. His name is actually Tony. He was a stockbroking customer of a colleague.

Tony was typical of many part-time speculators. He would take large positions in a few companies. The strategy was then to hold upon and hope they increased.

Now Tony had been my colleague’s client for a couple of years. He had a few decent wins. But some large losses were adding up. Their account was slowly heading south.

It was now late 1998. And the internet trend was about to hit top equipment.

Tony called my colleague. He said ‘buy me 20,000 shares in Sausage Software‘. Sausage was an emerging IT company. It’s shares were worth about $1.

Sausage shot to $2 a reveal within a couple of months. Just 3 months more and it was closing within on $10. Tony’s stake was quickly nearing $200,000.

Have a look at the next chart. This is what an 8-fold gain looks like.

My colleague advised Tony a2z to sell half. But he or she wouldn’t hear of it. The media was in a frenzy over Sausage. And so was Tony.

Sausage was your classic trend following stock. This ran, and ran, as well as ran.

The shares hit an optimum of $41 in March Two thousand. They had gone up 40-fold in just Fifteen months. It was what we call a 40 bagger.

Tony had run a $20,Thousand stake into a profit of around $800,000. He had also opposed all his broker’s calls to sell. Tony did exceptionally well to get this far.

There only agreed to be one more test — his leave strategy.

Think about this for a moment. How would you react?

It’s not as simple as stating sell. No one knew $41 had been the peak. And anyone prone to take profit had most likely sold out long ago.

Let me tell you what Tony did. He held on.

Sausage shares were back at $26 within just fourteen days. Tony’s $800,000 paper profit had been now worth $500,000. He saw $300,000 evaporate before his eyes.

My colleague was still being pressing Tony to sell. But there was a problem. Tony was now focusing on the $300,000 he had ‘lost’ — not the $500,Thousand he still had.

Many investors make this mistake. They location more value on what they’ve lost than what they still have. The need to get back to even overrides the necessity to get out.

Tony held, and held, and held. The shares were below $20 in times. Within two months they were below $10. And by 2003 they were buying and selling for less than $1.

Have a look at this chart — it’s a wipeout.

Source: BigCharts

It all comes down to this. A good entry strategy only gets you so far. You also need a plan to sell. This is what separates the plodders from the entertainers.

Let me show you what could have been. This is what happens when we apply Quant Trader‘s exit strategy to Tony’s trade.

Look at the difference a robust selling technique makes. It captures all but the final manic stages of a huge bubble.

An excellent real-time example is the Chinese market crash. Viewpoint is split on whether this is a short-term correction or a long-term bust line. The fact is, no one knows. This is exactly why you need an exit technique.

Quant Trader had exposure to the growth through the AMP Capital China Development Fund [ASX:AGF]. The system rode the trend up. But it won’t ride the popularity all the way back down.

Have a look at this chart.

Do you see the red dotted line below the stock price? That’s the trailing stop — it’s the point where we exit a trade. It ensures you don’t end up like Tony.

A looking stop won’t exit at the very top — that’s for the crystal golf ball gazers. But it does the next best thing. This gets the big middle area of the trend. That’s where you make the money.

Successful trading requires multiple strategies. You not only have to get to the big moves…you eventually have to get out. The trailing quit is the best way I know to get this done.

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: The basis of excellent trading is to stay with shares that are rising. But that’s insufficient. You also need to kill off the trades that are eroding your capital. Fortune favours the actual trader who masters this straightforward concept.

Quant Trader does this by utilizes algorithms — a collection of mathematical formula. These allow for consistent as well as unemotional trading. You can read more about Quant Trader’s algorithmic methods here.

The culmination of the last 9 months is almost here. In only 24 hours not only will you learn how you can USE the ‘fusion method’ investing strategy to much better time your stock investments…you will find three cheap companies currently bucking the broader market’s downwards trend.

Fundamentally, all three are appealing. But, importantly, the market is telling you they have turned a corner. They’re moving up. In other words, they’ve hit ‘lift-off point’. You’ll see what I mean the next day.

For now, here’s the final hit of my Facebook video chats with Kris Sayce. Today we talk about gold and maybe it’s a good time to buy. You can check it here.

Ahhh, gold. Why hath thou forsaken me?

I’ve been a long-term bull upon gold. I still am. But I’ve been terribly incorrect. The market’s verdict is, after all, final.

Who would’ve thought though? I mean, cast the mind back to 2012. The ECB has just said it would do whatever it takes to rescue the system. The Bank of Japan had just promised to go ‘Weimar’ on everybody. And the Fed was producing $85 billion per month in quantitative reducing.

Why wouldn’t you want to own precious metal? While I didn’t buy the argument that these actions would create high inflation or hyperinflation, I did think it would cause enough concerns for capital to seek the safety of gold.

What’s that thing they say about views? Something about everyone getting one…

Well, my opinion on precious metal was wrong. Horribly wrong. Yet I couldn’t see it at the time. My judgement was too clouded by my lengthy held biases about what gold ‘should’ do.

Like I said, I’m still bullish on gold. Just I’m cautious for the short term. I’m waiting for the market to warm back to the story prior to getting too enthusiastic.

If you had used the time to hear the market out…to listen to what it was trying to tell you back in 2012 as well as 2013, it would’ve already been a different story.

By the way, I’m telling you this because it’s something that you can learn to do too. That is, curb your excitement. Listen in to what the market says. Let me show you what I mean…

The graph below shows the US dollar gold price. After peaking in 2011, gold went into a remedial period, with support at the US$1,550 level.

Source: StockCharts

Then, on the back of all the central bank activity I pointed out above, gold broke greater and went back into an uptrend. (Note the short term shifting average, the blue line, crossing above the long term moving typical, the red line.)

But it was a confusing and fake move. The gold price quickly turned back down. The moving averages crossed again a few months later, in early 2013. This was a warning sign for anybody willing to listen.

The market had been telling you something wasn’t right. Despite all the bullish basic principles in the world, gold couldn’t create a new high. In fact, it was going back into a downtrend.

The rest is history. Except for parts of 2014, precious metal has been in a well defined downtrend ever since. While I think the long term fundamentals for gold remain outstanding, the market says I’m incorrect.

And I’m not about to argue. I will happily wait for the trend to show around before I start getting too excited about gold once again.

As I’ve pointed out before although, gold in Aussie dollars is a different story. It really bottomed back in 2013. But with the current big pullback in US dollar gold, even Aussie buck gold isn’t looking just like it did a month or so ago.

Despite the recent bounce, you’re ready to be cautious.

Among other things, it was this experience with the gold market that made me reassess and tweak my investment philosophy. As I’ve mentioned this week, I came up with the ‘fusion method’ to identify stocks that are both fundamentally sound AND are in established or emerging uptrends.

The beauty of this methodology is that you can use it in a fluff OR bear market. Because of the weakness the Aussie marketplace has experienced lately, this flexibility comes in handy.

For example, I have analysed the top 50 stocks on the ASX over the past few months in my subscribers. An increasing number of them are in downward trends. That’s telling you to stay away.

Even the stronger shares are under selling pressure. Yesterday, Telstra announced a decent result, but the market reacted negatively anyway. Telstra’s still in an uptrend, incidentally, but it’s not looking as strong as it was.

If this market does morph into a unpleasant bear, you’ll save yourself a lot of cash and angst by staying away from companies whose share costs are in a downtrend. It doesn’t matter if they’re essentially sound or good value. The actual downtrend warns that a change in investors’ emotional state is brewing. Just like it did with precious metal.

This reminds me of something I read in the classic book, The Money Game. So I went and caught it out to look up the passing I had in mind. The following is an estimate from a ‘Mister Johnson’, a revered you’ll need Wall Street in the 1960s.

‘You can have no preconceived suggestions. There are fundamentals in the marketplace, however the unexplored area is the psychological area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describer an emotional state.’

That’s what the fusion method attempts to do…it fuses the fundamentals using the charts. The charting evaluation is an attempt to describe the actual market’s ’emotional state’.

So if you’re willing to ‘have absolutely no preconceived ideas‘ there’s a whole new trading world that awaits a person. Given that many are now questioning the longevity of this bull market and are nervous about a new bear unfolding, it’s time you considered looking at things differently. The next day I’ll show you how. Keep an eye out on your inbox around 2pm.

Regards,

Greg