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Investing Essentials

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The Do’s and Don’ts of Investing in Real Estate

Real estate investing has created fortunes for many people, including the top three richest real estate investors:

1. Donald Bren: Estimated net worth: $15.5 billion
Bren made his fortune by purchasing a big stake in Irvine Company, which controlled 93,000 acres of land in Southern California, known as Irvine Ranch. That was in 1977; he became the sole owner of Irvine in 1996 and now owns more than 115 million square feet of real estate, primarily in Southern California.

2. Sun Hongbin: Estimated net worth: $9.2 billion
Although an American citizen, Sun Hongbin has made his fortune from investments outside the U.S. His Sunac China Holdings is one of China’s largest real estate developers, focusing on developing large-scale, medium- to high-end residential properties, as well as the Wanda Group’s hotel and tourism portfolio.

3. Stephen Ross: Estimated net worth: $7.6 billion
Stephen Ross began his real estate investing foray by developing affordable housing, then expanded into the Hudson Yards Redevelopment Project in NYC, a development that features eight structures that house residences, offices, a hotel, retail space, and a cultural center. Ross is also the owner of both the Miami Dolphins and Sunlife Stadium.

But it’s the Little Guy who Owns the Most Rental Properties
You might now be thinking that real estate investing is only for the rich. But you would be dead wrong. The truth, according to the U.S. Census Bureau, is that individual real estate investors account for 74.4% of rental properties in the United States. And the average real estate investor owns just three properties.

And even if you start out small (which I wholeheartedly recommend!), you can do very well by investing in real estate. When I was in my 30s, I worked in banking, and one of my fellow managers—with his wife—had started buying townhomes in Florida right after they were married. By the time I met them, they owned four properties. Now, they have a very large inventory of rentals and a booming property management business!

Of the 140 million housing units in the U.S., some 80 million are single-family homes, and about 15 million of those are rental properties. Here are some more fun facts about real estate investing, courtesy of

  • 6 million Americans earn income from rental properties
  • Landlords have an average income of $97,000 a year
  • Half of all landlords manage their own properties
  • Landlords have raised rent rates an average of 31% since 2010
  • Just 6% of rental properties are unoccupied
  • Landlords handle 6 repair calls a year from tenants
  • “Mom and pop” landlords own 22.7 million rental units
  • Half of single-property landlords purchased the property as a primary residence
  • Evicting a tenant may cost a landlord up to $10,000

The Rental Market is on Fire
The rental market is growing, and also becoming pretty lucrative—in terms of rents collected. reports that rental costs increased in 66% of U.S. counties between March and April 2019. And the market is even hotter today! Feeding the rise in rentals is an interesting statistic. According to RentCafe, as Baby Boomers continue to retire, many are choosing to rent, instead of buying a smaller home. In fact, the number of over-60 renters increased by 43% between 2007 and 2017.

Not surprisingly, the most expensive rental market is San Francisco, with an average rental rate of $3,690, according to Zumper. Zillow says San Fran is also one of the most expensive places to buy a home, with the average home coming in at $1,477,442.

According to Pew Research Center, rentals in the U.S. are at their highest percentage—36.6%— since 1965.

Renters are Getting Pickier
As the rental market grows, so do the expectations of the tenants. The top ten rental amenities desired, according to Zumper, are:

  1. Air Conditioning
  2. In-Unit Washer/Dryer
  3. Dishwasher
  4. On-Site Laundry
  5. Assigned Parking
  6. Central Heat
  7. Furnished
  8. Balcony
  9. Garage Parking
  10. Hardwood Floors

And the least-searched amenities were:

  1. Roof-Top Deck
  2. Package Service
  3. Concierge Service
  4. Residents Lounge
  5. Dry Cleaning Service

However, if you want to invest in luxury rental properties, these last five amenities will become very valuable. A Venturebeat survey reports that 63% of renters want smart home security, 63% desire smart home climate controls, 58% expect smart lighting, and 56% want safety devices like carbon monoxide detectors and nightlights.

So, keep these wish lists in mind as you search for potential properties to buy.

The Top 5 Criteria for Zeroing in on the Right Investment Property
Investing in real estate requires some serious research. You’ll need to study your market, know the demographics, look at housing trends, understand how to maximize the property value, and very importantly, figure out when to exit the property.

But before you do all that research, first pay special attention to the following criteria, which are the essential elements of real estate investing:

I’m sure you’ve heard this frequently spouted mantra regarding buying a home: “location, location, location.” That is still true—whether it’s your personal home or your investment property. Location can mean different things to different people. You may want to live in a home close to your work or your children’s school. Or you might desire a home with acreage, rather than a location in the suburbs. Some folks like to live in a thriving downtown.

Those are all personal preferences. But when it comes to real estate investing, they are major considerations. A professional real estate investor knows that choosing the right location can have a big impact on your investment returns. For example:

Big city or small town? Highly developed cities will be more expensive than less-populated areas. There’s no room to expand; they usually have a large number of vacant homes—many in disrepair—that may provide investment opportunities. However, be aware that large cities can also see rapid population declines, as was the case during the COVID pandemic.

According to the Brookings Institute, “Among the 10 largest cities, eight registered lower growth in 2019-20 than in 2018-19; six displayed their lowest growth in the last decade; and five lost population. The latter include New York, Los Angeles, and San Jose, Calif. (displayed in Figure 2), as well as Philadelphia and Chicago.”

You can see the results in the following graph.

City Populations

Accessibility, appearance, amenities, and safety are the hallmarks of a good neighborhood. You want your property to be close to major highways, with several egress points. Also, where applicable, consider how close you are to public transportation for commuters.

A nice-looking neighborhood is also desirable. Neatly kept lots, large trees, and nice landscaping are a plus. One way to gauge if a neighborhood is desirable is to look at the turnover. It’s a good sign if homes don’t stay on the market long.

Amenities such as parks or community spaces, restaurants, grocery stores, schools, fire stations, hospitals, and other retail shops, should be conveniently located. Schools are another important amenity.

Lastly, make sure the neighborhood has a low crime rate. You can usually find that out from your local law enforcement.

Determine if future development is on tap. Are their current plans for new schools, hospitals, public transportation, other civic infrastructure, or commercial or residential development that might improve property values?

Is it a good lot? Lots on busy streets or near noisy roads or highways are harder to resell. Likewise, a lot close to a commercial property is not usually desirable. Most of you know that I also own a real estate company, and I’ll give you a couple of examples of properties that had challenging locations. One was a gorgeous, all-brick, custom-built 3,600-square-foot home on five acres. It sat right next to a junkyard, and although there was a nice border of very tall trees between the house and the salvage yard, it took years—and a very reduced price—before it sold. Another property I showed a few months ago, was a great commercial building on a lovely tree-lined lot. However, right next door was a juvenile detention center. The building is still on the market.

On the other hand, lots that are near or on water or golf courses, wooded, or with mountain views are more likely to increase in value.

Choosing the right house is essential. Do you take your chances with a fixer-upper or buy “move-in-ready?” That depends on how much you think it’s going to cost to renovate, if you have the skills to do it yourself, or if you are going to have to pay someone else to do the reno and what your expected returns will be. But I’ll get into more detail on that in a minute.

Just know that choosing the right location is critical. In the choice between a fixer-upper on a better lot, compared to a decent house in a less desirable location, I would opt for location first.

All of these criteria are important when choosing properties to buy. And yes, you must keep reselling in mind before you make a real estate investment. A home that appreciates in value and doesn’t take long to sell will make your total profit picture much rosier.

Are you a Flipper, or a Long- or Short-Term Real Estate Investor?
Individual real estate investors come in three flavors: 1) folks who want to buy low and flip; 2) investors who buy vacation properties to rent out on a short-term basis; and 3) buyers who buy and rent homes over a long period of time, reaping the rewards of long-term income.

Note that in each of these scenarios, some renovations will most likely be required to outfit the property for resale or rentals.

So, you Want to be a Flipper of Properties?
Flipping properties sounds romantic, doesn’t it? And if you are a fan of HGTV or DIY (like me!), you are privy to scads of shows illustrating the “fun” of buying real estate for almost nothing, doing a few renovations, and then selling for a very nice price—usually within 8-12 months following your purchase.

Certainly, there are plenty of people who are really good at flipping. But, unfortunately, the reality of flipping properties is much less romantic. You’ll note that one or more of the stars of each home remodeling series is either a designer, craftsman, or general “can do anything” type of handyman. Now, if you are or have access to one or more of those types of people, you’ll be well ahead of the game. If not, your costs, time, and frustration are going to mount up.

To be an effective flipper, you’ll need to have some spare cash. The general consensus is the 70% rule, which states that an investor should pay no more than 70% of the after-repair value (ARV) of a property, minus the repairs needed. After the home is repaired/renovated, the ARV is what it is worth to buyers.

Next, it’s imperative that you create a budget; you need to know exactly how much money you have to 1) purchase the home, 2) renovate/repair it, and 3) cover marketing, real estate commissions, and other selling costs. A recent study from Harvard University reports that HGTV is doing its job—spending on remodeling reached $350 million by Q3 2019, up $20 million over the same period in 2018.

Here are a few ideas to help you reduce your cash outlay as you renovate:

  • Carefully choose which home features are worth spending a little bit more on—such as upgraded appliances, wide woodwork, elegant doors, etc.
  • If you can find them, use recycled or previously used materials you get from salvage sales or associates
  • Buy your supplies with a cash-back credit card, or a credit card with good rewards points

Also, don’t put funky features or designs in the home you want to flip. Vanilla is good; gilt is not. You want to attract the normal, mid-stream buyer, so stay true to classic designs that will easily resell.

If you need to take on a contractor to do the reno, secure references and get written estimates.

If you must get a mortgage loan to purchase the property, you’ll have to add the carrying costs (interest, closing fees, appraisal, credit check, etc.), into your expenses.

Determine how you are going to advertise the home once renovations are complete. To be on the multiple listing service (MLS), you’ll need to work with a Realtor. You can also list the home for sale on Zillow, but you will then be responsible for setting up and attending showing appointments and dealing with the mountainous paperwork. You can also hold open houses and advertise in the local newspaper. Note that all of these efforts will require some investment of your money and time.

Lastly, if you intend to make a business of flipping homes, you might consider getting your real estate license so you can at least save on commissions. One added benefit: Realtors have access to some of the best contractors, suppliers, and lenders to help you through your entire flipping process.

Are you in it for the Long Term?
This is a great way to build long-term passive income—buying properties and collecting rent over a number of years.

Besides the cash flow, landlords have some very nice tax deductions. Per, landlords can deduct mortgage interest (because it’s a business expense), depreciation of the property (usually over 27.5 years), property taxes and certain repairs.

When your tenant calls you in the middle of the night because the toilet is leaking, cheer yourself up by knowing you can deduct the repair! Now, there are lots of rules about what can be deducted immediately vs. what is a capital expense to be deducted over time. For example, adding a room on would be a capital expense. The IRS (Publication 527) also considers the following repairs to be capital expenses: landscaping and sprinkler systems, storm windows, new roofs, security systems, heating and A/C systems, water heaters, flooring, and insulation.

You may also be able to deduct transportation expenses associated with collecting rent, managing your rental or maintaining it; costs of advertising your rental; insurance on your rental; and utilities.

The IRS says you cannot deduct costs associated with travel between your home and the rental property (unless your home is your principal place of business), uncollected rent (but this depends on the accounting method you’re using for your rental income), and lost income during periods when your rental was vacant.

Lastly, be aware that most banks will not lend on long-term rentals unless they are move-in-ready. They generally will not provide rehab funds.

Do you Want to Buy Short-Term Vacation Rentals?
It sounds exciting to own a vacation/rental home, doesn’t it? I’ve done it before, and it was very lucrative. I was able to use a ski home in New Hampshire for an occasional vacation and rented it out via a property manager during the rest of the year. I held it about four years and sold it at a nice profit. And I learned a lot about owning a vacation rental!

First of all, you need to make sure that the home is in a popular location with lots of demand. Make sure to investigate your local city and county regulations to ensure they allow vacation rentals in that neighborhood. My friend was all set to buy a short-term rental in one of Nashville’s regentrified neighborhoods but learned that the city would not allow any more short-term rentals in that neighborhood.

Next, you’ll want to own properties for which you can steadily increase the rent year after year. And lastly, the home should be a good bargain when you buy it and have plenty of appreciation potential. This tool can help you determine value vs. income.

As with all real estate, there are pros and cons. These are from

Pros of Buying Short-Term Rentals

  • Higher rental income than longer-term rentals. In some resort areas, you could make as much as $5,000 for a weekly rental.
  • Pricing flexibility; you set the rates.
  • Flexibility in use: you have the opportunity to vacation at your own property.
  • Unlike long-term rentals, you will be able to check on your short-term rental regularly, clean it, and do required maintenance.

Cons of Buying Short-Term Rentals

  • Managing is time-consuming, but you can also do as I did—hire a property manager. More on that later.
  • Your property will probably not be rented 365 days a year. Ski rentals are popular in the winter. Cabins on northern lakes get a lot of use in the summer. This seasonality is important to consider when calculating your cash flow.
  • More risk—you can expect more damage, theft, or nuisance calls from neighbors when the renters’ parties get too loud.
  • Legal restrictions. As I mentioned above, some governmental regulations may not be favorable for short-term rentals.

Again, location is paramount. Here are some of the most popular places to own vacation rentals, according to

  1. Palm Springs, CA
  2. Sevier County, TN (my neck of the woods: think Pigeon Forge and Gatlinburg)
  3. Lake Tahoe
  4. Augustine, FL
  5. Panama City Beach, FL
  6. Flagstaff, AZ
  7. Big Bear Lake, CA
  8. Las Vegas, NV
  9. Sedona, AZ
  10. Savannah, GA

Of course, you may have a favorite place you like to visit; if so, check out the demographics to make sure there’s enough demand to keep you in steady cash flow.

Do you Need a Property Manager?
When I bought my New Hampshire ski home, I was very fortunate to have a property manager who handled most of the vacation rentals in the area. It was a very small town (Mt. Washington), and the monthly fees were reasonable. But, again, there are pros and cons of doing it yourself or hiring a property manager. These tips are from

The Pros of Self-Managing Your Rental Property

  • You’ll have 100% control over your investment.
  • You don’t need to pay the 7%-15% per month to a property manager.
  • You’ll get the chance to learn and gain experience in the rental property industry.
  • You’ll probably take better care of your property than a property manager would.

The Cons of Self-Managing Your Rental Property

  • The job is often very demanding and time-consuming. You are the person the tenant calls when the A/C stops working; the roof leaks; or the toilet stops up. That means you have to take care of the job or have a handyman on call.
  • You have to spend time collecting the rent.
  • You may not screen tenants properly and end up with a tenant that is consistently late; is a nuisance to neighbors; doesn’t take care of your property; and that you may have to evict.

However, if you employ a professional property manager who has the skills to screen tenants, knows how to collect rent, and has an iPhone filled with handymen and contractors, it may just be worth the monthly nut.

Do you Need a Loan to Buy Your Rental Investment?
There are several ways to finance rental properties:

Your cash.

Conventional Mortgages from banks and credit unions. Loans for investment properties generally require a 20% down payment. Before you apply for a loan, you will need a healthy credit score, of at least 650 or more; a debt-to-income ratio of 43% or lower; a financial statements for at least a couple of years listing your income, expenses, and assets; the ability to pay for any existing mortgage on top of your investment property’s mortgage; and six months of mortgage payments in the bank

Hard Money Loans. These are individuals or private companies that accept property or an asset (not necessarily the home you are buying) as collateral. They are usually short-term loans often used by residential developers. The term “hard money lending” doesn’t refer to how difficult it is to apply for; it refers to firmer financing terms when compared to other types of lending.

Hard money lenders are generally private investors or companies that deal specifically in this type of lending. Instead of looking at your credit score, they look at the value of the property—the after-repair value (ARV) in determining if they will make the loan.

These loans are usually a lot quicker to obtain than bank financing, and their loan terms are more flexible. But you will only have a short period in which to repay the loan (good for mostly flippers). And you’ll pay a higher interest rate. Hard money lenders will usually ask for about 11% to 15% and about five points (additional upfront percentage fees based on the loan amount).

To find a hard money lender, you can ask around, or just Google the term. I found pages of them in Tennessee. But make sure you check them out!

Private Loans. These are the ones you borrow from friends, relatives, business associates, or accredited investors. Terms are flexible, but these loans are also difficult to find.

How Much Money can you Make with Rental Properties?
Now, it’s time to put all this together and find the bottom line—how do you figure out if a property is worth your hard-earned money?

First, let’s start by defining some common terms used in rental property financing.

Net Operating Income (NOI) is how much money you make from a given investment property. To calculate it, take your total income and subtract operating expenses. Operating expenses include property manager fees, legal fees, general maintenance, property taxes, and any utilities that you pay.

Don’t include your mortgage payments—they are not operating expenses.

Capitalization Rate (Cap Rate). Think of it as similar to the stock market’s return on investment. It’s the ratio of the amount of income produced by a property to the original capital invested (or its current value). It tells you the percentage of the investment’s value that’s profit.

Cap Rate divides your net operating income (NOI) by the asset value. This should be equal to the property’s sale price. Know this: the higher the cap rate (higher returns), the higher the risk.

Internal Rate of Return (IRR). This estimates the interest you’ll earn on each dollar invested in a rental property over its holding period, or the rate of growth that a property has the potential to generate.

The calculation estimates long-term yield. When calculating IRR, set the net present value (NPV) of the property to zero and use projected cash flows for each year you plan on holding the building. Net present value is the value of money now, versus in the future once the money has accrued compound interest. It’s a complicated formula, so most investors use the IRR function in Excel to calculate the ratio.

Be aware that IRR assumes a stable rental environment and no unexpected repairs. A typical IRR metric ranges from 10-20% but can vary widely. It’s a way to measure whether or not a property is performing well for you.

Cash Flow. This tells you whether your property is making money for you—or not. It’s what you have left over after you’ve collected your rents and paid your expenses. It should be positive—or you are losing money—which is not why you got into the rental business!

Gross Rent Multiplier (GRM) helps you determine your investment’s worth. It’s calculated by dividing the property’s price by its gross rental income. The lower the GRM the better, but an average GRM is between 4-8.

LTV Ratio, or the Loan to Value Ratio measures the amount you’ll need vs. the property’s current fair market value. The difference between the percent a lender will finance and the property’s total value is the amount of cash that you will have to put into the deal. As I said earlier, most lenders will require at least a 20% down payment on an investment property loan. That would make your LTV 80% (100%-20%).

Debt Service Coverage Ratio compares the operating income you have available to service debt to your overall debt levels. Divide your net operating income by debt payments, on either a monthly, quarterly, or annual basis, to get your DSCR.

Lenders give great consideration to the DSCR. They want to make sure you can repay the loan. A high ratio indicates that you might have too much debt, and you may not qualify for a loan. A typical lender wants to see a DSCR in the 1.25–1.5 range. This means that your rental property produces 25% more of additional income after debt service. The higher the better.

Operating Expense Ratio (OER) shows how good you are at controlling expenses. To calculate it, add all operating expenses, less depreciation, and divide them by operating income. The lower the better.

Occupancy Rates consider two rates: 1) Physical Vacancy Rate—the number of vacant units, multiplied by 100, and divided by the total number of units. This gives you the percent of your units vacant when compared to the total units available. And 2) Economic Vacancy Rate, or the income you’re missing out on when a unit is vacant. Add up rents lost during the vacancy period and divided by the total rent that would have been collected in a year to get what the vacancy cost you.

Capital Gains Tax. There are two types:

Long-Term Capital Gains Tax is applicable if you sell a property you’ve owned for more than a year. You will pay tax on the profits you make.

Short-Term Capital Gains Tax is applicable when you’ve owned the property for less than a year (ex., house flip). Your profits are taxed according to short-term capital gains rates.

1031 Exchange is a great way to postpone capital gains taxes. With a 1031 Exchange, the IRS says that you can sell a property and reinvest the profit into what the IRS calls a “like-kind” investment. However, there is a time limit. You have to identify a replacement property for the assets sold within 45 days and then conclude the exchange within 180 days.

At last, we are getting to the bottom line! To determine if a rental property will be profitable for you, you must calculate its ROI. Return on investment (ROI) measures how much money, or profit, is made on an investment as a percentage of the cost of that investment.

For a cash purchase, to calculate the ROI, take the net profit or net gain on the investment and divide it by the original cost.

If you have a mortgage, you’ll need to factor in your down payment and mortgage payment, as well as other costs such as repair and maintenance costs, and regular expenses.

Here’s the formula:

Total gain on investment – original cost of the investment. Take that net gain and divide it by the original cost and you get the ROI.


Cash Transaction
You paid $300,000 in cash for the rental property.

The closing costs were $1,000 and remodeling costs totaled $9,000, bringing your total investment to $310,000 for the property.

You collected $2,000 in rent every month.

A year later:
You earned $24,000 in rental income for those 12 months.

Expenses including the water bill, property taxes, and insurance, totaled $2,400 for the year. or $200 per month.

Your annual return was $21,600 ($24,000 – $2,400).

To calculate the property’s ROI:

Divide the annual return ($21,600) by the amount of the total investment, or $310,000.

ROI = $21,600 ÷ $310,000 = 0.0697 or 6.97%.

Financed Transactions
For example, assume you bought the same $300,000 rental property as above, but instead of paying cash, you took out a mortgage.

The down payment needed for the mortgage was 20% of the purchase price, or $60,000 ($300,000 sales price x 20%).

Closing costs were higher, which is typical for a mortgage, totaling $2,500 upfront.

You paid $9,000 for remodeling.

Your total out-of-pocket expenses were $71,500 ($60,000 + $2,500 + $9,000).

There are also ongoing costs with a mortgage:
Let’s assume you took out a 30-year loan with a fixed 4% interest rate. On the borrowed $240,000, the monthly principal and interest payment would be $1,146.00.

We’ll add the same $200 per month to cover water, taxes, and insurance, making your total monthly payment $1,346.00.

Rental income of $2,000 per month totals $24,000 for the year.

Monthly cash flow is $654 ($2,000 rent - $1,346.00 mortgage payment).

One year later:
You earned $24,000 in total rental income for the year at $2,000 per month.

Your annual return was $7,848 ($654 x 12 months).

To calculate the property’s ROI:

Divide the annual return by your original out-of-pocket expenses (the down payment of $60,000, closing costs of $2,500, and remodeling for $9,000) to determine ROI.

ROI = $7.848 ÷ $71,500 = 0.1098.

Your ROI is 10.98%.

Now, the longer you hold your property, hopefully, the more value it will accumulate. So, when you finally elect to sell it, you can throw your home equity into the equation, and you’ll end up with a higher ROI.

Bottom line, ROI can vary greatly; so, it’s essential that you compare the expected ROI of each property you are considering purchasing.

5 More Tips to Becoming a Profitable Real Estate Investor
Finally, (I bet you thought we’d never get here!), I’ll leave you with a few other tips to help you maximize your profitability and minimize your costs in your real estate investing career:

Beware of High Interest Rates. Money is cheap right now, but it won’t always be. Keep that in mind, as you may be subject to variable interest rates at some point.

Calculate Your Margins. If you are buying distressed properties, investors should set a return goal of 10%. It’s a good rule of thumb to estimate maintenance costs at 1% of the property value annually. But don’t forget other expenses like homeowners’ insurance, possible homeowners’ association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.

Invest in Landlord Insurance. This covers property damage, lost rental income, and liability protection.

Expect Unexpected Costs. Think about emergency repairs (e.g., storms, fires, and burst pipes!) You’ll need to stow away 20%-30% of your rental income for such expense.

Invest in Less Expensive Homes. Your ongoing costs will be less.

Know Your Legal Obligations. This includes state and local landlord-tenant laws.

I hope this information is helpful in giving you some tips on real estate investing. Know that I am not an accountant or tax attorney, so make sure you seek qualified help before you begin your investing journey. I wish you good luck and healthy profits!

What’s Causing the Dollar Short Squeeze?

The month of June saw a fairly significant decline in the price of precious and industrial metals, which is broadly being attributed to a “short squeeze” in the USD. Gold and silver declined around 7% during the dollar’s rally, while copper suffered a 13% pullback and platinum led the way down with an 18% drop.

Although an immediate pullback in USD following the rally may have signaled exhaustion in short covering, the dollar has continued to strengthen since. Metals, broadly, experienced a relief rally but the ongoing strength has left metals’ price performance muted.


What Caused the Dollar Short Squeeze?
Serving as a catalyst to the dollar short squeeze event was the recent policy statement from Federal Reserve Chairman Jerome Powell, who indicated that the central bank could begin tightening interest rates by 2023, if not in 2022. While this is still a long way off, investors were spooked by the inference that prevailing easy money conditions will eventually come to a halt.

It was admittedly an emotional reaction to a distant event on the market’s part, but traders may also have been discounting an earlier-than-expected Fed tightening if inflation continues to increase in the coming months.

Last month, currency analysts quoted by Reuters noted that “If the risk-off response to expected Fed tightening persists, Treasury yields and tightening views might soften temporarily, too, allowing a dollar pullback.” But what appears to be happening is that, far from going “risk-off,” market participants seem to be moving closer to embracing a “risk-on” approach once again, as evidenced by recent gains in growth-sensitive areas of the stock market.

What’s more, the 10-year Treasury Yield Index (TNX) started showing strength again shortly after that weakness as investors seemed to be betting on a stronger economic outlook. More recent conditions have reversed that rise and driven the 10-year yield to lows not seen since the beginning of the year, however. Ongoing low treasury yields could potentially make non-yielding bullion more attractive as a safe haven in the near term.

Meanwhile, the leading industrial metals—particularly copper—are still in a position of short-term weakness. This can be seen in the graph of the Invesco DB Base Metals Fund (DBB), which has lately established a series of lower highs and lows and remains below its key 25-day and 50-day trend lines.


What to Do Now
While it’s always possible that the market is setting up for a classic “whipsaw” rally to confuse the metal bears, the fact remains that as long as the dollar index remains in a position of near-term strength, the safest course of action – if you invest in precious metals, like me – is to remain in a heavy cash position and avoid buying new long positions in the metals and mining stocks for now. Before you think about initiating new positions, you’ll need to see the dollar index show significant weakness by backing off levels and falling closer to its May low. Right now, the dollar’s residual strength is simply creating too many headwinds for the major metals.

Concerning gold mining stocks specifically, we also need to see substantial internal improvement before we start buying them again. As of this writing, my favorite technical indicator for the mining stocks—the 4-week momentum of the new highs and lows for the 50 most actively traded gold stocks—still hasn’t reversed its decline to let us know that the internal weakness in the gold miners has ended.

Do you have any precious metals plays in your portfolio? Tell us about them in the comments below!

Why Biden’s Proposed Tax Hikes Won’t Affect Stocks

News last month that President Biden was planning on hiking the capital gains tax rates on some investors cast a shadow over the market which was broadly blamed for rising selling pressure in equities. The fear, of course, is that higher taxes are bad for stocks and investors.

“Wealth inequality” in America was a central plank of Candidate Biden’s campaign platform last year and the proposal seems specifically designed to use higher taxes on wealthy Americans to fund The American Families Plan which includes enhanced tax credits for families. The initial plan, which is likely to be subjected to significant changes to get through Congress, proposes a top marginal income tax rate of 39.6% for households making more than $1 million annually.

There is also a new “Old-Age, Survivors, and Disability Insurance” (Social Security) payroll tax imposed on income earned above $400,000, evenly split between employers and employees.

Corporate income tax rates would increase to 28%, up from 21% now, which were just lowered four years ago by the Tax Cuts and Jobs Act in 2017 under former President Trump. Big businesses with profits of $100 million or more would also face a new alternative minimum tax to close corporate loopholes. The below chart, courtesy of the Cato Institute, shows the higher tax rates being proposed (red bars).

Federal Tax Rates in 2021

But what really got the stock market’s attention, and not in a good way, was the part of President Biden’s plan to nearly double the capital gains tax on folks making $1 million or more.

And when you add in the 3.8% surtax on investment income that helps pay for the Affordable Care Act it would raise the total capital gains tax on seven-figure income-earners to 43.6%!

According to estimates from the American Enterprise Institute on the plan’s likely impact, the top 1% of income earners (the target group for income inequality) would see their after-tax income decline by nearly 18%.

Do Higher Tax Rates Really Affect Stock Prices?
Overall, the first draft of Biden’s tax plan aims to raise tax revenue by $3.3 trillion over the next decade. But are higher taxes really the nightmare scenario for the stock market that some believe they are?

Capital Gains and Market Returns

Historically speaking, the answer is no.

In fact, a timely Tweet last week from Schwab chief investment strategist Liz Ann Sonders (see chart above) shows that there is virtually no relationship between changes in the capital gains tax rate and S&P 500 Index performance. This is based on many tax law changes dating back to the 1960s and up through the present.

The lack of correlation between higher taxes and lower stock prices holds true in both the year the tax change takes effect and the year before it happens, in anticipation of possible tax hikes (the stock market tends to be forward-looking, after all). In fact, Sonders goes on to note, “The last time cap gains went up (in 2013), the S&P had a stellar year (up 30%).”

There are, of course, still plenty of unknowns about what the final tax plan will look like. But investors should be able to take some comfort in the fact that, according to the historical record at least, higher tax rates are not automatically bad for stock prices.

Has this concern about capital gains tax rates caused you to alter your tax planning?

3 Positive Outcomes from the GameStop Fiasco

The GameStop (GME) fiasco was briefly the most newsworthy story on the planet, with a group of individual investors leveraging the commission-free trading app Robinhood and the social media site Reddit to coordinate a “short squeeze” by driving up the price of the heavily shorted stock and forcing professional investors to buy up shares and cover their short bets.

A few retail investors made money. Even more lost it, when they were left holding the bag as the stock came back to earth.

And in the background, there’s the broker-dealer network that required Robinhood to put up more cash to cover potential losses, an unexpected demand that led Robinhood to temporarily shut down trading in GameStop stock. Yes, the broker-dealer was just practicing good risk management, but it doesn’t seem right that the little guy was the one who was inconvenienced—or worse.

Still, I see numerous good outcomes from the affair.

First, in the wake of the testimony of the involved parties in Washington, I expect some kind of regulation that will tip the scales a bit more to the side of the individual investor. Already, Robinhood has modified its options trading screens in an effort to better educate its users.

Second, I expect the movement to democratize investing (one of Robinhood’s stated goals) to grow. Already, the firm’s zero-commission model has led other brokers to cut their fees to zero as well. The difference is that the older firms are making money from the big deposits their customers hold in cash. Robinhood, lacking those big cash deposits, gets paid when its customers trade, and that’s a bad incentive. In a frictionless world, customers who recognize this might transfer their assets out of Robinhood to another broker. Trouble is, Robinhood assesses a fee of $75 for that.

Third, and most important of all, I expect that the wave of traders who pushed up GameStop stock (as well as those who rode it back down) will work, over time, to improve their education about how the stock market really works. Call me an optimist, but I have great confidence in the ability of education to bring about positive change.

What Robinhood Investors Should Do Next
A strategy that works much better for the vast majority of investors is long-term investing. Trouble is, long-term investing doesn’t deliver the adrenaline rush that comes from watching your stock gap up in response to social media posts. And it doesn’t bring the camaraderie among fellow investors/traders (admittedly anonymous) that the Reddit/Robinhood crowd enjoy.

But if you truly care about your financial future, you’ll realize that investing is not a game. It isn’t meant to replace poker games or sports betting or visits to the casino—all of which have been in short supply thanks to the pandemic.

Investing is serious business—and it should be treated as such.

In fact, the original investment bible Security Analysis, published by Graham and Dodd way back in 1934, explained, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

They go on to explain that an investor may be defensive, in which preservation of capital is of utmost importance, or he may be “enterprising” or “aggressive,” in which case he strives a bit harder to increase his principal—but in both cases he does his research thoroughly and thus is well-informed about the prospects of his investments.

The Best Way to Learn About Investing
I was lucky; my father was a passionate investor who focused on growth stocks and he was happy to share his passion with others—which is how the Cabot business got started over 50 years ago.

But there are plenty of other ways to learn.

You can read books.

You can learn more about the value of charts.

And of course, you can become a regular reader of the advice published by any of the thoughtful analysts featured in this edition.

So Where is GameStop Stock Going Next?
When GME was trading at 100 (down from 483) I did a poll of 11 of those aforementioned analysts, asking them to predict (individually, not as a crowd) where GME would be at the end of June, and at the end of December.

Their average guess for the end of June was 72 (with a median of 50), while their average guess for the end of December was 34 (with a median of 31)—though one analyst predicted that GameStop would be acquired by year end, at 52.5.

Additionally, one analyst (our growth stock expert Mike Cintolo) predicted a Phoenix formation, in which the stock would experience a temporary rebirth that would take it to 185 before it collapsed again.

Well, the stock popped up to those levels (kudos to Mike!), and the odds are extremely high that it is going to 70—and then even lower.

What are your predictions for GME at the end of June and the end of December?

3 Free Websites that Will Help You Become a Better Investor

Professionals in equity research departments nationwide have access to a suite of tools that most individual investors either won’t need or simply can’t afford. The cost of something like a Bloomberg Terminal would be so exorbitant that it would easily wipe out any investment gains it might help you make.

So how does an individual stock trader level the playing field when the firm on the other side of the trade has the best research that money can buy?

The answer, perhaps unsurprisingly, is to take advantage of the amazing free resources that you can find online. There are a lot out there, and it can be easy to get overwhelmed, so here are three of my favorites.

Best Free Investing Resource: Twitter
If you are not on Twitter, you need to sign up. And when you do, make sure to follow me! It is far and away my favorite free investing resource (I would gladly pay if required).

I will give just one example, but I could write a book on the benefits of Twitter.

I closely follow spin-offs, but BBX Capital (BBXIA) slipped under the radar. It was tiny and there were some corporate governance concerns and so I didn’t spend much time on it until I saw Neil Cataldi tweet this.


To summarize, you had a recent spin-off trading at 39% of the cash that it had on its balance sheet (with no debt). Better yet, the company has operating businesses and real estate that were/are worth even more.

I quickly recommended the name to my subscribers and then bought it myself. We are up about 99% in five months! Book value per share is 16 (the stock price is 6.30) so there is still some good upside remaining.

Thanks, Neil!

Best Free Investing Resource: Google Alerts
Google Alerts are great and totally free. You just need to have a Google email to use them.

To set them up, go to

In a nutshell, you can get a daily email that alerts you to certain keywords.

Some keywords that I monitor:

  • Special dividend
  • Stock spin-off
  • Revenue pre-announcement

“Revenue pre-announcement” is a good one to use because – to state the obvious – it signals that things are going better than expected or worse than expected.

Usually, the market is slow to catch on. If a company reports a positive pre-announcement, its stock will trade up, but usually not by as much as it should.

Here’s an example.

On February 17, before the market opened, I got a Google Alert that a company called Stabilis Solutions (SLNG) had pre-announced positive revenue.


After reading the press release, I learned that Stabilis Solutions expected to generate Q4 revenue that is 170% higher than Q2 2020 revenue (the low point for the year). On a year-over-year basis, Q4 revenue is expected to be up at least 8%. It’s pretty impressive that an energy company is already back to peak revenue generation.

Meanwhile, the company’s valuation (1.4x revenue) seemed reasonable and there had been insider buying right around the current share price.

On the day of the pre-announcement, the stock jumped 3%; however, this was clearly an under-reaction. Fast forward to today and the stock has doubled!

Best Free Investing Resource: Koyfin
Koyfin is an amazing, FactSet-like resource that is completely free!

The company is venture backed so at some point I would expect it to start charging for certain features, but for now the company is focused on building a great resource.

Take advantage while it lasts!

My favorite feature with Koyfin is “Estimates Overview,” which enables you to see consensus estimates from sell-side analysts.

You can find consensus estimates using Yahoo Finance (another good free tool) but only on a limited basis.

Koyfin shows consensus expectations for Revenue, EBITDA, EBIT, and EPS. Further, its user interface is beautiful and intuitive.

I recommend checking it out.

What’s your favorite online research tool?

The Women’s Guide to Maximizing Wealth

In 1990, a friend asked me if I wanted to attend a National Association of Investors Corp. (NAIC, now called Better Investing) conference to learn about starting an investment club. I said, “sure,” and we went on to form a women-only club. There was a good reason for that. Most of our members were women aged late 30’s – 70 years old; many had no investment knowledge but were eager to learn; and none of us wanted men “taking over” and telling us what to do!

We did very well. As president, I made sure we had training every month, and I spent a lot of time helping these women learn the fundamentals of investing. But they put in the work. Eventually, we had 20 or so members—all who wanted to learn about investing. We did so well that every year, someone’s husband or boyfriend wanted to join, and we always voted a resounding no!

As you might imagine, that created some havoc in our personal lives. The solution was that I started an additional, co-ed club, and, not surprisingly, the majority of the members were men. (My women friends still did not want to comingle!) That club also was very successful—but our returns were never as good as the “women-only” club.

That disparity of returns did not belong just to our clubs; several national surveys confirm that women, on average, outperform men’s investment gains.

Between 1991 and 1996, The University of California reviewed 35,000 brokerage accounts and found that women outperformed the men by 0.94% every year.

Later, in 2018, financial services firm Fidelity reviewed more than 8 million investment accounts. They discovered that women not only save 0.4% more than men, but their investments also earn 0.4% more per year than those of men. That may not sound like much of a difference, but Fidelity’s math shows that over a lifetime, “using a 22-year-old starting out with a salary of $50,000 a year, a woman investor will outpace her male counterpart by more than $250,000.” That may mean the difference between eating beans and hot dogs regularly in your golden years, versus having a nice juicy steak once a week!

Finally, in 2020, a Goldman Sachs survey found that 43% of women-managed mutual funds outperformed their benchmark in 2020, compared to just 41% of those managed by men.

And in down markets—such as in 2015—on average, women lost 2.5% of their stock portfolio value, while men lost 3.8%.

Why the Difference?
There are several reason why women’s investment gains typically outpace those of men, including:

Women don’t trade as much. Fidelity reports that “men are 35% more likely to make trades,” which means they are paying more fees which, in turn, reduces their gains. A Wells Fargo study showed that single women trade 27% less frequently than single men. And Robo-advisor Betterment reports that women change their asset allocation 20% less frequently than men. In a survey of their investment accounts, Vanguard said women trade 40% less frequently than men.

The University of California study determined that this excess of trading reduced men’s investment gains by 2.65% a year. Interestingly, the hit to the returns of women who were considered traders, was just 1.72%.

Women save more money than men, as I mentioned above. Further, Fidelity found that while women save 0.4% more than men on an annual basis, when it comes to our retirement accounts—such as 401(k)s and IRAs—we save nearly 1% more.

Women don’t like risk as much as men. We tend to be more conservative investors, don’t put all our funds into equities alone, tend to diversify our portfolios more by using age-related, target-date funds, and make more automatic deposits, ensuring a constant influx of investing funds.

A study by WIM Analytics found that women take 94% of the risk that men take. And only 5% of women take much risk at all.

That, unfortunately, is not really enough for most of us, as playing it completely safe will drastically limit your returns. There’s a balance between risk and reward—for all investors, depending on your personal risk profile and investment strategy. If you invest in equities, history tells us that the S&P 500 has—on an annual basis—returned on average 9%. If you limit yourself to just extremely conservative fixed income investments, like bonds, over a 30-year period, you’re gains will probably add up to just half of that. Which is why most investment professionals recommend a mix of equities and other assets.

investing mindset

Women are less impulsive. Women don’t react to market or stock fluctuations as much as men. As many of us are long-term planners, we tend to view our investments that way. I can’t tell you how much more often a man in our co-ed investment club would recommend acting on a stock with very little information—often just a “hot” tip. Conversely, the women in that club and our women-only club always insisted on additional research before making an investment decision.

As I always say, those “hot” tips are good for one thing only—an idea that needs to be further researched to determine if it fits into your personal investing strategy.

Women Can do Even Better – What’s Holding us Back?
Women could see even better investment returns but there are a few societal mores that often prevent us from maximizing our gains.

Women have less confidence in our investing and financial abilities and skills. This dates back to puberty. A Time magazine study of 1,300+ girls from ages 8 to 18 and their parents discovered that “between the ages of 8-14, girls’ confidence levels drop by 30%.” Boys also see decreased confidence at these ages, but by age 14, “girls are hitting their low, and boys’ confidence is still 27% higher.”

That lack of confidence persists into adulthood for women, although often, confidence tends to rise with our age. However, the statistics are dim. According to Fidelity, just 9% of women think they are better investors than men (despite the proof to the contrary!). And Merrill Lynch says that just 52% of women have confidence that they can manage their own investments, compared to 68% of men. FINRA’s survey was even worse. That survey concluded that while 49% of men feel confident in making investment decisions, that number goes down to 34% with women.

But as I said, sometimes age helps. A report from U.S. Trust found that millennials (born between 1981-2000) are 46% confident in their investing skills; Gen X (born between 1965-1980), 52%; baby boomers (born between 1946-1964), 54%; and the silent generation of women (born between 1927-1945), 60%. So, there’s some hope for us!

Part of the lack of confidence is due to limited exposure to financial and investing education. I had a mother who ran the finances in our household, so I was lucky. In my years running banks I personally experienced dozens of instances of widows trying to locate their assets following the deaths of their husbands with no idea where to start. And once they found the assets, they lacked the tools or knowledge to manage them. Now, that’s a shame!

Another interesting point—I also started an investment club for gifted middle-school children, most of whom were boys. They were all from fairly wealthy families, and their parents had started their investment education at a very young age. But again, the demographics were mostly boys—not too many girls were afforded the same opportunities.

Women experience more fear around finances. Because women have less exposure to managing finances they are often too frightened to wade into the investing waters. I’ve heard from many of my professional friends—doctors, lawyers, and CEOs—who have spouted plenty of excuses as to why they don’t handle their own investments, including:

  • I’m not good at math
  • My husband (father, brother-in-law, etc.) handles all that
  • I don’t have enough money to invest
  • I don’t have time to learn about investing
  • I’m not interested

And while you would think that younger women are more financially savvy, that, apparently, is not the case. According to SoFi and Levo League, 56% of millennial women admit that fear holds them back from investing. That’s really too bad, as millennials, aged 21 - 40, have a long runway to retirement during which they could be saving and investing.

Cost of a wedding

This fear of investing significantly limits the accumulation of wealth. While about 25% of women are involved in the stock market, they also keepa whole lot of cash around. BlackRock reports that the portfolio of the average woman is 68% in cash. To that I say, “what?”

I know from experience you can learn how to be a good investor. In my first investment club, those women had never bought a stock; they didn’t balance their checkbooks; and they didn’t know how to calculate a percentage gain. If they can learn that (in a short period of time) and ultimately, become very successful investors with an investment club portfolio that today runs into the hundreds of thousands of dollars, so can you!

Women make less money than men, on average, so we have to make our money work harder! Last year, updated its gender inequality study, reporting that women earned about 82% of the wages of men. That’s $0.82 vs. $1.00. Sure, that is an improvement—in 1963, that number was 59%. But it’s inequitable and it puts us behind from the start. That extra 18 cents compounds over a lifetime of working. And it’s just less money to invest, which limits our gains.

As we grow older, men’s salaries tend to move up—peaking at an average of $101,200 at age 55. However, women tend to reach their peak earnings at age 44, topping out at an average of $66,700. Now, that difference can drastically change how much money we end up with at retirement. And, in fact, it is estimated that the cumulative lifetime earnings gap between men and women is $1,055,000.

Women traditionally bear the cost of getting married. The Knot informs us that the average cost of a wedding today is $30,000. And that’s if you pay cash. But if you’re like most young brides, you’ll charge a good portion of those costs, which means you are going to rack up substantial interest cost. You know, you can buy a decent economy car for that, or make a meaningful down payment on your first house! If you happen to come from a family that can afford it, it’s traditionally the bride’s parents that foot the bill. That may be a wonderful gift, but it’s at the expense of assets that could continue to grow over time to be passed down in the future.

Women have children. reports that in 2020, the cost of raising a child until age 17 was $233,610 on average.

Women take time out to care for children. That tends to reduce our income by a whopping 39%. And maybe more. Here’s just one example from, depicting wages lost due to taking time off to care for children:

“Let’s consider life without COVID (please!) in which a 28-year-old woman is doing some advance thinking, and figures she might take off two years starting at age 35 to have a kid. She started working at 22, and right now earns $60,000, and is contributing 10% to her 401(k) and her employer kicks in a 3% match. Those two years off (at 35 and 36) translate to a loss of around $330,000.

Here’s where it gets big: If she stays out for five years, which many parents of young children do, the total financial loss over her lifetime is $900,000.”

That’s frightening, isn’t it? Here’s a link to their calculator, so you can compute how opting to temporarily leave the work force may impact your future savings.

women with kids

men with kids

Women are often financially responsible for the care of our elderly parents. The average price of an assisted care facility in the U.S. is $4,000 per month (the range is $2,844 to $9,266, according to And a skilled nursing facility will set you back from $153 to $963 per day. They offer a cost of care calculator for you to find costs in your area of the country.

Women bear the cost of getting divorced. According to one report from the U.S. Government Accountability Office, women’s household income fell by 41% following a divorce or separation after age 50, while men’s household income dropped by only 23%.

Women live an average of five years longer than men—80.5 years vs. 75.1. And during those extra years, we will probably see our healthcare costs climb. Consequently, our money has to last longer, according to the CDC.

Women’s ultimate financial goals fall short of the goals set by men. It turns out that our goals are not all that different than men’s: vacations, education for our children, eldercare for our parents, and a secure retirement. Yet, a Mylo Financial Technologies study showed that men’s financial goals, on average, are double those that women set. It’s true that goals should be realistic, but in this case, it’s important to aim for—and to plan for—a much more substantial financial goal than we do now.

How to Overcome the Hurdles to Build a Bigger Nest Egg
Those statistics sound a bit depressing, don’t they? However, it’s not too late to kick your finances into high gear. There are some very practical steps that you can take.

Learn as much as you can about money. Before you dive in, you need to determine what you know and what you don’t know. So, first step, figure out your financial IQ. There are many websites with such quizzes. I would recommend you find a few, take them, and then decide where the holes are in your financial education. AARP and CNBC both offer quizzes that can help you get started.

Next, it’s time to learn!

In today’s world, there’s lots of investment education available. Here at Financial Freedom Federation and our sister site Cabot Wealth, we offer scads of educational articles.

If you are looking for some hands-on learning and would feel more comfortable joining a group of like-minded investors, consider starting or joining an investment club. These clubs focus on beginning investor education. To find one in your area, go to Better Investing (formerly NAIC) was founded in 1951 and has helped thousands of investment clubs get started. I have had a lot of experience with them; all of my clubs have been chapters of Better Investing. They do a fine job of educating investors.

There are numerous investing books that are helpful. Anything by Peter Lynch, the genius who kick-started the Fidelity Magellan Fund in 1977. At that time, the fund had a mere $18 million in assets. By the time he left 13 years later, it had grown to more than $14 billion in assets, and sported a 29% annual return. I’ve been a long-time fan of Lynch and his books Beating the Street and One up on Wall Street remain two of my favorites.

I would also recommend The Intelligent Investor by Benjamin Graham, Warren Buffett’s mentor. Graham is also the co-author, with David Dodd, of what I consider the securities industry bible, Security Analysis. That book is my all-time favorite, but it is a huge volume, and you may want to defer reading it until you have a bit of investing experience.

The other three books are suited for investors of any experience level.

By the way, I’m working on a comprehensive list of my favorite investment and financial books for our Financial Freedom website. As soon as I have it completed, I’ll shoot you an email.

Negotiate a higher salary. If you don’t ask, you don’t receive, in most cases. An AAUW survey found that just 53% of women felt confident in negotiating a salary, compared to 61% of men. But a Harvard study reported that if women are armed with objective information about the salaries of colleagues and peers in the same industry, they are actually better at negotiating than men. That’s no surprise, since as I mentioned earlier, we like to do our research!

So, if you’re ready to see if your pay is comparable to your cohorts (so that you have a base from which to negotiate), here are a few sites to consult:

  • (includes company reviews and employee feedback)
  • (for new grads)
  • (data from the U.S. Department of Labor)
  • (includes cost of living analysis and career salary potential)
  • (Bureau of Labor Statistics)

Start saving and investing early. That way, you can take advantage of compounding. This graph from paints a great picture:

compound interest

Here’s the back story:

“Michael saved $1,000 per month from the time he turned 25 until he turned 35. Then he stopped saving but left his money in his investment account where it continued to accrue at a 7% rate until he retired at age 65.

Jennifer held off and didn’t start saving until age 35. She put away $1,000 per month from her 35th birthday until she turned 45. Like Michael, she left the balance in her investment account, where it continued to accrue at a rate of 7% until age 65.

Sam didn’t get around to investing until age 45. Still, he invested $1,000 per month for 10 years, halting his savings at age 55. Then he also left his money to accrue at a 7% rate until his 65th birthday.”

They each saved exactly the same amount—$120,000, during a 10-year period.

But their ending nest eggs were dramatically different:

  • Michael, $1,444,969
  • Jennifer, $734,549
  • Sam, $373,407

The difference was due to starting early and enjoying the magic of compounding, which is simply your money making more money.

If you didn’t start early, there’s no time like the present to begin. And if you have younger relatives, encourage them to begin saving and investing right now!

Take a little more risk to boost your investment returns. Of course, be cautious; continue to do your research; but if you allocate most of your portfolio to conservative investments just so you sleep a little easier, your overall returns may just be so-so. Consequently, to boost your gains, consider carving out a small portion of your portfolio for more growth stocks that may offer some spectacular returns.

And the younger you are, the more risk you can afford, so if that’s the case, I recommend that you make your portfolio equity-heavy so that you can maximize your returns over time.

Set a tangible financial goal. Then, step-by-step, plan out how you are going to achieve it. Start with what you are saving/investing for, come up with a specific, reasonable (but stretch) goal, and make a plan as to how you are going to accomplish it. Create both short- and long-term goals. And celebrate when you reach those milestones! Each time you get a raise (or a windfall), instead of spending it, invest it (or at least part of it). And keep in mind that your goals will most likely change as you age, so be flexible.

Part of your goal-setting process will include creating a budget. After all, if you don’t know where your money is coming from and where it is going, you will not be successful in setting or achieving your ultimate goals. Along with your budget, it’s imperative to keep debt to a minimum.

Build an emergency fund. Traditional thinking was to set aside 3-6 months of living expenses in a liquid (not investment) fund. In today’s COVID-19 world, you might want to double that time frame. If you have an emergency fund, you’ll be ready for any temporary interruptions to your income or unexpected expenses, and you won’t have to take that money out of your regular savings/investment funds to meet that need.

Women are way behind men with this essential step. Last year, a MetLife survey found that 55% of women and 44% of men are living without this safety net.

Invest for retirement. There are many, many investment retirement options today, including IRAs, 401k’s, SEP’s, etc. And most of them offer some form of payroll deduction, making it very easy to “save it before you see it.”

If you think you’re going to be okay depending only on Social Security in your golden age, think again. This year, the average monthly benefit is $1,543, which would barely cover insurance, medication, utilities, and food—much less a mortgage or rent payment. And sadly, according to the National Women’s Law Center, in 2019, 10.3% of women, aged 65 and older lived in poverty. The rate for men in the same age group was 7.2%.

Reconsider paying for your children’s education. According to U.S., “the average cost of tuition and fees for the 2020–2021 school year was $41,411 at private colleges, $11,171 for state residents at public colleges and $26,809 for out-of-state students at state schools.”

College-bound seniors do have other options (besides mom and dad) in paying for their educations:

  1. Student loans come in many varieties and will require a dedicated effort to discover and dissect which ones may be of value to you and your children. This site lists the Top 10 student loans.
  2. Scholarships are plentiful, but may require a lot of research. But if you are diligent, you can find scholarships for almost anything—red-haired children, relatives of Realtors, specific courses of study, and yes, even women (especially in the STEM fields)! A couple of good sites to get started are org and
  3. I worked my way through college, and so did millions of other folks. I was fortunate to work for a company that paid 50% of my college tuition, and yes, there are still businesses that do that.

If you opt for a professional financial advisor, do your research carefully. Start with your friends, family, and colleagues; ask them if they have a trusted advisor. If not, U.S. News has a list you can consult. So does the National Association of Financial Advisors,. You can also check on for any violations by specific advisors. That will direct you to the SEC site for state registered investment advisers or the individuals who work for them. Be very careful, and if you do find someone you wish to work with, start slow—don’t give them all your money until they build trust.

Women and Money—a Bright Future
Despite the challenges we face, the prognosis for women and our money is excellent. According to, from 2016 to 2019, women accumulated wealth at a compound annual growth rate (CAGR) of 6.1%. And as you can see in the graph below, that rate goes up to 7.2% by 2023.

In fact, every year we are adding some $5 trillion to the wealth pool globally—at an accelerating rate. And one-third of the world’s wealth is now under our control.


Part of that wealth accumulation is due to the gradual changing in women’s attitudes about money.

A recent Visa study found that:

  • 57% of millennial women and 52% of Gen X women associate money with independence
  • 76% of millennial women and 78% of Gen X women associate money with security
  • 62% of women said they wouldn’t quit their job, no matter how much money their partner earned
  • 1 in 2 women believe they aren’t fairly compensated at work

I love this “awakening”! We’re starting to take responsibility for our financial futures and Financial Freedom, so let’s take the necessary steps to “go all in,” plan, save, and invest, so that we can maximize our wealth—for us, our children, and grandchildren.

P.S. For more information on many of these topics, please consult our Financial Freedom Federation website. I have written extensively on budgeting, goal-setting, retirement, etc.

3 Stocks that Won’t Benefit from the Post-Covid Recovery

Just one month into the new year, there are already signs of progress of reopening in the states. A growing number of U.S. states are gradually taking steps toward a return to normal. The stock market has already discounted much of the anticipated economic recovery, with perhaps some additional upside to come in the next few months as lockdowns end and strictures are eased.

But the substantial gains seen last year in several segments of the consumer discretionary sector—including automobiles, food services and entertainment—will likely lose some of their tailwinds as the reopening proceeds (and which is already baked into stock prices to some extent).

While some stock market sectors look to remain strong even as the reopening gains traction (e.g. communication services and financials), other areas will lag. Foremost among the potential laggards are companies in industries that aren’t poised to see an immediate benefit from the early stages of the economic reopening. Let’s take a look at some of them.

3 Reopening Stocks to Avoid
One such area that looks set to continue struggling in the coming months is the airline industry. According to the International Civil Aviation Organization (ICAO), airline industry seating capacity last year fell nearly 50% worldwide. Just 1.8 billion passengers booked flights through 2020, compared with around 4.5 billion in 2019, according to the ICAO.

Furthermore, according to a United Nations News report the ICAO “does not expect any improvement until the second quarter of 2021, although this will still be subject to the effectiveness of pandemic management and vaccination roll-out across the world.”

American Airlines (AAL)
One of the most useful proxies for how forward-looking institutional investors are betting on an airline industry recovery is to watch the stocks of the leading U.S. airlines. American Airlines (AAL) is a case in point. Passenger traffic for the nation’s largest carrier by fleet size remains muted, although the company did recently report a slight sequential increase in passenger demand.

Some industry analysts believe that a full recovery for the airlines could be anywhere from three to five years away.

But for now, American’s chart tells the story of sluggish demand which will likely continue into the foreseeable future. What would change this outlook? A decisive new breakout above the upper boundary of its 10-month trading range at the 20 level would suggest the market sees the proverbial “light at the end of the tunnel” and is beginning to discount a return to normalcy for the company. Until then, however, conservative investors should probably avoid the stock.

American Airlines Group (AAL) is one of several reopening stocks to avoid.

Carnival Corp. (CCL)
Another industry particularly hard hit by the pandemic is cruise lines. Carnival Corp. (CCL) is the industry leader but continues to face stiff headwinds from pandemic-related restrictions. As analyst Josh Arnold has pointed out, “Cruise lines are the most vulnerable because the business model is to pack thousands of people into a floating box and keep them there for days at a time.”

Carnival is still struggling with the effects of shutdowns and social distancing. However, cumulative advance bookings for the second half of 2021 are within the historical range, according to Carnival. And the company’s advance bookings for first-half 2022 are actually ahead of a “very strong” 2019 (which was at the high end of the historical range). Further, management said the company has enough cash ($9.5 billion) and liquidity to sustain itself through 2021 even in a zero-revenue environment. Still, virus-related problems are likely to remain a factor for the cruise line going forward.

Hyatt Hotels (H)
One industry that’s seeing a fair share of reopening optimism in the new year is lodging. Hotels were among last year’s biggest losers, but with the overall economic picture brightening, many observers feel confident that hotels will make a huge comeback in 2021. And while higher occupancy rates are widely expected by analysts this year compared to 2020, obstacles remain on the path to a full recovery.

Hyatt Hotels (H) experienced huge revenue losses last year due to pandemic-related shutdowns and travel restrictions. Subsequently, the company was forced to suspend dividend payments in order to conserve cash.

What’s more, last year’s disastrous events led to Hyatt taking on massive levels of debt (currently around $3 billion), which will require a substantial boost in the top line to service. Fortunately for Hyatt, the consensus expects revenues to increase in each of the next three quarters (though at a tepid pace).

But for a long-term recovery case to be made for Hyatt, a return of big-spending business customers is likely needed. The question that many are asking, though, is: “With the work-from-home paradigm likely here to stay, will business travel ever reach pre-pandemic levels again?” It doesn’t take much imagination to see that, even after a return to normal, traditional business travel isn’t likely to recover to pre-2020 levels anytime soon.

Hyatt is making efforts to counteract this likely decline in business guests by introducing its Work from Hyatt program, which permits customers the use of a private guest room from 7 a.m. to 7 p.m. with Wi-Fi, dining and parking discounts, plus other hotel perks. Management hopes this new offering will pick up some of the slack from lost overnight stay revenue. That remains to be seen, but given the listless action of Hyatt’s stock price in recent months, the market is obviously still skeptical. Avoid for now.

If you already have these stocks in your portfolio, are you selling or holding for the long-term?

What Will it Take for Gold to Shine Again?

Gold has been a source of frustration for investors who bought it as a hedge against pandemic-related economic and political uncertainty. Its price has continually eroded in the last several months, prompting growing concern that perhaps the metal has lost its value as a safety hedge.

I’ll make the case here that gold’s value as a protection against both uncertainty and inflation should remain intact. I’ll also explain what is holding gold prices back and what likely needs to happen before the yellow metal can finally resumes its long-term rise.

Gold investors are asking two big questions:

● Why are gold prices falling?
● How can you tell when gold is rebounding?

Why Are Gold Prices Falling?
I’ll start with why gold prices are falling. It’s the result of the puzzlement over gold’s currency factor. Since gold is priced in dollars, a decline in the dollar normally results in a corresponding advance in gold prices. But instead of rallying in the face of recent dollar weakness, gold fell.

It’s not often that gold and the dollar move in the same direction. But when it happens it’s normally the result of a significant countervailing force. In this case, the force in question is the current trajectory of U.S. Treasury bond yields.

Gold, in fact, competes with Treasury bonds; and since gold doesn’t offer a yield, yield-seeking investors tend to favor bonds over gold whenever bond rates are rising. Indeed, the rising 10-year yield has convinced many investors to allocate more of their money to Treasuries at gold’s expense as they remain focused on chasing higher yields.

How You’ll Know Gold is on the Rebound
All told, a significant T-bond yield decline is probably what it will take to kickstart the next extended rally for gold. Falling yields will cause investors to reevaluate their choice in safe-haven assets, and lower yields will naturally make owning Treasuries less attractive than owning gold. Moreover, assuming the dollar remains weak, it should serve as an added enticement for participants to own the yellow metal as a hedge against future inflation.

Bottom line: Gold’s next extended upside move isn’t likely to commence until the rising trend in the 10-year yield has exhausted itself. Rising yields will likely continue to exert some downward pressure on gold prices, even as a weak dollar keeps metal prices somewhat buoyant and not far below last year’s highs. For short-term trading purposes, a sharp decline under the 50-day line in the TNX (below) will serve as a preliminary signal that gold is primed for a turnaround.

In the meantime, with industrial metals (like copper, steel and aluminum) and rare earth metals still in a bull market, it’s my opinion that investors are justified in maintaining higher portfolio weightings in these base metals (via stocks and ETFs) versus precious metals. Just be sure to use a conservative money management discipline (or stop-loss strategy) whenever you’re trading the metals markets.

What are your thoughts on gold investing in the current market, are you buying, holding, or selling?

These Numbers Say Stocks Aren’t Actually Overvalued

Despite the continuing lockdown restrictions and political acrimony, the market indexes have been making an incessant series of new all-time highs for months now. This market is starting to look like that red-shirted, never-before-seen character on a Star Trek episode that beams down to check out the interesting planet with Kirk and Spock. You just know it’s dead meat.

Investors are anticipating a full recovery later this year, ushered in by the vaccine and the removal of remaining lockdowns and restrictions. This leads to the perception of overvalued stocks, but stocks may not be nearly as overvalued as most believe.

Sure, the current market P/E ratio of 32 is nose-bleed territory, and it can’t last. But that number is based on trailing earnings, which include a very temporary state of pandemic lockdowns and some of the worst economic quarters in history. A look beyond the past outlier year paints a more accurate picture.

The economy is already roaring back. So far, reported fourth-quarter earnings are averaging 1.7% growth over last year’s pre-pandemic fourth quarter. Companies are already making more money than before this virus nightmare, and the recovery still has one arm tied behind its back. Forward earnings for the S&P 500, based on estimates for the current year, are an average of 22 times, just slightly above the average market valuation of 20 times over the past 30 years.

And that 22 times number might be inflated.

What it All Means
First of all, estimates are just guesses. And these Wall Street, chic-to-be-pessimistic types have underestimated economic resilience and corporate earnings at every single turn of the recovery so far. It is highly likely that they remain true to form and end up low-balling earnings for this year. Such a likely occurrence would reduce the current forward earnings projections, perhaps even below the historical averages.

Plus, valuations are relative. Today’s microscopic interest rates justify higher stock valuations than the historical average. After all, money has no place else to go but stocks to fetch a decent return. The benchmark 10-year U.S. Treasury bond yield is currently a measly 1.15%. Sure, investors could always get spooked at some point. But fear always wanes. And when it does, investors will fall right back into the arms of the stock market.

The market tends to anticipate and look six to nine months into the future.

By then, it sees a full recovery as the remaining shackles come off the economy.

It will be an environment with the best GDP growth in decades, a market drowning in trillions of dollars in stimulus money, and record-low interest rates.

That’s like Christmas morning for the stock market, at least for now.

Could the market pull back after rising so far so fast? Of course it could. And it probably will. But any such selloff will likely be temporary ahead of what is one of the most promising market environments ever for the rest of the year.

What do you think? Is the market currently overvalued, or valued just enough?

Investing in Stocks

I know many readers of Financial Freedom are old hands at the stock market, but the investing world is changing. I also realize that every day, we are welcoming brand-new investors to our pages. And we’re also finding that many subscribers to my two new newsletters, Wall Street’s Best Stocks and Wall Street’s Best ETFs, are also fairly new to the investing world.

I’m thrilled to be able to serve you all and to be your guide to greater investing success.

At first glance, experienced subscribers may think this article may not apply to you, but I hope you’ll continue reading. Services offered at brokerage firms change almost as quickly as the market’s sentiment, and you may find your current company isn’t offering you the extent of products that other competitive firms have, and they may also be charging you more for their services. I’m sure you’ll agree that even if you love your broker, you want to make sure you are taking advantage of all that firm has to offer, and at a fair price. So, by reading further, you may just be able to negotiate a better deal! That’s one purpose for this article.

My primary goals are to make it easier for investors to:

  • Research and find a brokerage firm.
  • Understand that there are different ways to buy stocks.
  • Know how to set up your stock purchases to mitigate your risk and maximize your profits.

That sounds like a lot, doesn’t it? Well, we better get started then.

Step 1: What services and products do you need from your brokerage firm?
Now, I know some of you are going to be stock traders, not investors. But that’s a subject for another article, and while both investors and traders will have some of the same requirements for a brokerage firm, your technology and research needs will greatly differ.

Newer investors will most likely need:

  • Educational resources
  • Glossaries
  • Easily accessible help via chat, phone calls, or FAQ’s (frequently asked questions), and make sure that advice is FREE.

Some of you may want to practice before you begin buying and selling, and many brokerage firms will allow you to access online tools and set up “watch lists” for that purpose.

As you become more experienced—and confident—you will also want to seek analyst and other professional opinions on particular stocks, as well as the ability to view fundamental and technical data on each equity.

If you don’t want to buy and sell individual stocks but are interested in knowing more about better managing your 401(k) or other retirement accounts or buying mutual funds and ETFs (Exchange Traded Funds), you will still find many parts of this article helpful.

Lastly, I always believe goals are essential. Think about that for a moment. Do you have both long- and short-term investing goals? If so, your strategies for attaining those separate goals may differ, so keep that in mind as we proceed.

Step 2: Make sure you are dealing with a reputable broker.
You will want to make sure your brokerage firm is a member of the Securities Investor Protection Corporation (SIPC). The SIPC ( is a federally mandated, non-profit, member-funded, United States corporation created under the Securities Investor Protection Act of 1970 that mandates membership of most US-registered broker-dealers. SIPC protects the securities and cash in your brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in your account to buy securities. This protection does not cover regular trading losses but covers fraud on the part of your broker or brokerage firm and protects your assets should the firm fail.

It would also be prudent to ask your firm if it has additional insurance—above and beyond the SIPC coverage.

Next, you need to ask if the brokerage is a member of the Financial Industry Regulatory Authority (FINRA). FINRA ( is a private American corporation that acts as a self-regulatory organization which regulates more than 624,000 member brokerage firms as well as exchange markets.

If the brokerage offers checking or savings accounts, or any other deposit products, are the accounts covered by the Federal Deposit Insurance Corporation (FDIC)? The FDIC ( provides deposit insurance to depositors in U.S. depository institutions. It is important to note that investment products—stocks, bonds, options, annuities, and retirement accounts—are not eligible for FDIC insurance. The insurance just covers CDs, Money Market Deposit Accounts, checking, or savings accounts, that you own through your brokerage firm.

Will your brokerage firm reimburse you for fraudulent losses? And what kind of documentation do you need to maintain to prove such losses?

Look up your broker’s record at the Securities & Exchange Commission (SEC): ( This site allows you to look up individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

How secure is your brokerage firm’s website? Does it offer two-factor authentication?

Step 3: What products and services does the brokerage firm offer?
Here are some of the most common services offered:

  • Buying and selling stocks, options, mutual funds, and ETFs
  • Individual and/or Business Retirement accounts: IRAs, 401(k)s, SEPs
  • Educational Savings Accounts
  • Watch lists/alerts
  • Stock screeners
  • Specific types of orders, including market, limit, stop, and trailing stops, good for day, good until canceled, all or none (more to come on these in a minute)
  • Buying on margin (more on that later, too)

Step 4: Determine the fees for the types of accounts and services you want.
These may include:

  • Commissions: are these tiered according to account balances or number of monthly trades? Do they differ depending on the type of investment you purchase?
  • Account management/portfolio fees (sometimes called advisory fees). It’s usual for these fees to run 1%-2% of your net assets
  • Fees for opening/closing accounts
  • Deposit minimums
  • Maintenance minimums
  • Annual/monthly maintenance fees
  • Margin interest rates
  • ETF/Fund loads, expenses, other fees

Step 5: Is a discount or a full-service broker right for you?
If you think you need advisory services, such as financial and retirement planning as well as tax and investment advice, a full-service broker may be the way to go. However, you should understand that their fees will be higher.

Many discount brokers will offer some sort of advisory service and they generally have low commission rates on trades and are very web friendly.

Additional Questions to Ask:
Are quotes in real-time? Are they streaming? Sometimes, stock quotes are delayed 20 or more minutes.

Can you trade in Extended Hours? That is, can you trade beyond the normal exchange hours of 9:30 a.m. – 4 p.m. EST?

Does the site offer charting capabilities? For new investors, this won’t be of prime importance, but as you gain more experience, you may want to delve into the world of technical indicators, so it would be good to know at the outset of your brokerage relationship if it can offer you more advanced tools.

Is the site easy to navigate?

Is it easy to deposit, withdraw, and transfer funds on the site? How long does it take for these items to be credited to your account?

How long does it take for settlement after you place your orders?

Step 6: Which brokerage firm is right for you?
A big part of investing is knowing your costs. Here are some average costs for making stock trades:

  • Stock Trade Fee (per trade): $0.00 - $6.95
  • Stock Trade Fee (per share): $0.006 - $0.01
  • Broker-Assisted Trade Fee: $0.00 - $50.00
  • Mutual Fund Trade Fee: $0.00 - $50.00


In today’s world, it is pretty common for zero commissions on regular stock trades, with fees charged for things like options.

But there is much more to consider, besides fees, such as your experience, goals, frequency of trades, and the type of investments you want to buy and sell.

I’ve reviewed several articles that rank brokerage firms, depending on your goals. Here, I’ve combined information from Investopedia, Motley Fool, and

Large Brokerage Firms

Brokerage FirmBest ForAccount Minimum ($)CommissionsWeb Site
Fidelity InvestmentsOverall0$0 for stock/ETF trades, $0 plus $0.65/contract for options
TD AmeritradeBeginners/Mobile0Free stock, ETF, and per-leg options trading commissions in the U.S., as of October 3rd, 2019. $0.65 per options
Charles SchwabETFs0Free stock, ETF trading, $0.65 per options
E*TradeEase of trading experience0No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading
Merrill EdgeCustomer service0$0 per stock trade. Options trades $0 per leg plus $0.65 per
RobinhoodCommission-free, mobile app, cash management0$0 for stocks, ETFs, and
Interactive BrokersAdvanced traders, international trading0Maximum $0.005 per share for Pro platform or 1% of trade value, $0 for IBKR
tastyworksOptions, low costs0$0 stock trades, $1.00 to open options trades $0 to

Step 7: How to buy a stock.
First, of course, you need to decide how much you want to invest in a particular stock, mutual fund, or ETF. That depends entirely on your personal circumstances, risk profile, and how long you intend to keep the investment. But for new investors, consider starting small to keep your risk minimal. Most brokerage firms will allow you to purchase one share of stock or an ETF. As for mutual funds, those will typically have minimum investments of around $1,000, although many brokerage firms that offer their own funds have much lower initial minimums.

There are a several ways to buy stocks:

  1. Through a regular brokerage
  2. Through a Dividend Reinvesting Plan
  3. Through the purchase of fractional shares

Buying through Your Brokerage:

You can purchase stocks using different types of orders. They include:

Market order: You ask to buy or sell a stock ASAP at the best available price. Your order will be executed immediately. This is the type of order that most ‘buy-and-hold’ investors use.

Limit order: You ask to buy or sell a stock only at a specific price or better. For example, if the stock you want to buy is trading at $25 a share, and you want to buy it only if it goes down to $20, you would place a limit order. Alternatively, if you want to sell a stock only if it rises to a higher level, you tell your broker that you want to sell it at that particular price. Limit orders are placed after Market orders, and are first-come, first-served, meaning your entire order may not be filled. These orders work well when buying more volatile stocks.

Stop (or stop-loss) order: A market order is placed when a stock reaches a certain price—the ‘stop price’ or ‘stop level’—and the entire order is filled at the prevailing price. Note that this is not the same as placing a stop-loss on your stocks to mitigate losses. More on that in a minute.

All or none order (AON): This order is only placed when all the shares you want to trade are available at your price limit.

Good for day (GFD): This order expires at the end of the trading day, whether or not it’s been fully filled.

Good till canceled (GTC): This order stays in place until you cancel it, or it expires, which could is typically 30-90 days, although could be longer depending on your broker.

You can also buy stocks through your brokerage on margin. That means you borrow the money from your broker to buy the stock (I recommend this only for very experienced investors). Buying on margin allows you to use your brokerage firm’s money to buy shares, so that you can invest more than if you were just using your own money. But it’s going to cost you, anywhere from 1.6%-8% interest.

The Federal Reserve says that you have to put up at least 50% of the cost of your shares in cash (the initial margin requirement)—before you buy on margin. And FINRA requires that you keep a maintenance margin of 25% equity in your margin stocks, at all times. Brokerage firms are also free to set more restrictive margin requirements, which is most likely on volatile securities.

That’s because if the shares decline in price (rather than the increase you were counting on), the broker will place a margin call on you, and you will have to either liquidate your investment or put up more money.

Margin buying is not for the faint hearted. That’s why I don’t recommend it for beginning investors.

Dividend Reinvesting:

Dividend reinvesting is like ‘free money’! And often, companies increase their dividends, which puts even more money in your pocket. And while 2020 was a challenge for most sectors due to the coronavirus pandemic, you can see by this graph that several industries actually increased their dividends last year.

Change in Average Dividend (by sector)

Change in Average Dividend (by sector)

According to, more than 4,100 companies and closed-end funds offer Dividend Reinvestment Plans (DRIPs). A DRIP allows you to automatically reinvest cash dividends by purchasing additional shares or fractional shares on the dividend payment date.

Companies who operate their own DRIPs will often let you buy additional shares of their stock commission-free, and sometimes even at a discount to the current share price. In my Wall Street’s Best Digest newsletter, I follow two investment pros who keep a close eye on dividend reinvestment plans—Charles A. Carlson, editor of DRIP Investor and Vita Nelson, editor of Each month, they offer great insight into the DRIP industry, as well as a selection of recommended stocks.

DRIPs are often recommended for long-term investors. Buying and selling shares in a DRIP is not as easy as picking up the phone and calling your broker. Most companies buy and sell shares in a DRIP in bulk (to reduce transaction fees), so you are most likely not going to get current market prices. It may take a few days to get in or out, so if you tend to trade stocks, a DRIP would not be your best investing vehicle.

But DRIPs are a great way to invest in well-managed, financially stable companies—for the long term. When my nieces and nephew were born, I set up DRIPs for them, buying stock in McDonald’s. They didn’t get rich from the DRIP, but when they set off for college, they had a tidy little sum to use for buying some of the extras they needed. My hope was that discussing their shares with them through the years would turn them on to investing for life. Alas, that didn’t exactly happen. However, I can report that they were thrilled with the McDonald’s coupons that came with the annual company report each year!

Buying Fractional Shares:

When stocks are trading at what are seen as lofty prices, investors often hesitate to buy them—either because they can’t afford that much money, or because the price is just intimidating.

For instance, as I write this, Amazon (AMZN) is trading at $3,124.51; Alphabet (GOOG), at $2,069.94; and Berkshire Hathaway Inc. (BRK-A), at $377,758.88! That would take a lot of dough to have a portfolio of these companies, wouldn’t it?

That’s why buying in fractional shares is so exciting. Fractional investing—buying pieces of one full share of a company or Exchange Traded Fund (ETF)—makes buying shares in companies like these easy. And they are a great way for beginning investors to jumpstart their investing plans.

Fractional investing allows you to allocate however much money you want to invest among a number of different stocks. And that leads to a much more diversified portfolio than if you invested your entire nest egg in one company’s stock (not counting how unwise that would be!).

According to, here are some brokerage companies that offer fractional investing:

Companies Offering Fractional Investing

Available for:
Interactive BrokersAll stocks listed on U.S. exchanges
RobinhoodStocks and ETFs worth more than $1 per share; market cap above $25 million
FidelityAny stock or ETF listed on the National Market System (NYSE, Nasdaq, etc.) — more than 7,000 in total
Charles SchwabStocks included in the S&P 500 index
SoFi Active InvestingLimited to select stocks and ETFs (currently 43 choices)
Stash*Select individual stocks and ETFs


Of course, there are also downsides to fractional investing, including:

  • If you decide to change brokerage firms, you won’t be able to move fractional shares; you’ll have to sell them.
  • If you own a very small fraction of a share, your broker may keep your dividend.
  • Because it’s so easy, you may be too tempted to buy without doing your research; Please do not do that!

Step 8: Maximizing your gains and minimizing your losses.
My philosophy is this—if you are going to invest, your goal should be to make as much money as you can, according to your risk profile.

Since I like to plan, I want to determine—the day I purchase a stock—just how much money I think I can make from it. And that’s why I set price targets. You should know that there are plenty of advisors who will disagree with me, but setting price targets helps me become a more disciplined investor. After all, if you don’t set a target, how do you know when you should sell a stock?

Setting Price Targets

I recommend you set a price target the day you purchase your stocks. Your target should be based on the P/E of your stock, multiplied out by expected future earnings. I recommend that you at least think about what price your stock can achieve within 18-24 months. And that should at least be a 30%-50% gain. If it doesn’t have that potential, keep looking.

Going forward, when the stock hits your target, reevaluate it and determine if it has the ability to continue double-digit price gains or if you would gain more by cashing in now and using those funds to purchase a different stock with more potential. Many of the contributors to my Wall Street’s Best Digest newsletter make this decision easy for you, by providing targets for their recommendations, and often cash in just a portion of the holding to take some profits and let the remaining shares ride toward a new target.

When I speak at Money Shows across the country, I am frequently asked about how I set my target prices. If it’s not the most common question I get, it’s certainly up there in the top five.

First of all, I can’t emphasize too strongly that it is essential to set a target at the time you buy a stock. If you don’t, then how the heck do you know when your stock has appreciated enough to sell it?

I always ask my workshop attendees how many set price targets on their stocks, and I never see more than two or three hands go up. That’s a shame, but I think it’s because folks just don’t know how to set targets, rather than them not wanting to. So, let me tell you how I do it, but keep in mind that, like all investing, it is not black and white. It’s a combination of science, art, and experience. But most of all, it’s easy! No complicated math here—just a few assumptions.

Let’s walk through an example step-by-step. For this example’s sake, we’ll set your holding period at three years, max.

You’ve done your research and have selected the stock you want to buy—the Widget Co. The price of the stock is $10 per share, the company made $2.00 per share in the last four quarters, so its price-earnings ratio (P/E) is 10 divided by 2, or 5.

The company’s earnings have been increasing at a 20% annual growth rate for the past five years. With a little calculation, you can project out over the next three years, and if that same growth rate continues, the company’s earnings will look like this:

Year 1: 2.00 x a 20% increase = $2.40 per share

Year 2: 2.40 x a 20% increase = $2.88 per share

Year 3: 2.88 x a 20% increase = $3.46 per share

So, at year 3, your company is earning $3.46 per share. Now, if its P/E ratio remains the same (5), the projected price of the shares can be found by mere substitution into the P/E equation, and solving for P:

P divided by E (3.46) = 5. So, a little algebra later, P = $17.30. Wow—that’s a 73% gain! Most investors would be tickled pink by that.

However, should you believe that the company’s earnings may grow even faster than 20% annually, due to some event such as a tremendous new product, gains in market share, new markets, etc., or that one of those occurrences might drive the company’s price higher than $17.30 (even without the requisite earnings growth), you would be even happier.

To be on the safe side, it’s also smart to calculate what would happen should the Widget Co. not grow as quickly over the next three years as it had done for the past three.

The other side of the buying and selling equation is minimizing your losses. And that’s why I set stop-losses.

Setting Stop-Losses

Stop-losses are a form of protecting your investment.

In addition to setting a price target, I also recommend that you set a stop-loss limit the day you purchase your stocks. For aggressive investors, the stop-loss could be 30% or more. For more conservative investors, you might be happier with a stop-loss of 10%. The actual percentage is not as important as being disciplined in exercising the stop-losses. Sure, no one likes to lose money, but a stock riding momentum down can clean you out in no time, so it’s best to take your losses. If the stock bounces back, you can always buy back into it. Many of our advisors provide stop-losses for you, but it’s always a good idea to consider your own investing strategies when setting your stop-losses.

A stop-loss is simply an order—either formally placed with your broker—or a “mental” reminder—to sell your stock when it reaches a certain price threshold.

It’s painless to place when you buy your stock through your broker’s website, or, if you prefer, you can just set an alert on whatever portfolio tracking web site you use, so that if the stock reaches that price, you can make an instant decision on whether to cut it loose or keep it. That’s what I call a “mental” stop.

I’m a big believer in stop-losses for one simple reason: If your stock doesn’t go the way you think it will (up in most cases!)—for whatever reason—this little tool will limit your potential losses.

Sure, it’s true that if you are diligent in the use of stop-loss orders, you can be stopped out of what could turn out to be a very good stock. But you know what? You can always get back in, and more importantly—stop-losses can also save you money—as well as lots of sleepless nights—if market or industry forces cause your stock to take a nose-dive.

The actual percentage you set is up to you, according to your personal risk tolerance. In my Wall Street’s Best Stocks newsletter, I set both price targets and stop-losses for each recommendation I make, but really, it is up to you. Very conservative investors may want to place their stops at a level that is 10%-15% below their purchase prices. Moderate risk takers would probably feel most comfortable setting stop losses at 15%-25% below their buy prices and Aggressive investors who have a longer time frame and the ability to weather short-term losses, may prefer to set stop-losses at 25%-35% of their purchase prices. To easily determine your risk tolerance, take my Investor Profile Survey.

Here’s how it works: If you buy a stock at $3.00, and use a 20% stop, you would be stopped out at $2.40 (20% or $0.60 less, in this case, than you paid for it).

In normal times, I often find that a 20% stop is sufficient for most stocks; up to 35% if the company operates in a fairly volatile industry.

But in a bull market, you may want to use trailing stops—stop-losses that continue to move up as your stock rises—rather than stops based on the absolute value of your purchase price. A trailing stop is more flexible than an absolute stop, as it continues to allow you to protect your portfolio in case the price of your stock declines. But as the price rises, the trailing stop is based on the new price, helping you to lock in your gains and reduce your overall risk.

It works this way: Using the above scenario. You buy a stock at $3.00 and place a 20% trailing stop. If the stock falls to $2.40, you are stopped out. But let’s say it rises to $3.50. Your new stop would be 20% of $3.50, or $0.70. So, if the shares then fall to $2.80 ($3.50-$0.70), your stop will kick in. But now, you see, that instead of losing the $0.60 that you would have with the absolute stop, you only lose $0.20 (your original investment of $3.00 minus the stop price of $2.80).

I want you to know that there are also plenty of advisors who don’t believe in stops. But I believe that wise investors should use all the tools at their disposal. And I have found that stop-losses have worked very well for my subscribers and are great tools for stemming potential losses.

There you have it—the ABC’s of buying stocks. I hope this helps you choose the right brokerage firm for you, takes some of the mystery out of the jargon that investment pros throw around, and that it also increases your level of comfort as you progress in your investing life.

Is Bitcoin for Real? Or Just an Unreliable Short-Term Play?

Bitcoin is undeniably volatile—its peaks tend to be followed by sharp declines. So that begs the question: is bitcoin a good long-term investment? Or is it only useful as a short-term momentum play in brief, exhilarating bursts?

Bitcoin vs. the Stock Market
There have been three big rallies in bitcoin in the last four years: in 2017, when it raced from about $1,000 per bitcoin to better than $19,000 by year end. In the first half of 2019, when it zoomed from just under $4,000 at the start of the year to over $12,000 by the end of June. And then in the last few months.

All other times, bitcoin has been either stagnant or plummeting.

Consider: after the $19,000-plus top in December 2017, when all your friends who don’t normally talk about investing were asking you about bitcoin, the cryptocurrency completely crashed, losing 83% of its value in the ensuing year.

Following the rally in the first half of 2019, bitcoin prices again collapsed, dipping back below $5,000 by March of this year after nine straight months of losses. Then, like stocks in the wake of the February-March market crash, bitcoin rallied again, but really took off in the last three months of 2020, more than doubling its December 2017 by year’s end.

If you had the foresight to invest in bitcoin four years ago, you’d have made a ton of money today. But most people weren’t buying bitcoin in early 2017. Chances are, if you did buy bitcoin, you first did so in late 2017, when the noise surrounding it was at a fever pitch. If you did that, you likely either lost money, or (hopefully) sold off and booked a modest profit when cryptocurrencies were in freefall in early 2018.

The same thing would have happened if you bought on the rally in mid-2019. And if bitcoin was your first investment to start 2021, well, you’ve already lost money.

Is Bitcoin a Good Long-Term Investment?
Perhaps this time the steep drop-off is little more than a needed pullback after nearly quadrupling in price over the prior three months. The problem is there’s no way of knowing for sure. Bitcoin has so little history as an asset, and what little history it does have suggests that when the price goes south, it reaaallly goes south.

As the last four years have shown, bitcoin can be a very good long-term investment. But you have to get it at just the right time (i.e. not when everyone is talking about it), and you have to be willing to stomach some major ups and downs along the way.

So, You Want to be a Millionaire?

What do you think of when you hear the word millionaire? I bet your mind is filled with all the things that you would picture a millionaire owning, from luxury cars, mansions, and designer clothing to country club memberships and private schools.

If those items are what your mind has conjured up, you’d be dead wrong (except for the private schooling point). Here are the facts:

1. Millionaires know that most vehicles are depreciating assets and buy accordingly. According to Dave Ramsey, about 61% of the wealthiest people drive Hondas, Toyota, and Fords. I used to work with a lady who married into a very wealthy family—I’m talking generations of wealth, from the Northeast. She so badly wanted to buy a Jaguar, but her husband absolutely forbade it. Instead, she tooled around town in an old ‘woody’ station wagon. Flaunting your wealth was not on that family’s agenda.

2. Millionaires understand that curb appeal may be good for your ego, but not your wallet. While 90% of millionaires are homeowners, the average value of their homes is $320,000, say Dr. Thomas Stanley and William Danko (authors of The Millionaire Next Door). In contrast, when I ran banks in Florida, my bank was located in a very upscale golf resort neighborhood.

You would have thought that my banking customers belonged to the upper crust. And some of them did. But, while my bank’s parking lot on any given day was populated by Bentleys, Rolls Royces, and Lamborghinis, it wasn’t uncommon for my richest client to pull up in his beaten-up Chevrolet.

And it’s true, many of my customers lived in multi-million-dollar homes, but some of them couldn’t afford furniture, and stocked their homes with only the basic necessities—like a bed. But they sure looked good from the outside! Famed investor Warren Buffett (whose net worth is estimated at $84 billion) still lives in the house he bought in 1958 for $31,500 (that’s equal to about $250,000 in today’s dollars).

3. Millionaires know that nothing tastes as good as staying wealthy feels. Tom Corley, author of Rich Habits: The Daily Success Habits of Wealthy Individuals, reports that just 23% of rich people have memberships at country clubs. Most of my rich friends and clients don’t have country club memberships or regularly enjoy 7-course meals.

In fact, they don’t eat out that much. One of my favorite banking customers used to pull up in his old red pickup truck and take me to breakfast at Kmart once a month! Yet, he kept more than a million dollars in his non-interest-paying bank account, which was one of many accounts. And, oh, by the way, one of Warren Buffet’s favorite eateries is Gorat’s in Omaha, Nebraska, where you can still get a burger for $10.

4. Millionaires would rather stay rich than look rich. noted that clothing resale site ThredUp analyzed the demographics of its customer base and found 36% of its regular clients earned $250,000 to $1 million a year. My favorite banking customer always wore holey overalls. And one of the wealthiest men I have worked for used to buy his ties from the street vendors in New York City (before his CNBC interviews)!

5. Most Millionaires get there through wealth accumulation over time. Stanley and Danko report that the millionaires they surveyed (500 + 11,000 high-net worth and/or high-income respondents) earned average annual incomes of $131,000. Only 8% earned $500,000-$999,999 and 5% earned $1 million or more.

As for private schooling, only 17% of millionaires went to private schools, say Stanley and Danko, but 55% of their children are privately-educated.

The Road to Riches is not through the Lottery, or even an Inheritance
We are so used to conspicuous consumption, that we automatically think that if you look rich—with all the fancy accoutrements—you are. However, statistics show that it’s the folks who live fairly frugal, disciplined lives and who have money in the bank, investments, or in assets that make them money, who are the real rich.

There are some 18.6 million millionaires in the U.S.—about 5.7% of the population. And just 20% of them inherited their wealth. If you ask most Americans about their retirement plans, they’ll jokingly tell you, “winning the lottery.” It’s sad to say but more than a third of people in the U.S. really believe that! However, the odds of winning either the Powerball or Mega Millions are roughly 1 in 292.2 million and 1 in 302.5 million, respectively.

According to, the odds of winning the lottery are worse than the probability of your death due to one of these events:

  • Snakebite: 50 million to one
  • Plane crash: 11 million to one
  • Shark attack: 3.75 million to one
  • Falling out of bed: 2 million to one
  • Lightning strike: 1.2 million to one
  • Flesh-eating bacteria: 1 million to one

And, if by some incredible luck, you do win the lottery, watch out! The National Endowment for Financial Education reports that about 70% of people who win a lottery or receive a large windfall go bankrupt within a few years.

So, forget the lottery, and most of us also are not going to inherit millions. Even if your inheritance does make you rich, chances are—without changing your spending and investing habits—you won’t keep that money. A study at the University of Michigan noted that some 70% of wealthy families lose their wealth by the second generation, and 90% do so by the following generation.

But don’t let that scare you off. Most millionaires made their money the old-fashioned way—by working. And as I said above, on average, their paychecks were $131,000, but their average incomes (including investment dollars) was $247,000. They increase their income by saving and investing—instead of spending. After all, as Warren Buffett has been known to say, “If you buy things you do not need, soon you will have to sell things you need.” Think about that.

3 Paths to Financial Freedom
In last month’s issue of Financial Freedom, I discussed several steps to achieve Financial Freedom, including setting a budget, making saving and investing a priority, and reducing spending.

And that is exactly what everyday people who become millionaires do. They make their money work for them. They don’t just hide it under the mattress or let it wallow in bank accounts. The average 3-year certificate of deposit interest rate is 0.26% today. You’re never going to get rich by sticking your money in one of those!

There are really three primary paths to becoming rich:

  1. says that the average millionaire owns two investment properties. And those numbers are rising, as millennial millionaires are created. Those folks average three rental properties, according to
  2. The average millionaire, according to Stanley and Danko, invests 20% of their household realized income each year; and most invest at least 15%. More than 20% of their household wealth is held in transaction securities such as stocks and mutual funds.
  3. Many millionaires have or had steady jobs, but more than two-thirds of them are self-employed and 21% of their wealth is invested in their businesses. In my November issue of Financial Freedom, I offered tips on transitioning into your own business and included several resources to help you get started.

In each of these cases, the millionaires invested in assets that made them more money: the markets, real estate, and their own businesses.

Most folks make the mistake of thinking that their home is an investment. Now, many of you know that I own a real estate company, and far be it from me to discourage you from buying a home! But a look at historical prices should illustrate why you don’t want to put all your assets into a home. The U.S. Bureau of Labor Statistics (BLS) reports that U.S. home prices, since 1968, have increased at an annual 4.2% rate.

US National Home Price Index

Compare that to the S&P 500, which has returned an average 10.25% since 1968:

S&P 500

And that’s if you just invested in the S&P 500 Index. If you chose stocks wisely, you could have done much better. For example, just look at the returns of the 2020 Top Picks from my Wall Street’s Best Investment Newsletter. Every year, I ask my contributors to name their favorite stock of the year. For 2020, the entire universe of Top Picks averaged 180.19%! And the Top Five Picks averaged gains of 252.72%. That was in a year when the Dow Jones Industrial Average generated a 9.7% total return including dividends, the S&P 500 gained 18.4%, and the Nasdaq Composite’s rose 45%.

As for investment real estate, billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate. I don’t know if that is still true, but I do know that many fortunes have been made from investing in real estate—an asset that works for you. Today, investors own and rent out about 18.2 million one-unit homes. According to, residential rental properties returned an average of 10.6%, while commercial real estate returned an average 9.5%. Of course, that depends on the price you paid for the property, the amount of rent the property can garner, the area in which it is located, and how much you’ve had to invest in repairs and maintenance. But if you buy right, you can see some amazing returns!

When I was in my early 30s in Florida, I was friends with a young couple who lived very modestly, but had begun investing in rental properties right after they were married. Instead of a big wedding, their parents gave them a pot of ‘get started’ money. They were smart, made money off of rents, sold properties to buy more expensive investment parcels, and ended up retiring in their late 40s. That’s one method. Another is—if you have some skills—buying run-down properties, fixing them up, and flipping them for a profit. That is risky business, but if you buy during rough economic cycles when the housing market is in a downturn, you can pick up properties for a fraction of their true value.

As I said above, most millionaires are entrepreneurs. In the U.S., 99.9% of all businesses are small companies. That amounts to 30.2 million businesses with less than 100 employees. Unfortunately, about 20% of them fail within the first year, and 50% by the end of their fifth year. However, those that survive most often thrive. Robert T. Kiyosaki, author of Rich Dad, Poor Dad, says that to be a successful entrepreneur, you must master three processes:

  • Management of cash flow
  • Management of systems
  • Management of people

But know that if you fail the first time, the motto of self-made millionaires is “try, try again”. According to, the average millionaire has gone bankrupt 3.5 times.

Self-Made Millionaires don’t Give Up after their First Failures
The stories of their failed businesses or hard-to-start ideas are legion:

  • Sir James Dyson created 5127 vacuum prototypes, all failures. It took him 15 years to perfect his product before taking the DCO1 to market in 1993.
  • Walt Disney’s first company, the Laugh-O-Gram Corporation, declared bankruptcy after just two years; he failed as an ambulance driver, an actor, was rejected by the Army, and MGM even turned Mickey Mouse down!
  • JK Rowling, the author of the Harry Potter series of books, was a welfare mom whose Potter manuscript was rejected by 12 major publishers.
  • Kentucky Fried Chicken’s Colonel Sanders didn’t strike it big until he was 62, and that was after 1,009 restaurants rejected his recipe!
  • Henry Ford, the father of the automobile, saw his first company go bust. Then he was forced to walk away from his second business, keeping only the rights to his name. And as we know, that was a good thing!

How to become a Millionaire
What do all of these folks have in common? Perseverance. They didn’t give up the first, second, or even the thousandth time! I’ve known lots of folks who started their own businesses. Many have failed a time or two or three. But they all had the perseverance gene. I once had neighbors who were very comfortably retired. They had failed at a grocery store and meat market, before deciding to open a hardware store. That last stab set them up for life. Their business grew into two stores which became national franchises.

And one other thing they did—they didn’t waste money. I’ve gone shopping with her, and have witnessed her debating about buying a beautiful $80 bowl, for more than an hour. And she didn’t buy it! It took them years to build their business into a profitable company that eventually made them millions, so they didn’t spend their money without a lot of consideration.

And that’s another factor that self-made millionaires have in common. They live below their means. My hairdresser is just 31 years old, and her husband is 34. They have twins, aged 9. He works for a governmental entity and she does hair from her home. Their home is paid off; their fifth wheel is free and clear, and they have no car payments. That’s pretty incredible in this age of spend, spend, spend!

I interviewed her to find out how they came by their great financial sense. She said they owed it to several factors/events:

  • First, they both came from homes in which their parents had good saving/investing habits. They both bought used cars from their parents, and kept them until they could go no longer. They don’t buy new cars.
  • Her husband had already been investing and had a brokerage account with about $13,000 in it when they wed. They continued investing and used a brokerage firm recommended by one of their parents. But they weren’t that happy with their absentee broker, who never had time for them.
  • Their church offered a Dave Ramsey money management class and they enrolled. And they followed his principles—the envelope system (designating envelopes for all their regular and variable expenses), the emergency fund, and saving and investing. They discovered that Ramsey has a list of local financial providers—brokers, insurance agents, lawyers, accountants, etc, on his website: So, they interviewed some new brokers, and signed up with one of them, who has been very attentive, and also extends himself to teaching them about investing. They made enough on that investment account over the next five years to pay off their house, buy their recreational vehicle, and allow her to set up her hair salon in their home (thereby making and saving more money).

This young couple is my favorite example of how you can build financial success, step by step.

The 7 Most Important Traits of Millionaires
And that is what self-made millionaires do. In their book, The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko share their research on the habits of millionaires, and how to become one. They first published the book in 1996, and have written many updates—as well as other books in the series—but these tenets hold just as true today as they did in 1996.

Here are the 7 key factors that these millionaires have in common:

  1. They live well below their means. They don’t buy expensive houses, luxurious clothes, or new cars.
  2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
  3. They believe that financial independence is more important than displaying high social status.
  4. Their parents did not provide economic outpatient care (allowances, inheritances, etc.).
  5. Their adult children are economically self-sufficient.
  6. They are proficient in targeting market opportunities.
  7. They chose the right occupations.

And they illustrate that the common thinking that wealth equals income is totally false.

6 Truths about the Road to Riches
That is also the subject of another of my favorite books, Rich Dad, Poor Dad, by Robert T. Kiyosaki. Kiyosaki built the book around his dad, a university professor who made a lot of money, but never had any extra. He lived for his next raise, and already had plans to spend it. Sound familiar?

His second ‘dad’ belonged to his friend, Mike, and that dad was a serial entrepreneur. He taught both his son and Kiyosaki all about making—and holding onto—money. In my mind, this quote says a lot about keeping your money: “An important distinction is that rich people buy luxuries last, while the poor and middle class tend to buy luxuries first.” He notes that his wife didn’t get her Mercedes until they had met a goal of accumulating several rental properties that generated enough money to pay for the car.

Kiyosaki lists his 6 Big Ideas for becoming rich:

  1. The rich don’t work for money. They make their money work for them.
  2. The importance of financial literacy. You must know the difference between assets and liabilities. The rich buy assets and the poor buy liabilities that they think are assets (for example, your own home).
  3. Mind your own business. Know the difference between your profession and your business, and understand that your business revolves around your assets—not your liabilities—column. So, start buying assets.
  4. The history of taxes and the power of corporations explains why your business is better off as a corporation, tax-wise. He summarizes: Business owners with corporations earn money, spend, and pay taxes. Employees who work for corporations earn money, pay taxes, and spend. You see the difference? Corporations allow you to write-off certain expenses.
  5. The rich invent money, Kiyosaki says, “it’s not the smart who get ahead; it’s the bold.” Rich people take calculated risks and grab opportunities as they appear.
  6. Work to learn—don’t work for money. “Financial intelligence is a synergy of accounting, investing, marketing, and law. Combine these four technical skills and making money with money is easier than most people would believe.”

Kiyosaki says, “The best thing about money is that it works 24 hours a day and can work for generations.”

Yet, Kiyosaki admits that the reasons that many people may desire to be rich, but just don’t get there are really pretty simple:

  • Fear
  • Cynicism
  • Laziness
  • Bad habits
  • Arrogance

He notes, “For most people, the reason they don’t win financially is because the pain of losing money is far greater than the joy of being rich.”

I think he’s absolutely right! Fear is a big motivator and also a de-motivator. Listen, everyone is afraid. But those who take the leap to riches analyze the pros and cons, and jump into the opportunity.

As for the other three, laziness, bad habits, and arrogance, that requires abilities beyond mine to fix. I can just tell you that no success comes without hard work and good habits.

Determine your Wealth!
Lastly, I’m going to leave you with a calculation to determine if your wealth is building as fast as it should. I know I was disappointed when I worked this out for myself. Like most of you, I’ve had my share of bad spending habits too, but I’ve made myself a promise to reinvent my financial strategy.

This calculation is from Stanley and Danko.

You all probably understand that Net worth = Assets – Liabilities

The authors want to answer this questions: How wealthy should you be?

A person’s income and age are strong determinants of how much that person should be worth, which is what we have always learned. And generally, the higher your income, the bigger your net worth is expected to be. If you are older, you should also have accumulated a bigger net worth, as you’ve had many income-producing years. But that’s not always the case, is it?

This is the Millionaire next door formula:
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

For example, Mr. Duncan is forty-one years old and makes $143,000 a year.

He would multiply $143,000 and has investments that earn another $12,000, for a total of $155,000. Times that by 41 = $6,355,000.

Dividing by ten, his net worth should be $635,500.

PAWs versus UAWs
Stanley and Duncan say that if you are in the top quartile for wealth accumulation, you are a PAW, or prodigious accumulator of wealth.

If you fall in the bottom, you are labeled as a UAW, or under accumulator of wealth.

PAWs typically have a minimum of 4x the wealth accumulated by UAWs.

Their rule says that to be well-positioned in the PAW category, you should be worth twice the level of wealth expected.

So, Mr. Duncan’s net worth/wealth should be equal to two times the expected value or more for his income/age cohort, or:

$635,500 x 2 = $1,271,000.

If his level of wealth is one-half ($317,750) or less than expected for all those in his income/age category, then he would be classified as a UAW.

Summing it Up
I hope you aren’t too depressed after that!

But, seriously, it is possible for regular folks to become millionaires. You may just have to adjust your thinking to living a frugal lifestyle, instead of a conspicuous consumption routine, taking the extra money and saving, and investing it. Make small sacrifices today so that you truly create financial freedom for you and your family. The younger you are, the more wealth you can accumulate.

Imagine being 65 (or younger) and saying to yourself—I don’t have to work any longer. My net worth—without any more earning years—will last me the rest of my lifetime. Isn’t that true financial freedom?

Why Oil is the New Water

Oil is usually the commodity we think of, when we think of the heart of the global economy, but in the 21st century, the price and supply of another scarce commodity is beginning to generate headlines. It’s a commodity even more important than oil, and at the heart of everything we do—from growing food to manufacturing to hydrating. I am of course talking about water. As water becomes more scarce, water investments become increasingly essential.

This is why the late Texas billionaire T. Boone Pickens became the largest individual water owner in America, purchasing rights to an underground aquifer that supplies 27% of all irrigation in the United States.

And while we take an inexpensive and steady supply of water as a birthright, in much of the world, this is anything but the case. Take Jakarta, Indonesia, for example. According to the United Nations, 42% of its 10.7 million residents do not have running water. In many countries, the situation is much worse.

Water is a hot issue all over the world. Even in China. Waters originating in Tibet supply around 30% of China’s fresh water but it is a long way from China’s arid regions in the industrial northeast. The Economist sums up the predicament well:

“Grain-growing areas around Beijing have about as much water per person as such arid countries as Niger and Eritrea. Overuse has caused thousands of rivers to disappear. The amount of water available is diminishing fast as the water table drops and rivers dry up; what little is left is often too polluted even for industrial use.”

The high demand/dwindling supply fundamentals underpinning this story seem unassailable. The world’s per-capita water consumption is accelerating – up six-fold in the last century, with no end in sight. The World Bank estimates that global water demand is doubling every 20 years.

Is Investing a Water a No-Brainer?
With this doomsday scenario, one would think that investing in water would be a no-brainer. Not so fast.

First, if you think oil is political, water is five times more so. Governments heavily subsidize water prices and like to keep tight control over water supplies. I found this out personally not all that long ago when I sought my fortune by becoming involved with a couple of entrepreneurial water companies. One company used wave action off Galveston, Texas, to create energy to pump fresh water to farming communities. The other was a deep- drilling technology company looking to find water locked in deep pockets of the earth’s crust in the Middle East.

The second challenge is that most water investment opportunities are boring, low-growth utilities and water treatment plants. A more promising area is water infrastructure.

One reason for the lack of clean water is old and inadequate water infrastructure. Aging municipal water pipes have been disintegrating, causing money to flow away from city water districts and resulting in contaminated water. As water becomes scarcer and more expensive, an increasing number of water districts are expected to shoulder the cost of detecting and fixing leaks.

If you’re thinking of investing, one company that fixes these problems (and much more) in the U.S. and around the world is Milwaukee-based Rexnord (RXN). Rexnord Corporation designs, manufactures, markets, and services process and motion control, and water management products worldwide. The stock is in a strong uptrend as the company has made several smart acquisitions to broaden its industrial product lines.

A broader approach is to go with the exchange-traded sector fund Invesco Water Resources ETF (PHO). Some of its top holdings include companies such as Danaher (DHR), American Water Works (AWK), and Waters Corp. (WAT).

Investing in water could mean big gains in 2021.

What Does this Massively Bullish Option Trade Mean?

Many investors are raging bulls on the stock market lately, and not because of dovish actions by the Federal Reserve, or hopes of a Covid vaccine. Instead, it’s because a hedge fund or institution has been amassing a billion-dollar position that is the biggest bullish option trade I’ve ever seen.

Starting on Wednesday, August 5, EVERY single day a trader has been buying bull call spreads in Apple (AAPL), Amazon (AMZN), Facebook (FB), Adobe (ADBE), (CRM), Google (GOOG), Netflix (NFLX) and Microsoft (MSFT). For example, here is one day’s activity:

  • Buyer of 8,000 Amazon (AMZN) October 3,420/4,100 Bull Call Spreads for $176 – Stock at 3,430 ($140 million position)
  • Buyer of 10,000 Google (GOOG) October 1,650/1,950 Bull Call Spreads for $74.50 – Stock at 1,650 ($74 million position)
  • Buyer of 10,000 Adobe (ADBE) October 520/620 Bull Call Spreads for $30.75 – Stock at 522.5 ($30 million position)
  • Buyer of 12,000 Netflix (NFLX) October 550/650 Bull Call Spreads for $26.5 – Stock at 541 ($31 million position)

Net/net this trader bought $275 million in bullish positions that day. And this is a fairly normal trading day for this trader. And when a trader is buying a billion dollars’ worth of upside positions in mega-cap technology stocks, I want to be in the market as well.

Now some might ask me, “Jacob, how do you know it’s one trader who has been doing all this buying, and not several traders?”

In reality I don’t know for sure that is the case. However …

If my wife buys a bag of Cheetos for our family, and asks later that day who ate all the chips, it would be pretty obvious to her it was me as I was the only person who was home, and has orange Cheeto dust all over my face and fingers. My wife isn’t Sherlock Holmes, but she knows a chip crook when the evidence points to just one suspect.

Similarly, while I will never know for sure that it is one fund or institution that is buying these bullish positions, the fact that these trades are being structured exactly the same way, every single day, in the same eight stocks, is a pretty glaring clue.

So is a billion dollars of bull call spreads a sure-fire signal that the market is headed higher?

In reality, no.

Hedge funds and institutions get trades wrong all the time. No trader is perfect.

However, along with these bullish positions in mega-cap tech stocks has been “normal” call buying and nearly zero put buying for weeks.

Only time will tell how this trader’s billion-dollar positioning will work out. However, until he/she stops buying I am going to remain wildly optimistic that the market is going higher in the months to come.

The Math Doesn’t Work When You Try to Short Stocks

Earlier this spring, when the markets were in free fall as the coronavirus pandemic spread in the U.S., any stocks that were deemed to be beneficiaries of the pandemic went to the moon.

Alpha Pro Tech (APT) was one such company.

The company is United States-based and manufactures disposable protective apparel, building supply, and infection control products.

Over the past 10 years, revenue has grown at a 3.7% CAGR while net income has grown at an 8.8% rate. It’s a solid little company with a $200 million market cap.

However, occasionally, there is a health scare, be it SARS in 2003, H1N1 in 2009, and Ebola in 2014. During these periods, APT’s stock goes nuts.

The stock shoots up when a health scare emerges, but then always comes back down to earth.

As it became clear that the coronavirus was not going to be contained to China, APT started going crazy.

Over the past 10 years, it has traded at a median EV/EBITDA multiple of 10.8x and an EV/Sales multiple of 0.7x.

When I established my short position, the stock was trading at 34x EBITDA and an EV/Revenue multiple of 5.0x.

Based on its historical price performance through health scares and its elevated valuation, I shorted the stock at 16.

But I watched in horror as APT stock continued to rise.

It eventually peaked at 41.69. At its peak, I had a paper loss of 160%!

Eventually, as I knew it would, APT’s stock price collapsed. I ultimately covered my short position at 9 and made a significant profit. Nonetheless, the experience was harrowing and reminded me that “the market can stay irrational longer than you can stay solvent,” as John Maynard Keynes so famously said.

APT went to 42, which was an irrational price given the company’s fundamentals. But why couldn’t it have gone to 100?

If it had stayed at an “irrational” price, my broker could have forced me to add collateral or even to sell other high conviction ideas to cover my Alpha Pro Tech short.

When the Math Isn’t In Your Favor
The other problem with shorting stocks is that your downside is unlimited but your upside is capped at 100%.

When I’m looking to invest, I’m looking for asymmetric risk/reward scenarios. My ideal situation is a stock that has 3x more upside than downside. So if a stock could trade down by 50% in a worst-case scenario, I have to believe that the stock has at least 150% upside potential.

When shorting a stock, the upside is capped at 100% (if the stock goes to zero), but your downside is unlimited if the stock goes parabolic. As such, it’s a terrible risk/reward bet.

I recently had a conversation with famed short seller Jon Carnes of EOS funds. Carnes is known for exposing Chinese frauds. Despite an uncanny ability to sniff out corporate fraud, Carnes has recently focused less on shorting stocks, for a couple reasons.

  1. First, you have to pay an exorbitant interest rate (60% to 100%) to short stocks that are rumored to be frauds because they are hard to borrow. This isn’t a big deal if the stock goes to zero quickly, but you can run into trouble when trading in a stock is halted for six months or more as the SEC investigates a fraud. In this scenario, you still have to pay the massive interest rate until the stock begins trading again. These interest payments can eat up all your profit, even if the stock goes to zero.
  2. Second, companies that are subject to short reports can be very litigious and legal fees can eat up a large portion of your profit, even if you are successful.

Carnes told me that, after factoring in interest payments, legal fees and stress, he probably would have been better off investing in an S&P 500 index fund.

How amazing that it’s hard to consistently make money shorting stocks even if they are frauds.

In summary, shorting stocks is not worth the risk. You are much better off spending your time identifying and investing in great companies.

Avoid these Sector ETFs in October

There’s a thing called seasonal bias, and this year’s autumn could negatively impact three key sectors: energy, financials and healthcare. Below, I’ll tell you specifically which sector ETFs to avoid.

As you’re probably aware, there’s a well-documented historical tendency for the September-October period to witness above-normal choppy trading action. Jeffrey Hirsch of Stock Trader’s Almanac has observed that October “sits at a juncture in the market’s calendar where things tend to get turned around.”

While October marks the end of the stock market’s so-called “Worst Six Months” and the start of the “Best Six Months,” it has also witnessed its fair share of declines – most notably the infamous financial crises of 1929, 1987 and 2008. October’s bad reputation has been variously explained as being the result of late-third-quarter “window dressing” by portfolio managers preparing for year’s end. Others point to the late-October deadline for mutual funds (which must sell losing equity positions in order to offset gains in other assets and reduce tax liabilities).

Then there are presidential election year Octobers, which tend to be particularly virulent for markets (as the election-year declines of 2008 and 2016 attest). According to Hirsch, “In election years, October ranks dead last” among the 12 months in terms of stock market performance (though he adds that, if you simply exclude October 2008, the month’s ranking improves to mid-pack). But whatever the reason for October’s bad reputation, it’s important to realize that the month can be dangerous for investors who aren’t properly prepared for the increased volatility it often brings.

One sign that this October could witness above-normal volatility is the recent trend toward increasing internal weakness in the broad market – especially the Nasdaq.

One method we use to gauge the extent of short-term weakness is the Two Second Indicator. This indicator simply looks at the number of stocks on both major exchanges that are making new 52-week lows on a daily basis. When the number of NYSE or Nasdaq stocks making new lows is above 40 for several consecutive days, it’s a pretty good indication that there’s concentrated selling pressure somewhere in the market.

Unfortunately, this has been the case lately, as there have been a number of days in September when the new 52-week lows on the Nasdaq alone have been well above 40. Digging deeper, we find three major areas where weakness has been fairly persistent: energy, financials (mainly bank stocks) and healthcare (particularly pharmaceuticals).

Breaking down these lagging market segments even further, we can see some clear signs of poor relative performance (that is, how well a stock or industry performs versus a benchmark like the S&P 500 Index).

3 Sector ETFs to Avoid

1. Financial Select Sector SPDR ETF (XLF)

Among the weakest of the major segments right now are the banks. Bank stocks are being hampered by ultra-low interest rates and tightening lending standards in the midst of this coronavirus-caused recession. (Dividend caps and share buyback suspensions have been an additional headwind for the group).

Below is a chart showing the performance of the Financial Select Sector SPDR ETF (XLF) – a popular financial industry tracker – versus the S&P 500. This chart illustrates the underperformance of the bank stocks in the face of recent obstacles. And with so many bank shares piling up on the new 52-week lows lists for both the NYSE and Nasdaq, conservative investors might consider avoiding heavy commitments to the banks heading into October.

2. Energy Select Sector SPDR ETF (XLE)

The next underperforming group worth mentioning is energy. Oil and gas shares have been relentlessly hammered in 2020, thanks to an unprecedented (and unlikely) confluence of negative economic and political events. Shown here is the Energy Select Sector SPDR ETF (XLE), which has drastically underperformed the S&P 500 all year. This graph punctuates the message that investors should probably steer clear of energy stocks until oil demand improves substantially.

3. Invesco Dynamic Pharmaceuticals ETF (PJP)

The third and final underperforming group is found within the healthcare sector. This one might surprise you, as drug stocks have been heavily in favor on Wall Street this year – particularly the drug makers that are leading the race to develop a COVID-19 vaccine. More than a few high-profile biotech and pharmaceutical stocks continue to make new highs, so there’s definitely some resilience within the broad healthcare sector (which makes it difficult to denounce it as being categorically weak).

Yet there’s a definite, if small, undercurrent of weakness within the pharma industry. This can be seen by the persistent tendency for pharma names to populate the Nasdaq new 52-week lows list in recent weeks. There have been times in the last month, in fact, where up to a third of the Nasdaq daily new lows were drug stocks. (Reasons for weakness within this industry range from election-year concerns over drug pricing to perceived failures in the COVID vaccine race).

Whatever the reasons are, it’s important to be aware that there are many biopharma stocks that simply aren’t keeping up with the industry benchmark. The Invesco Dynamic Pharmaceuticals ETF (PJP) is one way of tracking the overall trajectory of stocks in this group. As the following chart suggests, the strength of the leading pharma stocks hasn’t been sufficient to keep the overall group in line with the S&P 500.

The potential danger here is that this (admittedly small) undercurrent of weakness in the biopharma stocks could expand to the rest of the healthcare sector in October. For the sake of comparison, there was a similar increase in new 52-week lows among drug companies in the weeks leading up to this year’s February-March sell-off. That’s not to say that history will repeat itself this time around. But it wouldn’t hurt to remain alert and avoid taking on too many commitments in the healthcare sector – at least until the relative performance of the PJP sector ETF improves and drug stocks stop showing up on the Nasdaq new lows list.

In conclusion, it should be remembered that while October can be a hyper-volatile month for equities, it also marks the end of the so-called “Worst Six Months” for stocks. Moreover, its passing heralds the start of the “Best Six Months” for stocks. So, while there are some potential pitfalls in October, there should be some excellent intermediate-term opportunities ahead once the market’s latest seasonal weakness has been completely worked off.

The 5 Commandments for Selling Short

Selling short is a for investors who bet that a certain stock will be lower in the future. Basically, you sell a stock that you don’t own in the expectation that it will decline and you can buy (cover) it a lower price in the future. It’s just like buying low and selling high, except that you do it in reverse order.

These investors make money when stocks fall—investors who are “short” the market—and if you’re nimble enough, you can successfully join them. But selling short is not an enterprise to be undertaken lightly; it’s an easy way for amateurs to lose money!

So before you enter into this arena, consider the five commandments of selling short in the stock market:

1. Thou shalt sell short only in bear markets.

“The trend is your friend” is one of the most valuable of the scores of market truisms that I’ve internalized over the years.

For more than 10 years, the market’s trend was up, and anyone who bet against it (hedge funds, for example) suffered.

But a bear market suddenly, historically arrived along the coronavirus pandemic this March, and while stocks have bounced back remarkably (unsustainably?) well, a second retreat is possible. If and when it happens you can garner some good profits by selling short, by investing in sync with that downtrend.

For now, though, the bull market has resumed, which means you should not start selling your stocks. The biggest reason for shorting only in confirmed bear markets—and most people forget this—is that the real long-term trend of the market has been up for centuries, and will continue to be up as long as investors perceive that the U.S. economy is growing. Usually, this long upward trend helps investors, which is why holding index funds for decades is one decent investing strategy.

2. Thou shalt sell short only stocks that are trending down.

This rule, like the first, ensures that the odds are on your side when you short. Trends, once in place, tend to continue, so you want to be sure that the stock you’re shorting is already in a downtrend. Sure, it’s nice to dream about shorting a ridiculously overvalued stock at the top and riding it down, but picking tops (and bottoms) is a fool’s game. Put the odds in your favor and only sell stocks short that are in confirmed downtrends.

3. Thou shalt sell short only when public opinion of the company behind the stock has a long way to fall.

Stocks decline because investors as a whole lower their expectations about the stocks’ future—and when they do, some stop buying and others start selling. For little-known stocks, expectations can’t fall much because there aren’t many expectations. If anything, expectations are likely to rise as people discover the company and the stock.

It’s far better to short stocks that are over-owned, and stocks that are or were well loved, and which are thus ripe for lowered expectations. For example, Chipotle (CMG) after their food contamination incident. Chipotle stock has since completely recovered, reaching new all-time highs above 1,250. But the recovery took a couple years.

But don’t forget Commandments #1 and #2.

4. Thou shalt, at all times, beware of the mathematical realities of short selling.

When you buy a stock, hoping it will go up, the most you can lose is what you invested—while there’s no limit to what you can win. That’s a pretty good trade-off.

However, when you sell a stock short, the very best result—if the stock falls to zero—is that you double your money. But if the stock goes up instead, there’s no limit to the amount you can lose! That’s not a great trade-off.

5. Thou shalt not get greedy.

When you put it all together, it becomes clear that selling short is a high-risk proposition that can only work during certain periods, and even then, it’s unlikely to work for long. So when you find yourself with a profit from selling short, take some off the table. Let some ride, if you like, but remember that eventually, the market’s long-term upward trend will return, and it will be hard to swim against that tide.

Bitcoin and Gold are Hot. Should You Invest in Either of Them?

For adventurous investors, there’s a big world out there far beyond stocks and index funds. Currencies and precious metals aren’t typically our thing. But I have to admit: the recent run-ups in bitcoin and gold prices have been intriguing enough to talk about (not necessarily recommend). So let’s compare bitcoin vs. gold, to see if either is worth an investment for a longer-term investor seeking financial freedom.

Bitcoin vs. Gold: One-Year Comparison

First, let’s start with the charts. Here’s what a one-year chart of bitcoin looks like (chart courtesy of


Not bad. At more than $12,000, bitcoin prices have more than doubled since mid-March, when they bottomed just below $5,000 along with everything else. The net gain over the past year isn’t as impressive, just over 18% – only slightly ahead of the 17% gain in the S&P 500, and well below the 39% run-up in the Nasdaq.

So now let’s look at a one-year gold price chart (courtesy of


That’s a much better looking chart! At more than $2,000 an ounce, gold has never been more expensive. As you can see, gold hovered in the $1,450 – $1,675/ounce range from last August through this March. Then the first breakout came in April, and a much bigger one came in the last month, pushing gold prices to new highs. All told, the price of gold is up 32% in the last year.

That’s pretty good. When you compare those one-year returns to what has happened to the U.S. dollar (-5.9%) in the last year, bitcoin and gold would have been much better investments. But again, if you had bought the average Nasdaq stock, you’d have fared even better.

Bitcoin vs. Gold: Five-Year Comparison

Now let’s take a look at how bitcoin and gold have performed in the last five years. Again, let’s start with a five-year chart of bitcoin (this one courtesy of


That’s much more impressive. Five years ago, one bitcoin was worth a mere $228. If you had the foresight to invest in bitcoin back then, you’d be sitting on a life-altering return of 5,187%. You’d be rich.

Let’s compare that to a five-year chart of gold prices:


That’s a pretty good chart. But there’s no comparison. The five-year change in gold prices is a mere 73% – virtually on par with the S&P 500 during that time (+71%), but barely half the 134% rally in the Nasdaq.

So, in the battle of bitcoin vs. gold, gold wins in the short and intermediate term, outperforming bitcoin for the past year-plus. But if you look further out, it’s no contest; bitcoin wins in a landslide.

Why We’re Staying Away from Bitcoin and Gold

Here’s the problem with both alternative forms of currency, though: their biggest runs are already behind them. Bitcoin will never make as big a jump as it did in the last five years – particularly in 2016-17, when prices topped $19,000 at one point. In fact, if you invested in bitcoin when it was super-hot in late 2017/early 2018, you lost a lot of money.

Gold tends to be steadier. It’s called the safe haven investment for a reason, after all. And with a global pandemic continuing to rage, gold is understandably having a very good year, up 32%. But when the pandemic wanes, the flight to safety will subside, and gold prices will start to sag again. A year from now, I doubt gold prices will be much higher than they are today; in fact, they’re likely to be lower.

Stocks are a Better Bet

The stock market, on the other hand, is always rising. Sure, there are bear markets, market corrections and market crashes along the way; in fact, we’ve seen all of them in the last six months! And yet, here stocks are, hitting new all-time highs, pandemic or not. They may not be higher a year from now (though I bet they will be); but three years from now, I can all but guarantee that they will be.

Bottom line: the bitcoin vs. gold battle is an interesting sideshow, and you could have made money in either currency in the past year—and especially the last three- and five-year periods. But both currencies have a ceiling. Stocks don’t have that problem.

So, if you’re a long-term investor looking for more financial freedom, I’d stick to stocks.

3 Universal Investing Lessons from Peter Lynch’s Online Treasure Trove

Unless you’re deeply involved in the world of investing, there probably aren’t too many names in the field that you recognize. But just like any line of work, there are superstars; Peter Lynch is one of them.

In a world where most active managers can’t beat their benchmarks, Lynch generated a compound annual return of 29.2% over the 13 years that he ran Fidelity’s Magellan Fund, crushing the performance of the S&P 500 over the same time period.

Peter Lynch has written two excellent books: One Up on Wall Street and Beating the Street. I’ve read both multiple times, but I recently discovered 181 pages of his articles online, and thought I would share the three key investing lessons that I learned from them.

1. Retail investors can beat the pros

Lynch has argued in his books that amateur investors can beat professional money managers, and he hits on this theme often in the articles that he has published. He says that retail investors won’t win by buying “hot stocks” that they have read about in Barron’s or The Wall Street Journal. The way for amateur investors to beat the professionals is to rely on their own research abilities.

Here’s what he wrote:

“I suspect that amateur stock pickers would have a much higher opinion of their abilities, as well as a greater net worth, if they avoided all expert buy recommendations in favor of their own research. This is the only kind of ‘independent investing’ that makes sense.”

“Actually, there are two kinds of investor’s edges: the on-the-job edge, in which you have a working relationship with an industry and the related companies with whom you do business; and the consumer’s edge, with which you can capitalize on your experiences in restaurants, airports, and shopping malls.”

“In fact, of the 20 top-performing stocks on the New York Stock Exchange in the last decade, no fewer than six (Home Depot, Circuit City, the Gap, Wal-Mart Stores, Liz Claiborne, and Dillard Department Stores) have been stuck under the noses of millions of shoppers who, if they’d paid attention to the popularity of these enterprises, could have profited from their edge.”

2. Let your winners run and cut your losers

One of the oldest sayings on Wall Street is, “Let your winners run, and cut your losers.”

Peter Lynch believes this is the way to make money investing even if you have a few mediocre or even terrible stocks in your portfolio.

“If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.”

3. Don’t waste time on macro analysis

Time spent analyzing macroeconomic conditions is a waste, according to Lynch. Instead, focus on each company’s fundamentals and its valuation.

In all the articles written by Peter Lynch, it’s amazing how little he focuses on economics. Instead, Lynch focuses simply on individual stocks that look attractive, such as Sotheby’s in 1994, REITs in 1997 or H&R Block in 1998.

While Lynch doesn’t stick his head in the sand about economic growth, he doesn’t spend much time forecasting GDP growth or interest rates. He prefers to identify companies that are growing rapidly but trade at reasonable valuations.

These lessons should make investing easier and more lucrative for individual investors. And wouldn’t it feel great to get better returns than all those “top” money managers?

Why Diversifying Your Portfolio Isn’t as Important as you Think

One of the keys to investing success is diversification - at least according to conventional wisdom. Diversification certainly has its place.

But there’s a myth that portfolio diversification by itself is inherently good. That myth can push investors into buying underperforming small-cap index funds.

I have a love-hate relationship with small-cap stocks.

I love the asset class and the huge upside potential of individual small-cap stocks. I also feel strongly that investors need to have exposure if they are investing for the long-term.

Is there such a thing as too much diversification?

The short version of the portfolio diversification myth is, as Warren Buffett once said, “Diversification is protection against ignorance.”
If you have no idea what individual stocks you should buy (i.e. if you are ignorant, to use Buffett’s term) then yes, you can gain broad exposure to an asset class by buying an index fund (protection).

But you’re going to get a lot of junk mixed in with the gems.

If you can screen out most of the junk and allocate more money to the gems – i.e. replace ignorance with knowledge – then you will absolutely destroy that overly diversified index over time.

In short, again to quote Buffett, portfolio diversification “… makes little sense if you know what you are doing.”

This cuts against the conventional wisdom that diversification is good!

But that wisdom is only partially accurate. In reality, the benefits of diversification are substantially reached when an investor owns around 20 to 30 stocks.

That’s not to say investors shouldn’t own more than 30 stocks. But if they do, they should do so knowing that the incremental portfolio diversification benefit of each additional stock goes down after that 20 to 30 stock threshold is crossed.

That’s especially true if they are blindly buying dozens if not hundreds of low-quality stocks, which is what arguably happens when you buy a small-cap index.

I could go into details of why there are so many junk companies in the small-cap index. But that’s a different subject.

The gist of my message today is that investors who wish for exposure to small caps are far better off constructing their own portfolio of 10 to 20 high-quality small-cap stocks and holding those – with appropriate replacements as needed – over the long-term.

What types of small-cap stocks should you look for?

I prefer growth names that offer pure-play exposure to secular growth trends, have a solid business model, a history of successful product launches and/or acquisitions that increases their addressable market, and a rapid growth rate, with a rational path to profitability, if they are not yet there.

These are the types of stocks that are likely to go through the inevitable corrections that will come and go when you’re invested for the long-term, and still come out the other end providing market-crushing returns.

What We Can Learn from Past Market Rallies that Followed Big Crashes

Big market crashes go down in history. There was the Black Thursday crash on October 24, 1929, that triggered the Great Depression. The Black Monday crash on October 19, 1987, saw the DOW drop by 22.6 percent. A rolling crash in September and October, 2008, led to the Great Recession. (What is it with October?)

Scary as those are, market crashes are rarely as big or as well known as those. In fact, the U.S. experienced its first “crash” before it was even a country. The credit crisis of 1772 is largely forgotten, but among other things, it led to Britain imposing a tax on tea to the U.S. colonies, which ultimately resulted in colonists in Boston dumping 342 chests of tea into the Boston harbor (aka the Boston Tea Party). A long list of crashes and recoveries followed.

What does that mean today? It’s a little hard to say. We’re not leaning too much on precedent analysis in this environment because there just aren’t a lot of “pandemic playbooks” to go off of. Plus, while we don’t get too into the economic weeds, it’s a fact that the policy response (both via government spending/stimulus and from the Fed) is wholly unique. That’s why we think staying flexible is really the best thing you can do for your portfolio at the moment.

All that said, one thing we’ve been looking at is past initial market rallies after harrowing declines, be them long bear phases or sharp crash-like meltdowns. The question we wanted to answer was how long these market rallies lasted before the sellers finally put up a real fight. To make it straightforward, we looked at how long the rally went on—from the first week off the bottom to the last up week—before the market broke its 10-week line (even if it was for a brief time).

3 Market rallies that offer lessons for today
First we have 1987, which brought a market crash somewhat similar to this year’s March debacle. After a retest in December, the Nasdaq kited higher for 15 weeks before settling down in March 1988, which ended up being the start of a three-month rest.

Moving on to 2003, the S&P 500 rallied strongly from its March retest for 15 weeks before starting a sideways phase that briefly cracked the 10-week line. After the next big bear market in 2009, the initial rally lasted 14 weeks before a four-week correction took the market below the 10-week.

And even in 2011, which had a summer meltdown and was trickier to interpret, the rally that began in December (once the bottom process was complete) lasted 15 weeks before a meaningful correction.

To be sure, there are exceptions—when the 1982 blastoff came, the market didn’t break the 10-week line for 10 months! And even during the above examples, different indexes acted stronger or weaker; in 2003, for instance, the Nasdaq went about 19 weeks before a real downturn.

Nevertheless, a few things stand out when looking at these examples: First, these initial market rallies tend to last 14 to 15 weeks. Second, of course, these dips took the market below its 10-week line.

Third, and most important, none of these market rallies marked major tops—there was some pain (usually for four to eight weeks) for sure, but the bull moves picked up steam afterwards. These precedents are worth keeping in mind.

The future should bring higher prices
Playing off that very last theme, probably the most bullish thing we see out in the market today from a big-picture perspective is that so many stocks either (a) are recent IPOs in the past year or two that staged their initial breakouts in April and May, or (b) are names that had good runs in 2018 and early 2019, but had enough down action (even before the crash) to generally “reset” their overall advance.

In other words, many names look to be early-stage, meaning in the first half of their overall advances. For example, look at Peloton (PTON), which just came public in September 2019, and shaped a nice IPO base from December through April before breaking out and having a huge run.


Spotify (SPOT) is another example, with a longer 20-month post-IPO base before blasting off in May and June.


Then there are names like PayPal (PYPL)—in this case, the stock had a solid advance over a couple of years, but then had two big corrections over a nine- to 10-month period, the first being tedious and the second knifing lower during the market crash … action that likely scared out the remaining weak hands.


Of course, there are never any sure things; maybe PYPL and PTON will get crushed on earnings and won’t be heard from again. But the market is an odds game, and given the early-stage nature of many leaders, the odds are that any hesitation in these stocks should give way to higher prices down the road.

5 Tips for Getting Your Portfolio Through a Pandemic

Over time, your approach to managing your stock portfolio will change. You might have begun by buying high flyers without any regard to the company’s finances, solely focused on buying hot growth stocks that would hopefully double in a few short months. After a while, you realize that’s gambling, not investing, and you get tired of the profit-and-loss roller coaster.

You move on to an investment strategy that’s based on some sort of principle: fundamental analysis or technical analysis or your Dad’s advice or your familiarity with a specific industry. Along the way, you tweak that strategy with an additional focus on dividends or lower price/earnings ratios (P/Es) or sector diversification.

Well folks, it’s time to add another layer of focus to your stock selection: Pandemic Stock Portfolio Management.

This is not about people being sick. This is not about a wave of deaths that’s ebbing and flowing across the globe through the first half of 2020. This is about the economic fallout from the lockdowns, in which citizens were quarantined and businesses were impaired from their normal, revenue- and profit-producing activities.

I know that you would prefer to stick with the investment plan that you’ve had in place for several years, but you need to understand that professional portfolio managers – the folks who move the global stock markets – are all adapting to these new business realities. The better you understand why they’re buying NVIDIA (NVDA) and selling Carnival Corp. (CCL), the better you’ll understand how to improve your portfolio returns during the new economic recession.

5 Things to Remember When Managing a Pandemic Stock Portfolio

1. People are not gathering in large groups. They’re afraid of catching germs and viruses. Investors need to be wary of companies that rely on packing people into close quarters. These industries include airlines, casinos, movie theaters, hotels, cruise ships, and even retail shopping and restaurants. If these companies can’t operate normally, there’s no chance that their balance sheets are going to remain healthy. Do you want to invest in unhealthy companies? No, because the goal of stock investing is achieving capital gains. Investors can most dependably achieve capital gains over multi-year periods by owning shares of healthy, growing companies. Do you know what they call people who invest in unhealthy companies on the hopes that the companies will soon solve their financial problems and thrive again? Gamblers.

2. Job loss will harm the housing market. Everybody’s talking about the government throwing money at lower-level workers who temporarily lost their jobs during the lockdowns. But news stories and reality are often two very different things. You know what nobody’s talking about? An awful lot of mid- and high-level career workers lost their jobs too. When the lockdowns end, there’s not going to suddenly be a mad hiring rush for corporate salespeople, actors, interior designers and C-suite executives.

The waiters and baristas who lost jobs did not have mortgage payments. Nobody buys a home on a barista’s salary. But mid- and high-level career workers are the backbone of the housing market and the breadwinners within families. When they lose their incomes, they scramble to assess their savings and assets, lower their spending to the bare bones, and make tough decisions. Not only will these people not be buying homes any time soon – thus lowering the demand for new home purchases – but many will be selling their homes in order to achieve lower housing payments on smaller properties, cashing in second homes (that little cottage on the lake), and even moving into their parents’ basements. As an investor, you don’t want to own stocks that cater to a thriving housing market during an economic recession that features high unemployment among skilled workers.

3. People are doing lots more work and entertainment at home. Neither sickness, lack of mobility, social anxiety or unemployment will make a dent in people’s use of cell phones, televisions, computers or other electronic devices. Now more than ever, they’re upgrading their assortments of home office equipment and services to enhance their new work-at-home lifestyles. They’re accessing a tremendous amount of streaming entertainment and educational activities. You can confidently invest in companies similar to Apple Inc. (AAPL), Zoom Video Communications (ZM), DocuSign (DOCU), Applied Materials (AMAT), Netflix (NFLX), Verizon Communications (VZ) and their industry peers. (This was a random list of names. Use your personal investment criteria to choose the right companies in each industry.)

4. People are saving more and spending less, and they’re receiving retirement plan distributions. While online shopping has certainly given (AMZN) a huge revenue boost this year, overall, people are spending less. U.S. savings rates are higher than ever in 2020. In addition, people who lost jobs are receiving distributions from 401(k) plans and other assorted business retirement plans. Much of that money will flow toward investment management, life insurance and annuity companies, and you’re in luck! As an industry group, those companies are generally very financially healthy and their stocks have low valuations. Consider adding any of these companies to your stock portfolio: Equitable Holdings (EQH), Voya Financial (VOYA), Brighthouse Financial (BHF), Charles Schwab Corp. (SCHW) and their peers. And yes, even people who are scared about long-term job loss will initially be making retirement plan rollover decisions. More than 40 million people have lost their jobs in the U.S. We can roughly estimate that half of them will be making new investment decisions in the coming year.

5. Businesses are realizing that they need less office space. Almost all companies that remained up and running during the lockdowns sent their employees home to work. Now they’re all analyzing how to proceed in the future. We don’t know yet whether 10% of employees will continue to work from home, or 60%, but we can safely assume that 100% of these employees will not be returning to their traditional office spaces. That means that businesses will be downsizing the amount of office space that they lease. That’s not good news for the commercial real estate market. As an investor, you’re going to want to avoid owning stocks or REITs that focus on commercial real estate.

There are many other changes taking place in global commerce, these are just a few big ones to keep an eye on.

This Indicator Says It’s Still Time to Buy Stocks

Reminiscences of a Stock Operator, a not-so-fictional biography of Jesse Livermore that was written by Edwin Lefevre back in the 1920s, remains one of the my favorite books of all time—it’s conversational, with as many investing lessons as any book out there. If you haven’t read it, I highly recommend it, especially if you’re just starting out.

That said, Reminiscences isn’t a how-to book; you won’t find chart explanations or screening techniques. Later in his life, Livermore did, however, publish his own brief book in that genre, dubbed simply How to Trade in Stocks. It’s also a solid read, for what it’s worth.

Besides giving you a couple of titles for your summer reading list, the reason I bring those up today is because of one thing that Livermore talked about in his second book that is so applicable to today—the time element of trading. In the book, he mostly wrote about how things take time to play out, especially things setting up for a big move.

But I want to touch on another aspect of the time element of investing: That similar occurrences can have vastly different meanings depending on where and when they happen.

Right now, for instance, I’m reading a lot about the “crazy overbought” market. Not only have the indexes made big moves of late, but many internal measurements are at nosebleed levels.

Such straight-up action does likely mean that some profit taking will occur in the near-term. But bigger picture, does such wild upside action portend bullish or bearish things? The answer depends on where the market is in its overall run.

For instance, take a look at early 2018—in January of that year, the market went bananas, with the indexes rising ever-higher on a bunch of good news (corporate tax cuts) while the internals of the market, while not as strong as today, looked great. But, of course, that move came 15 months after the market really got going in November 2016. The result: A very sharp correction and, a year later, the market was lower than it was then.

The Blastoff Indicator
Today, however, the market is obviously in a different stance—it’s a few months off a historic crash that, at its lows, saw the S&P dip 35% to three-and-a-half year lows. Again, that doesn’t mean the near-term won’t see some wobbles, but the strength is more likely a bullish factor for the intermediate- to long-term.

And that’s not a total guess on my part. It turns out that, after a huge selloff, the first time that 90% of NYSE stocks rise above their 50-day lines is a rare “blastoff” indicator. It’s only happened 12 other times since 1970, and what followed was almost always bullish—the average max gain in the S&P 500 during the next year was 19.4%, and the average maximum loss from the signal during the next year was less than 2%!

Of course, the 90% Blastoff Indicator is just one measure, and nothing is guaranteed in the market. But the point is that, historically, very strong breadth relatively soon after a big downmove (like the one in February-March) is usually a good thing, not a bad thing.

It’s a similar story when examining individual stocks. Take earnings gaps—big gaps higher tend to be bullish for a stock looking out a few months, while earnings disasters often mean a stock is broken. But again, a lot has to do with where a stock is in its overall run.

The good news today is that many growth stocks have come out of “early-stage” consolidations, so a lot of the strength we’ve seen since mid-April is likely more blastoff than top-ish.

Expert Tips for Buying Low When the Market is Off

Reap short-term capital gains with 3 tricks

When a stock market correction arrives, there’s an opportunity to buy stocks on sale. The caveat is that you can’t just buy any random stock and expect that stock to rise with the eventual rebound in the broader market.

Here are a few tips that can drastically increase your ability to reap short-term capital gains on today’s stock purchases.

1. Buy stocks with growing annual profits. If a company is growing and thriving, odds are strong that their share price will also grow and thrive. So avoid companies that are on track to see their profits fall this year and next year.

To determine the profit trend of your favorite stocks, visit any stock market website and look for consensus earnings-per-share projections. Those are the combined estimates of most Wall Street analysts, giving you a realistic picture of what to expect from a company’s future financial performance.

Ignore prior year earnings trends. Instead, look for current- and next-year trends. The stock market is forward-looking. Institutional investors – the big players who move the markets – are making decisions based on the future, and you should, too.

You might prefer other stock-picking strategies. For example, you might focus on shares of companies whose products you like to purchase, like Walt Disney (DIS) or Apple (AAPL). Or maybe you focus on energy stocks like Total S.A. (TOT) because you’re a petroleum engineer.

Those can be valid stock-picking strategies. But in terms of lowering the risk associated with investing, I will always urge investors to begin by screening companies for profitability. It’s somewhat of a no-brainer that companies with rising profits are usually going to perform better than shares of companies that are losing money or watching profits erode.

2. Buy stocks that fell a little, while avoiding stocks that fell a lot. There’s an art to successfully buying low among stocks, and one key facet of that decision is sticking with stocks that fell, but didn’t plummet. In that light, look for stocks that fall 10%-15% during market corrections.

It might be tempting to buy low on a stock that may have plummeted, on the theory that you’ll reap much larger capital gains when the market rebounds, but be wary. Stocks that fall dramatically need to spend many weeks or months stabilizing before they can begin a recovery, whereas stocks that fell a modest amount can rebound relatively quickly. And don’t buy stocks that were already falling before the correction in the broader market arrived.

3. Buy stocks that have big dividend yields. If you can find a company that’s growing its annual profits and also paying a dividend yielding 3% or more, you’re in luck!

Picture the share price and the dividend yield on opposite ends of a seesaw. As the share price falls, the dividend yield rises. When you buy the stock at a low price, you lock in a higher-than-normal dividend yield. As the share price eventually recovers, you reap capital gains and you also continue to receive an outsized dividend yield.

How to Interpret Earnings Gaps

Earnings season is part excitement, part anxiety, and definitely a reason to pull out the popcorn and take in a show. Okay, maybe not everyone enjoys earnings season as much as we do. Some people watch the Oscars, we watch board meetings. But earnings season is especially interesting, because it’s kind of like watching a magic show. Why? Because what you see isn’t always what it seems.

One of the market maxims we subscribe to is that the market fools the majority of investors the majority of the time. Because the market is basically human nature on display, it’s often filled with shakeouts, dips and contrary behavior that keep most people off balance.

At no time is that seen more than during earnings season, when, thanks to Regulation FD (instituted back in the early 2000s), we typically see a ton of growth stocks gapping up or down based on their quarterly reports and guidance. And it turns out these earnings gaps often send powerful signals for the intermediate-term … but not in how most expect.

When a stock gaps up powerfully, it often portends further solid gains in the weeks and possibly months ahead. Of course, few investors will go ahead and buy a stock that gaps up 20%, 30% or more because it looks “too high”—but the bigger the gap, the better the chance a stock can continue higher, assuming it has a solid growth story.

And the good news is that there have been more powerful earnings gaps among growth stocks than I’ve seen in years! All else equal, that bodes well looking down the road.

However, investing is never easy, and just buying a stock that gaps up 20% isn’t guaranteed to make you money—you still have to keep in mind the stock’s overall action and the market environment. So I thought I’d go over a handful of stocks that have gapped this earnings season from different positions on their charts and share my thoughts.

Earnings Gap #1: Big Base, Gap to New Highs – Twilio (TWLO)
When I say “big base” I’m usually talking about a stock that’s consolidated for at least a few months if not much longer, with lots of ups and downs (including a big shakeout or two) that wore down and scared out the weak hands. And then, usually with the stock in the middle to upper portions of that big consolidation, comes a massive earnings gap that takes the stock to new highs.

That’s the script that TWLO followed, with a top near 150 in June of 2019, two big declines (one to 90 that October, then to 68 during the coronavirus crash) before bouncing back to 110 or so just before earnings. Then the roof blew clean off, with the stock rallying a whopping 40% the day after earnings on trading volume that was more than eight times average.


Again, such a big move seems like it would lead to a sharp pullback, but usually (not always!) it’s more of a blastoff signal. That’s been the case so far with TWLO. (For another example, look at Chegg (CHGG),which had a similar big base and huge earnings move.)

Interpretation: These types of big gaps out of big bases often launch big moves and can be bought right away—and after their first pullback. We’ll see if TWLO and CHGG follow the usual pattern. So far, so good.

Earnings Gap #2: Gap to New Highs, but Narrow Base – Datadog (DDOG)
This is the same sort of powerful gap, but instead of coming out of a six-, 12- or 18-month consolidation, the gap pushes the stock to new highs out of a jagged launching pad of just a few weeks.

Datadog (DDOG) is an example here, as it went public in September 2019, rallied nicely for a few months and then crashed with the market in March. But the advance from the lows was persistent, and it began accelerating in April and then went bonkers, pushing to new highs ahead of earnings and then gapping up wildly after results.


Interpretation: Any gap out of a base is bullish, but this example is higher risk than when a stock gaps out of a longer base. Why? These narrow launching pads usually mean the stock has come basically straight up from its lows, which means there could be plenty of pent-up selling pressure, short-term. Thus, it’s usually best to start small on these names or wait for some sort of pullback or shakeout after the gap before entering.

Earnings Gap #3: Gap from Near the Bottom – Beyond Meat (BYND)
These situations can be lucrative, but are a bit more like lottery tickets than other earnings gaps. Beyond Meat (BYND) fell from a high of 240 (!) back in July of 2019 all the way to a low of 48 when the market crashed; even after a solid rally, the stock was hanging around the century mark before earnings, no higher than it was two, four and six months beforehand.

But then earnings came out and the stock went nuts—it rallied 26% on the day and continued to motor higher.


Interpretation: These situations usually aren’t reliable—but I will say that, when they work, they tend to do great. Thus, if you’re familiar with the company, really like the story and see the gap, you can consider starting small and adding more shares if the stock heads higher. Just realize that, since these stocks are usually still in overall downtrends, many will stall out or fall apart soon after the gap.

Earnings Gap #4: Gap after an Extended Run – Nvidia (NVDA)
Like I wrote in the intro, the market is there to fool investors, and this is a good example. There aren’t many stocks with extended runs nowadays, so let’s go back in time. Here’s Nvidia (NVDA) —you can see that the stock was trending higher along its 50-day line for a few months, then started to accelerate higher. The earnings move itself wasn’t the biggest ever (up 7%), but it led to a few days of straight-up action.


Interpretation: Ironically, while most earnings gaps portend good things, this situation is often bearish—it’s a matter of it being too good to be true. Usually if a stock has been running for five or six months and then gaps up, it’s a good time to take at least partial profits, or trail a tight stop.

Profiting From the Frauds (Legally)

In the 50 years that Cabot has been providing investment advice on fast-growing young companies, there have been three occasions when stocks of companies run by crooked executives fooled us (as well as other investors and auditors) for a while.

The sad part of these stories is that in each case, many individual investors were hurt; having bought high, they were left sitting on big losses when the financial frauds were uncovered.

The happy part of these financial frauds is that they are few and far between—and sometimes, investors can make very good money in these stocks before the fraud comes to light.

Financial Fraud #1: ZZZZ Best
The first, in 1987, was ZZZZ Best, a small California company run by Barry Minkow, a brilliant but ethically flawed individual. (He was later diagnosed as having antisocial personality disorder, narcissistic personality disorder, attention deficit hyperactivity disorder, anxiety disorder, opioid dependence, and anabolic steroid abuse.)

The company started as a legitimate carpet-cleaning business while Minkow was in high school, but after expanding into insurance restoration, the company increasingly became a giant Ponzi scheme—which looked great on paper. The paper fooled enough people that in 1986, Minkow became the youngest person to lead a company through an IPO in the history of Wall Street (he was 20 years old). And soon after, ZZZZ Best’s stock ran from 3 in January 1987 to 17 in just three months—achieving a market cap of more than $200 million. But two months later as the fraud unraveled, the stock was down to 6—and two months later it was near zero.

Sentenced to 25 years in prison in 1989, Minkow became a born-again Christian while inside, but a few years later, as an ordained minister, he was sentenced to five years for defrauding his church! He was released from prison last June. (Note: ZZZZ Best was written up only once by Cabot back then and was never in a Cabot portfolio because we were in a bear market and holding cash when the stock was hot.)

A movie on Minkow’s colorful life, titled Con Man, was released in March 2018, to very mixed reviews.

Financial Fraud #2: Centennial Technologies
The second notable financial fraud was in 1997, when Centennial Technologies, a Massachusetts manufacturer of PC boards, was found to have “cooked the books.” At the heart of the scheme was CEO Emanuel (Manny) Pinez, who was fired by the company’s board in February 1997 for falsifying inventory reports and inflating sales figures. Three days later he was arrested by FBI agents and sued by the Securities and Exchange Commission for stock fraud.

Centennial had come public in 1995, and the stock was the top performer on the NYSE in 1996, up 447%. Before Pinez was fired, the stock had traded at 55 in the hot technology stock bull market. But trading was halted and when trading resumed, the stock was at 3. Four months later, after digging through the numbers, management revealed that Pinez and his allies had inflated profits by $40 million over 3 ½ years.

In 2000, after a trial, Pinez was sentenced to five years in jail and fined $120 million. Centennial stock had been in the portfolio of our Cabot Market Letter (now Cabot Growth Investor) since November, and had a 72% profit at the top, but the bottom fell out so fast that it was impossible to get out unscathed.

Financial Fraud #3: Luckin Coffee (LK)
And now, in 2020, we have another financial fraud in Luckin Coffee (LK), a Chinese company that purportedly ended 2019 with 4,500 coffee outlets in China, a number larger than Starbucks.

Luckin came public in May 2019, and the stock was up 157% by this January, peaking at 51. Our Cabot Global Stocks Explorer had recommended the stock at 18, soon after the IPO, so some readers had even larger profits!

However, chief analyst Carl Delfeld knows that trees don’t grow to the sky; he repeatedly told his readers to take some profits off the table. And then the bottom fell out of the stock on April 2, after the company announced that it had suspended COO Jan Liu and several employees reporting to him for misconduct related to “fabricated transactions.”

Maybe there aren’t 4,500 outlets. Maybe there are. What we do know is that the company stated, “The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion.” In U.S. dollars, that amounts to about $310 million—which is greater than the revenues previously reported (apparently falsely) in the third quarter alone.

After the fraud was exposed, LK stock fell for three days, and then trading was halted (pending new information from the company)—so now investors who didn’t sell are stuck, with the stock 91% off its January high—and hoping that the truth (when it emerges) is enough to lift their stock at least partially out of this deep dark well.

Also, in time we’ll get a look at how the Chinese justice system treats con men—or maybe we won’t.

So, what have we learned?

  1. If you invest/trade in young, fast-growing companies, there’s a small risk (very small) of falling for a con. For Cabot, three cases (only two of which were actual recommendations) in 50 years is not bad.
  2. Frauds are not limited to small companies; even if you invest in big companies, you can still fall for a fraud. Famous cons in this time have included Enron, Worldcom, Tyco and HealthSouth, all of which we avoided—and of course Bernie Madoff.
  3. You can actually make money in these frauds if you’re quick to take profits when the stocks are high. Remember, bulls make money, bears make money, pigs get slaughtered.

Learning How to Make Money in Education Stocks

There’s never been a better time to invest in for-profit education

Now is the time to invest in for-profit education stocks, and there are two big reasons why.

  1. Betsy DeVos, Donald Trump’s Secretary of Education and undoubtedly the most business-friendly person to hold the title since the Department of Education was created by Jimmy Carter in 1979.
  2. The entire sector of for-profit education stocks, which peaked in a huge bubble in 2010 and bottomed after a widespread collapse in 2013, is now in a healthy upcycle. But it hasn’t yet come anywhere close to “overheated,” so you can still make a lot of money!

That previous bubble, remember, was inspired by the mantra “Everyone Deserves a College Education” and fueled by billions of dollars in federal loans, which for-profit colleges happily steered to millions of students who might previously have never dreamed of going to college.

Trouble is, some of them wouldn’t have otherwise gotten a college education—either because they couldn’t do the work, or they couldn’t pay back their loans—and when the Feds wised up and cut back on the loans, the bubble collapsed.

In many ways, the bubble in for-profit education was similar to the one spurred by the mantra “Every American Deserves to Own a Home,” which fueled the growth of the subprime mortgage industry, whose implosion kicked off the Great Recession of 2008-2009.

Happily, the bursting of the bubble in for-profit education didn’t bring the same widespread damage.

But it did leave two of the most aggressive companies bankrupt and defunct (Corinthian Colleges in 2015 and ITT in 2016), while countless smaller institutions simply closed their doors. The most recent was Education Corporation of America, which in December 2018 closed its remaining 70 colleges after losing its accreditation.

The biggest of all, the University of Phoenix, didn’t die, but was taken private in 2017 at less than 12% of its peak market value. And in the final act of the implosion, hundreds of millions of dollars of loans have been forgiven by the federal government—the cost to be borne by the American taxpayer, me and you.

But now the sector is healthy again, so it’s time for a fresh look. In fact, there are more than 30 public companies trying to make a buck in the education business.

While most of these companies are running schools—both physical and online—the sector also includes companies supplying educational materials (programs and textbooks).

As to the remaining for-profit education stocks, it’s interesting that half are based in China and serve the Chinese market. In general, the Chinese for-profit education business has been booming in recent years.

The for-profit education industry in the U.S., meanwhile, though it has not enjoyed the rapid growth of the Chinese schools in recent years, is now looking stronger, with numerous stocks hitting new highs.

My favorites of the Chinese stocks are New Oriental Education (EDU), GSX Techedu (GSX) and Hailiang (HLG).

As for the U.S. for-profit education stocks, Strategic Education (STRA) has the power of a merger working for it, Grand Canyon Education (LOPE) boasts a pristine record of revenue and earnings growth as well as a healthy chart, Bright Horizons (BFAM) is slower but rock-solid, and Chegg (CHGG) has a great leadership position in the niche of educational resources.

As always, your best bet is to use the traditional tools: look for growing revenue and earnings combined with a strong chart.

Timing Isn’t Everything

They Say Timing is Everything. And the Same Goes for Market Timing. But is it?

When we bought our Golden Retriever as a puppy, we also had a 5-year-old boy starting kindergarten in two weeks, and a 3-year-old girl who never stopped talking or moving. Oh, and my wife, a high school counselor, started back at work the same week week after having the summer off, while I’d be away for four days, attending our annual Cabot Wealth Summit conference. All of this got me thinking about timing.

On the surface, throwing an eight-week-old puppy into the busiest month of the year for my family may have seemed like a hasty decision. It sure felt like it when the puppy started yelping to go out to pee at 1:30 in the morning … and when my daughter entered our room at 4 in the morning for her nightly visit … and again when the puppy was up for good at 5:30.

And it would really feel like it to my wife the rest of the week as she shuttled kids and puppy to and fro by herself while dealing with the usual stresses that come with working at a high school as a new school year begins.

Perhaps our timing could have been better.

Similarly, there have been better times to buy stocks than the current one. But market timing is an imperfect science. This could be a good time to buy some great growth stocks while they’re trading at a discount. If you’re a long-term investor who is unperturbed by the ebbs and flows of the market, now may be just the retreat you were looking for to create an ideal entry point. “Buy on dips,” we always advise.

Besides, if the long term is your investment timeline, you probably won’t care much if the current market is more than just a pullback. If volatility continues and stocks are knocked back for another month or two, you’re OK with it. You’re betting that prices will be higher a year from now, five years from now, and 10 years from now. They usually are.

If that’s the case, then market timing may not matter to you. You might be fine buying stocks regardless of what’s going on in the market.

And that’s how I rationalized the timing of our puppy purchase.

Sure, the first week may be hell. Sure, we could have waited another week. Sure, my wife may have needed an IV and an impromptu 48-hour spa getaway the second I got back from the Cabot conference.

But a year later, we won’t remember how physically, mentally and emotionally exhausting the week was. We’ll just be happy we have a dog, reassuring me that timing is overrated.

Hot Market Sectors for Investors

In a Flourishing Stock Market, Which Sectors Should You Choose?

Analysts all have their own ideas and forecasts when it comes to the hottest sectors to invest in.

The S&P 500 Index suggests the top sectors are Information Technology,
Consumer Discretionary, Industrials and Real Estate. James Stack, editor of InvesTech Research suggests Health Care, Technology, Consumer Staples, and Industrials. Richard Moroney, editor of Dow Theory Forecasts, recently ranked his favorite sectors, Technology, Healthcare, REITs, and Materials.

While analysts all have their own methods for picking the sectors they think are more worthwhile, there are many recurring themes. The sectors we suggest to our own clients, are:


The REIT sector was hit hard at the end of 2018, when investors feared interest rates were going to continue to rise. But rate fears have lessened, and the sector is doing very well with the strong economy, and with the average dividend yield of 4.14%, they remain very attractive for cash flow.


Due to the same interest rate fears, financials had a downturn at the end of the year. But, like REITs, they have started to pop back up, albeit with a bit more volatility. The average bank stock P/E (price-to-earnings) ratio is 18-21, but many banks are still undervalued, and trading at P/Es around 11-14. In addition, most banks pay at least a 1% dividend yield, so you get cash while you wait for appreciation. The strong economy should continue to boost bank stocks.

Consumer Defensive

To hedge your bets just in case the economy does begin to falter a bit, it’s good to keep some fairly secure stocks, that do well even in a slower economy. Consumer Defensive Stocks fit that bill.


All the political wrangling in D.C. has created much frustration and uncertainty in the Healthcare segment. However, our nation is not getting any younger, and there are plenty of opportunities for growth in this arena. You can be as speculative as you like, with biotechs, or stay a little more conservative, with medical device stocks.

A Down Market Smells Like Opportunity

Bear markets usually accompany recessions, and there’s been a lot of talk about both. Is all this talk just bluster, or is it justified? It might be a bit of both.

The reality is that recoveries always end in recession and bull markets always end in bear markets. Both the current recovery and bull market are already the oldest in history. Investing today gives you the feeling that you’re playing musical chairs, and the music has been playing for a really long time. It could come in a month or in three years, but a bear market is looming somewhere on the horizon.

Sure, this bull market could forge on for a while longer. But how much is left in the tank? It’s difficult to see the market advancing another 50% or 100% before the next bear market. Returns for the rest of the way will likely be less inspired than we’ve seen in the recent past. So what do you do?

You may reasonably wonder at this point why you should stay in the market at all. Why stick around for some measly twilight returns if it means risking riding into the next bloodbath? Why not get out now, wait for the bear market to hit, and then get back in cheap?

That’s easier said than done. There are a few things wrong with getting out of the market and trying to time re-entry. Market timing has not been a winning strategy for most. For one thing, what if you get out and the bull market continues to run for another five years, and you’re on the sidelines earning practically nothing? Do you get back in at a higher level?

Let’s suppose you get out of the market, and you’re right. The bear market comes in full force this fall. Are you going to jump in during the thick of the selloff? My experience has been that most people don’t want to try and catch a falling knife.

The fact is market timing usually doesn’t work because most people miss out on all the returns before the bear market and then miss most of the bounce-back afterwards, if they get back in at all. In the end, most investors who try it end up worse off.

Well Then, What Should Investors Do?

What would happen if you stay mostly invested in stocks and a bear market creeps up?

Let’s use the last bear market as an example, the worst since the Great Depression. If you invested in the market index at the market high on October 8, 2007, right before the financial crisis, and just kept holding the index without adding another dime, today your average annual return would have been 7.67%. That’s still probably better than you would have done in any other asset class.

Of course, you would have had to endure some short-term pain and it would have taken several years to get back to even. But it’s also true that if you actually added more money along the way you could have significantly improved your returns. And most bear markets are nowhere near as bad as the last one.

The point is that bear markets are not the disaster many perceive. Bear markets actually represent fantastic opportunities to enhance your longer-term returns. Consider this: Since 1926 we have been in a bull market about 86% of the time and bull market returns have been significantly higher than bear market losses.

It’s more rational to look at a bear market as an opportunity to get in dirt cheap ahead of the next bull market. We should spend bear markets positioning ourselves for the next bull market. But many investors do the opposite. They spend bull markets worrying about how to position themselves for the next bear market.

At some point a bear market will hit. But you will be a much more successful investor over time if you look at it as an opportunity instead of a tragedy. Use this time to target certain investments and prepare to get in cheap. Don’t fear the next bear market – exploit it.

Why Savvy Investors are Undaunted by Weak Small-Cap Index

If you were to follow the Russell 2000 Index—the world’s best-known benchmark of small-cap stocks— you might notice that small caps, as an asset class, are underperforming.

This data is frustrating, because it implies to the everyday investor that small-cap stocks are not a wise investment.

And at an index level it’s true … small-cap stocks are stuck in the mud.

But nothing could be further from the truth when you look at a narrower subset of small-cap stocks: mainly technology, biotech and MedTech stocks. The performance of these small-cap stocks is off the charts!

Bottom line – the average investor who doesn’t look any deeper than small-cap index performance is missing out on all the great small-cap growth stocks of today, which will likely become the mid-cap stocks of tomorrow.

And they don’t need to.

Why the Russell 2000 is Not a Good Indicator

There are a lot of ways we can unpack why small caps are underperforming. But given time and space constraints I’m mostly going to rail against the Russell 2000 Index in broad generalities.

For those that don’t know, the Russell 2000 is a group of 2,000 small market-cap stocks that FTSE Russell decides are most relevant each year.

Their pitch is that this market cap constrained methodology removes subjectivity and increases transparency, so index investors get an index that’s “representative, reliable and relevant.”

There are three current underlying issues with the Russell 2000 Small Cap Index that I see.

First, there’s no real type of quality screen. Sure, removing subjectivity from index stock selection is great, if the subjective opinions of decision makers is dreadful.

But if subjective opinions are good, that’s what you want! The Russell 2000 doesn’t allow for good, subjective stock additions and deletions.

Second, there’s the upward migration issue. Growth investors know that good stocks go up! If all the good small-cap companies are getting bigger where’s the incentive to blindly purchase a basket of 2000 smaller companies? Especially when upward migration – which happens when companies that get too big for the Russell 2000 are removed from the index – takes away all the best-performing companies?

It would be one thing if the IPO market refreshed the index at the low end with a constant stream of new blood. But from what I’ve seen IPOs are getting bigger, not smaller.

While there are a lot of good companies that enter the small-cap index each year, they are dwarfed by the sheer number of stocks that don’t perform well.

The S&P 500 doesn’t suffer from this upward migration issue. A great growth stock can keep going up, and that performance won’t lead to its eventual removal from the index.

And third, the world, and the stock market, is changing. The emergence of new technologies, like cloud computing, are driving massive changes. One of those changes is that the strong are getting stronger as these businesses scale up more rapidly than businesses of yesteryear.

Why the S&P 500 is a Better Indicator

Much of that performance is being captured in the S&P 500. The S&P 500 holds five of the most successful technology companies in history, and they don’t need to leave the index. Ever.

In comparison, the Russell 2000 holds one tech stock in its top 10 positions, and if and when it gets too big, it will leave the index.

How can the Russell 2000 ever compete?

There are a lot of other nuances we could talk about when comparing relative attributes and performance of the Russell 2000 and S&P 500. But is it worth the time and effort?

I don’t think so. Which is why I find myself spending less and less time looking at the small-cap index, and its performance. Unless it’s to bash it.

As currently constituted, the Russell 2000 Index holds zero allure for growth investors, in my humble opinion.

The Pros and Cons of Seasonal Investing

We all know that the news from across the world can rock our markets, but in addition, there are myriad seasonal investing trends (movements during certain times of the year) to consider. But should you really pay attention to any of them? That all depends. First let’s look at the most well-known stock market adages:

  • Santa Claus Rally (stock market rallies in December, usually the last week). The truth: According to The Stock Trader’s Almanac, since 1950, the average gain for this period of the year has been 1.3%, and since 1969, it has generated positive returns 75% of the time.
  • Sell in May and Go Away (November 1 – April 30 are considered the best months of the year for the markets). The truth: A report by Barclays found that average returns from 1970-2017 were stronger between November and April than they are in May through October.
  • The January Barometer (as goes January, so goes the rest of the year). The truth: According to Fidelity, in regard to the U.S. markets, “an up January has generally been bullish for stocks, particularly when the market has gained more than 5% in January.” Since 1945, the January barometer held true 75% of the time when the market was up in January (as has been the case so far this year). But, declines in January have not reliably predicted a weaker year.
  • The Presidential Market Cycle (first year following a presidential election is usually the worst, with the third and fourth years seeing above-average performance). The truth: History bears out the cycle; but with President Trump, the pattern changed. Whether or not that will continue into the future remains to be seen.
  • October is a Scary Month (many market crashes have occurred in October—Panic of 1907, Black Tuesday 1929, Black Thursday 1929, Black Monday 1929 and Black Monday 1987). The truth: October is the most volatile month. According to CFRA Research from 1950 to present day, “The S&P 500 on average registers more daily moves of at least 1% in October than in any other month.” On the flip side, however, going back to 1950, the S&P 500 has averaged a gain of 0.7% in October, according to The Stock Trader’s Almanac.

The Pros and Cons of Following Seasonal Stock Market Adages

As you can see from the data above, these adages aren’t reliable, though they certainly can be predictors. For example, the holiday season comes and goes in December every year, and people are unlikely to stop spending more money then, than the rest of the year. But what about following all of them?

Pros of Seasonal Investing

  • Predictions and trends are easily found, because these seasonal adages are well known, tracked and reported upon. The ones above are supported by decades of data.
  • There are many other seasonal trades, such as in commodities—sugar, natural gas, heating oil, grains, coffee, copper, etc.—that are influenced by seasonal weather, as well as patterns, cycles and trends in consumption, supply and demand. So in terms of diversifying your portfolio based on seasons, you have options.
  • There are many companies with predictable seasonality, like amusement parks whose profits are made in the spring and summer, giving their stocks a seasonal boost. Or retailers whose big months are the end of summer and holidays.

Cons of Seasonal Investing

  • When it comes to seasonal investing, timing is everything and no one is perfect at market timing.
  • You need to be a day trader or a short-term investor, otherwise, the calendar should only be a minor consideration in deciding whether to buy or sell stocks.
  • There are more factors than what’s most obvious. For example, President Trump completely changed the pattern of the Presidential Market Cycle -- and there’s no way to predict a change of pattern.

We find that while seasonality comes with history and data, it’s best to stick with the trends, the charts and the fundamentals of the companies in which you’re invested.

You Haven’t Lost Any Money Until You Sell Your Stocks

This downturn is temporary. It wasn’t caused by problems in the economy. Prior to the coronavirus outbreak, we were enjoying a bull market, low inflation, and an enviable unemployment rate. And while I can’t predict when we will get back on track, I do know that it will happen.

So, for most of us, that means we should hold tight to our stocks.

However, there may be a few reasons to sell stocks in your portfolio, and they are the reasons you would sell them in any market.

Should You Sell Your Stocks?
In this kind of market, with few endemic fundamental problems, the primary reason to sell a stock is this: If the fundamentals of the company have deteriorated to the point where you do not think it can recover after the coronavirus pandemic is over.

For most of your stocks, that is probably not going to be the issue. But if you are holding shares in companies in which the fundamentals of their business were teetering on the brink of insolvency before the coronavirus hit us, then face it: they are companies likely to fail and not be able to spring back once we start our recovery phase.

Some of these failing indicators would be:

  • Were they losing money before the outbreak?
  • Are they overloaded with debt?
  • Were revenues shrinking before coronavirus?
  • Are they in a sector that was suffering before the pandemic?

Now, if your stock doesn’t fall into any of the above categories, I would put it through these last three tests:

  1. Are all the reasons I originally bought this stock still in place?
  2. Is my price target still valid?
  3. Can I make more money by retaining the stock than by substituting another investment?

If the answer to any of those questions is no, it’s time to bail, and move on to investments with greater potential.

If you are still happy with the company and satisfied with its potential, then keep the stock. If not, sell it and look for greener pastures.

I recommend that you take some time to review your portfolio. And then, be brave. Now that you know when to sell stocks in this extremely volatile environment, cut your losses on some of the stocks that you just don’t think will recover, and then just sit tight on the rest.

America’s 10 Millionth Patent is a Reason for Optimism

From the beginning, the protection of intellectual property such as patents, trademarks and copyrights has been the driving force behind America’s economic rise.

The patent and copyright clause in our constitution led to the 1790 Patent Act and the first patent board composed of Thomas Jefferson, Henry Knox and Edmund Randolph.

None other than President George Washington signed America’s first patent, for improvements in making potash.

Abraham Lincoln was awarded patent number 6,469 in 1849 for an invention to lift boats over shoals and obstructions in a river. Nikola Tesla was granted a patent in 1888 for the technology behind the electric vehicle, which wasn’t mastered until more than a century later by a company named after him; Disney (DIS) in 1940 for the art of animation; Bowerman in 1972 for Nike’s waffle sole; and Steve Jobs in 2007 for the basis of the iPod.

It is not an exaggeration to state that the protection of intellectual property has been the fuel for the engine propelling America to capture the commanding heights of the global economy.

Here is the good news: Last year America’s patent and trademark office (USPTO) issued its ten millionth patent.

Protecting America’s Crown Jewels
So in these turbulent times, when trade disputes dominate the headlines and globalization is under attack, it’s worth pausing to acknowledge that our primary agenda should be promoting the protection of intellectual property at home and abroad.

The U.S. Chamber of Commerce’s Global Intellectual Property Center’s (GIPC) research highlights the high stakes for America. Intellectual property is the foundation of 45 million high-paying U.S. jobs, 74% of our exports, and 38% of our GDP.

But here is a wrinkle that may not have occurred to you: When a foreign country puts in place a transparent legal framework to protect intellectual property rights, it is not only good for American companies; it is essential for their own economic vitality and progress.

The recently released sixth edition of the U.S. Chamber’s International IP Index ranks 50 countries on the basis of 40 intellectual property protection indicators.

The U.S. leads the pack, closely followed by the U.K. and the European Community. A quick survey of the country rankings shows a close correlation between strong protection of intellectual property and economic development.

For example, a robust IP protection results in a country being 53% more attractive to foreign direct investment, six times more likely to attract highly skilled researchers, 60% more receptive to entrepreneurship, and 42% more likely that an idea will be supported by venture capital and private equity.

This much is clear – a fair and transparent legal framework to protect innovation is the key to unlocking capital, talent, creativity and economic growth.

Protecting U.S. trademarks is also vitally important. Each year counterfeit goods rob America of 750,000 jobs and $250 billion of sales, resulting in 53 billion visits to rogue websites.

So while trade statistics are important, let’s center our economic diplomacy on the basic building blocks of America’s edge to further its leadership of the global economy and create more high-paying jobs at home. Progress in the protection of intellectual property by countries such as India and China is painfully slow and incremental. That fact should be at the core of America’s trade negotiations.

A Reason for Optimism
America’s ten millionth patent is a major milestone that deserves ample appreciation and recognition.

Next time you visit Washington, D.C., take the time to cross the Potomac to visit the U.S. Patent & Trademark Office’s impressive campus in Alexandria, Virginia. Fittingly, this organization does not rely on the U.S. taxpayer for even one cent of its budget. Bravo!

Jefferson, Knox and Randolph, names that grace the main buildings in this complex, must be looking down on it today in awe and optimism.

Day Trading in a Global Pandemic: A Cautionary Tale

Day trading is like gambling. We know that the stock market goes up over time. Day to day, you have no idea which direction the market is headed, and individual stocks can be even more difficult to pinpoint. Sure, people can succeed in doing it, but it takes considerable practice. You can’t just dive into day trading and expect to make money with any consistency.

Which brings me to one Dave Portnoy.

Day Trading Gone Wrong
Dave Portnoy is the founder of a popular sports website called Barstool Sports. Portnoy may know a thing or two about sports gambling – he hosts a sports gambling radio show on Sirius/XM, and a public company called Penn National Gaming (PENN) now owns a majority stake in Barstool. But he knows nothing about day trading, as evidenced by this quote he gave in an interview with Business Insider earlier this month: “I’ve never really day traded before. I think I’ve bought one stock in my life, maybe two.”

Nevertheless, Portnoy decided to become a full-time day trader on March 23, the day stocks were bottoming after falling nearly 34% in little more than a month. That’s right: a man with no day trading and no real investing experience decided to become a day trader in the middle of a global pandemic!

To his credit, Portnoy has copped to the foolishness of this strategy. In his March 23 “announcement,” Portnoy said, “To be very clear, I have zero idea what I’m doing.”

Portnoy promptly deposited $3 million into a new E-Trade account and changed the name of Barstool’s daily sports gambling radio show from “Picks Central” to “Stocks Central.” With no sports to gamble on in the midst of coronavirus, Portnoy decided to do a full pivot to day trading.

You can guess what happened next.

Portnoy lost $200,000 in his first week of day trading. By April 17, he’d piled up $740,000 in losses before rallying to be down “only” $640,000 by April 20. In other words, Portnoy lost $640,000 day trading in less than a month

Nobody needs sports back soon more than Dave Portnoy.

The larger takeaway, however, is that day trading isn’t for newbies. Even if you’re a seasoned investor, day trading is an entirely different animal; you’re not buying stocks for their long- or intermediate-term profit potential, you’re buying stocks that you think will rise that day. Under normal circumstances, predicting what stocks will do on a given day is like throwing darts with a blindfold on. In the middle of a global pandemic not seen in modern times, it’s like throwing darts with a blindfold on from the back of a bucking bronco.

A Better Way to Make a Quick Profit
We’re not completely averse to short-term trading. After all, we have an advisory called Cabot Top Ten Trader, which every week recommends the 10 hottest stocks on the market, complete with buy ranges and loss limits. But the timeline for owning the stocks Top Ten Trader recommends is weeks or months—not days, and certainly not one day.

There’s nothing wrong with trying to make a quick profit. In fact, the quicker you profit from your investments the better. But to make money in investing, the longer your timeline, the more the odds are in your favor. With day trading, your odds are a flip of the coin—at best.

The 6 Best ETFs to Buy Now

One way you can improve your batting average as an investor is to look for bargain opportunities after the broad market has experienced a huge decline.

One of the most important ways of identifying strong buy candidates is to look for ETFs whose price lines have shown a clear and conspicuous divergence from the benchmark indices, such as the S&P 500 Index (SPX).

The key here is to look for signs that the seasoned market pros are accumulating (buying) stocks. In his book, The Secret of Selecting Stocks for Immediate and Substantial Gains, Larry Williams made this observation:

“To spot professional accumulation, all we need to do is find an example of steady and determined buying in the face of a weak stock market. When this happens, we have a good idea that professional buying is taking place.”

Another way of identifying how well an industry is performing versus the rest of the market is by using a relative performance (RP) line. This technique was developed many years ago by Carlton Lutts, founder of our Cabot Top Ten Trader momentum-investing advisory. He wrote:

“Relative performance (RP) is simply a measurement of how a stock is acting relative to the market as a whole. This can be measured mathematically, but we prefer a visual representation because we have found it easier to analyze. As they say, a picture is worth a thousand words.”

An RP line is basically the stock’s daily closing price divided by the daily closing price of the benchmark S&P 500 Index or another major index. It shows how the stock is behaving compared to the broad market, and as such, is a powerful tool that will give you a considerable advantage over the average investor. The RP line is simple to use; when it’s moving higher, it shows a stock is outperforming the broad stock market. When it’s declining, it shows the stock is underperforming. A steady, level RP line tells you the stock is performing roughly the same as the market.

By combining these two techniques, we now have two reliable ways of detecting accumulation (or informed buying) in an ETF:

  • Look for a bullish divergence between the market itself—using the Dow 30 or S&P 500 as a benchmark—and the ETF you’re examining. For instance, when the S&P has made a series of lower lows over a certain time period, and the ETF you’re watching has made a series of higher lows in that same period, you’ve just found an ETF that is likely being accumulated by the “smart money” crowd.
  • Watch for ETFs that are showing above-normal strength when compared to major indices like the S&P by using a relative performance line. You can easily spot an ETF’s relative performance by simply noticing if it has resisted declining in a period of broad market weakness. If it has shown strength compared to the S&P, it’s likely being held by “strong hands” or professionals. And it usually pays to follow the lead of the smart money crowd.

Let’s apply these basic principles to six of the most popular ETFs as we search for the best performers among them. For the rest of this article, below are the best ETFs in terms of relative performance (versus the S&P 500), starting with the lowest and working up to the highest ranking.

The 6 Best ETFs to Buy Now
6. Consumer staples typically perform well in a recession; after all, people will always need to buy things like shampoo, toothpaste and toilet paper. So, it’s not surprising that several well-known consumer staple firms have outperformed the averages of late. For that reason, the Consumer Staples Select Sector SPDR Fund (XLP) has outperformed the S&P 500 Index in recent months, as shown in the relative performance line below. The impressive rising trend in the fund’s RP line provides a strong indication that consumer staples have likely been accumulated by smart investors at a time when most participants were selling.


5. An even better example of an industry group with a strong RP line is internet providers. With millions stuck at home during the pandemic, the internet has become a service more essential than ever before. Consequently, the stocks of companies which provide internet-related services have been booming. This is illustrated by the strong relative performance of the First Trust Dow Jones Internet Index Fund (FDN) versus the S&P 500. With internet connection now a critical necessity for homebound workers, investors can likely expect to see continued growth ahead in this key industry.


4. Healthcare stocks have benefited from the market’s resurgence as investors focus their attention on healthcare providers, medical equipment makers and drug companies on the front lines of the fight against coronavirus. Coming in at number four on our list is the iShares Global Healthcare ETF (IXJ), which tracks the performance of several well-known companies in the healthcare sector, including Johnson & Johnson (JNJ), Bristol Myers Squibb (BMY), Abbott Laboratories (ABT), Pfizer (PFE) and others. Here you can see the eye-catching strength of IXJ in relation to the benchmark S&P 500.


3. Gaming stocks have also done exceptionally well during the coronavirus lockdowns as millions of people sitting at home, some with nothing much to do, are diverting themselves by playing video and online games. Last year, the ETFMG Video Game Tech ETF (GAMR) was created to track companies including video game software developers, publishers, platform providers and gaming accessories makers. The ETF has shown persistent strength when compared with the S&P lately, and with an uncertain timeframe for the end to shelter-at-home orders, gaming tech companies will likely continue beating the market averages for some time.


2. Gold has benefited tremendously from the flight-to-safety in the last few months as investors worry about the fragility of the global economy in the coronavirus’ wake. Many are also concerned that trillions of dollars recently created by central banks to prop up vulnerable markets could eventually lead to inflation. Consequently, investors have turned to gold and gold derivatives, including the stocks of companies that mine the precious metal. The VanEck Vectors Gold Miners ETF (GDX) is one of Wall Street’s star tracking funds right now and has completely outshone the benchmark SPX. GDX also has the distinction of being one of the only ETFs to have hit a new yearly high since the market crashed. This ETF holds several top gold stocks, including Newmont Mining (NEM) and Barrick Gold (GOLD).


1. Leading our list of the best ETFs during this period of uncertainty has been the Vanguard Extended Duration ETF (EDV). The ETF tracks the performance of zero-coupon extended duration Treasury securities and provides exposure to the red-hot Treasury bond market. T-bonds have obviously benefited from safety-related demand, and the following graph underscores the sizable performance gap between EDV and the S&P 500. EDV is one of the few actively traded funds near an all-time high and tops our list of outperforming ETFs in percentage gain terms.


Based strictly on relative performance, these are six of the best ETFs in the U.S. equity market right now. While past performance doesn’t guarantee future results, it usually pays to follow the path of the smart money traders and investors. And the ETFs discussed above appear to be among the favorites of this market-moving crowd.

Best Investment Sites to Research Stocks

Research is a major key to successful investing. And a big part of research in today’s Internet-centric investment environment is reading a variety of investment websites, e-letters and blogs to gauge the opinion of various experts on a given stock, sector or investment idea.

We at Financial Freedom Federation browse a variety of investment websites on a daily basis in addition to our proprietary research. In this special report, I’d like to share some of our favorite investment sites with you!

In the interest of teaching you how to become a better investor, I have compiled a list of the best investment sites recommended by our nine expert advisors, broken down into four general categories: Education, Research & Analysis, News and Tools. Lastly, I include a section on investment sites for small-cap investment research.

Let’s get started!

Cabot Wealth Network:

Any list of the best investment sites has to start with the one you’re currently reading, right?!

This website contains a wealth of free information describing the investment advisories and expert analysts, showcasing the latest stock picks and providing a daily market update. The education section has valuable information on all sort of personal and retirement financing as well as reports on Market Timing, Selling Stocks, Technical Analysis and many others.


AAII Investor Classroom:

Contains various lessons covering everything from managing risk to evaluating dividend stocks. Best of all, you can easily find guidance on a specific investing topic.


This is an excellent source for definitions of financial terms. In addition, the site has tutorials and articles broken down by investment level and style, such as Beginners, Active Traders and Retirement. Free.

Research & Analysis

Security analysis falls into two broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. The process includes examining a company’s financial statements and financial health, its management and competitive advantages, and its competitors and markets.

By contrast, technical analysis focuses on price and volume activity of a stock. In its purest form, technical analysis assumes that all the fundamental factors of a company are reflected in the price of its stock. Technical analysis studies the market supply and demand in an attempt to identify where a stock’s price will go in the future.

AAII Stock Screens:

The Stock Screens area on the AAII site offers both education and investment ideas for members looking to construct and manage a stock portfolio. The area profiles more than 60 strategies grouped by investment style. Members can read about factors that make each approach unique, see how a hypothetical portfolio following each approach has performed during various market environments, and access stocks filtered by each screen. The cost of an annual membership is $49.

For pre-digested dividend information, such as how many years in a row a stock has increased its dividend, this site is a great resource. It’s also one of the most reliable and up-to-date sources of ex-dividend dates and payment dates.

Earnings Whispers:

A good place to find quarterly and full-year earnings estimates on all your holdings. Free.

EDGAR Online:

Another interactive charting tool is on the I-Metrix website by EDGAR Online. The homepage shows all the new SEC filings for that day, but if you click on the “Company” tab and enter your ticker symbol of choice, you’ll be directed to the company’s “Summary” page, which gives you the company’s basic info. In the upper right, you’ll see a little chart image. Click on it and you get a nice clean charting tool. The nice thing about this website is it also provides the basic company info for free, as well as access to recent SEC filings, all in one ad-free spot. All items without a lock icon are free.


Another stock screener. It has a free version, which is very good, and a paid version is available. The best screener we’ve seen since MSN eliminated theirs.

Morningstar: is a reliable source for fundamental stock data including historical data, financial statements and price data for individual companies. Morningstar is also the leading source for mutual fund and ETF data, offering a wide range of performance information. The site also includes a comprehensive screener and mutual fund ratings. The basic service is free, which includes five years of data. The premium service ($199/yr.) offers 10 years of data and comprehensive research tools including portfolio tracking, analysis and optimization.

Seeking Alpha:

Seeking Alpha publishes quarterly conference call transcripts for many companies. These transcripts can offer insight into a company’s performance over prior quarters and management’s outlook for the future. Registration is free.


Many sites offer price charts, but StockCharts is more advanced with additional charting options, educational content and extensive technical analysis. A favorite of Cabot small-cap expert Tyler Laundon, StockCharts also offers a broad collection of scans for technical conditions, including candlestick and point & figure patterns. Free real-time price charts. The basic service is free; premium services start at $14.95/month.


The site provides a stock screener, sorting capabilities, charting, individual company information, technical data and a portfolio tracker. The basic service is free, but a premium subscription gives you more tools and starts at $79.99/year.

Zacks Investment Research:

Offers comprehensive data for more than 5,000 companies, including sales and earnings estimates, revisions and past surprises. The basic free service offers lots of information; the premium service includes even more at $495/year.



Barron’s includes its own articles, and articles from some other good investment sites—The Wall Street Journal, Dow Jones Newswires and MarketWatch. A subscription is required to read the actual articles from Barron’s and The Wall Street Journal. The $48 per year introductory rate is well worth the money.

Bloomberg offers extensive economic, business and stock market news plus live streaming video. The site also carries a comprehensive economic calendar. Free.


CNNMoney aggregates news articles from a variety of credible sources along with fundamental and technical data for each query. The site does a good job of highlighting breaking news. Free.


Another good company news website. MarketWatch features articles from leading sources including, Barron’s, and Seeking Alpha. The site also contains company press releases to give you “unfiltered” news about a company as well as articles with an analytical slant. Marketwatch also provides historical stock prices with charts. Free.

Twitter and Stocktwits: and

Social media certainly has its drawbacks. But in 2017, it’s the fastest way to get your news. If you have the stomach to create an account, both of these sites can be great sources of news. As the name suggests, Stocktwits is a stock market-specific version of Twitter. So if getting more up-to-date information about your investments is your lone reason for creating an account, that’s probably the better bet.

Here’s what Jacob Mintz, our options trading expert and our most social-media savvy analyst, had to say about both sites:

“The two websites I check regularly to get a sense for trader sentiment, and which stocks traders are watching, are Twitter and StockTwits. While these social media sites are not the places to go to get PE ratios and dividend information, they do a great job of highlighting trending stocks. Also, because of the speed of social media, Twitter beats traditional media sources, such as Bloomberg and CNBC, to world events and stock stories, more times than not.”


Yahoo is one of the best investment sites for industry and sector news. The site also offers the top business news, company briefs and personal finance. Type in a ticker symbol, and you will receive a current quote, flexible chart, message boards and the latest news on your company. Free.



This site features up-to-date rate comparisons for bank accounts, CDs, mortgages, credit cards and insurance. Bankrate also offers extensive collection of personal finance calculators, income tax resources and tools. Free.

Dividend History: and

Discount Brokerage Research Websites

Brokerage account sites offer research on stocks and mutual funds from third-party services. While the research offerings differ, most top discount brokers give their customers free access to research reports from companies such as Morningstar, Thomson Reuters and Standard & Poor’s. Free with brokerage account.

Economic Calendar:

Use for economic news, such as unemployment numbers, housing stats, production changes and sentiment readings. Free.

Free Real Time:

Gives free real-time stock quotes and market news.

Investor Relations Websites

Simply type the company’s name or ticker symbol followed by “investor relations” in a search engine such as Google. The investor relations section of a company’s website can offer a large amount of information including presentations, annual reports, dividend history, press releases and calendar of upcoming events. Free.


This news site also features write-ups on individual stocks that go into much greater depth about the details of a company’s business plan. It will also give competitors and other valuable information.

Best Investment Sites for Small-Cap Research

Small-cap stocks are a different animal. By definition, the companies are smaller, less mature and therefore have less coverage, so finding the good ones can require quite a bit of digging. Fortunately, deep-diving for small-company gems happens to a specialty of our small-cap investing expert, Tyler Laundon.

Here’s all you need to know about Tyler’s small-cap investing credentials: eight of the 13 current positions in his Cabot Small-Cap Confidential advisory portfolio are winners, with an average return of 84% - even after the 30% March cratering in the S&P 500!

Finding that many small-cap winners is anything but easy, but here are a few ideas from Tyler Laundon on where to find the best small-cap research.

Best Investment Sites for Getting Creative

Many of the best small-cap investment ideas come from random sources: a conversation, a passing glance at something or a magazine article. A lot of things can set off alarm bells that inspire you to find stocks to play the trend.

This approach requires a completely different tool than your standard stock screener. The best free tool Tyler has found is the SEC’s advanced full-text search tool. The tool lets you search SEC filings by keywords, then gives you a list of all filings in which that keyword has shown up over the last four years. It’s worth reviewing the tool’s FAQ page to understand how the search works so you can generate relevant results. For instance, if you search for “cloud software,” you’ll get a gazillion results with stocks all over the market cap spectrum. But if you search for “cloud AND software AND biotechnology,” and limit the filings searched to 10-Ks, you’ll get results that are much more specific to a certain concept.

Idea generation for small-cap stocks is inherently time-consuming. Make sure you know that going in, and set aside a reasonable amount of time. And remember, the more specific your search criteria is, the faster you’ll be to find relevant results.

Once you have a dozen or so stocks that seem intriguing, you need to dig deeper. Is it a buy now? Maybe a buy later? Or a no way in hell am I touching this thing! You need to do technical and fundamental analysis to figure it out.

Best Investment Sites for Technical Analysis/Charting Tools

There are so many charting tools out there that you’ll have no problem finding a good free one (if you haven’t already). But speed is critical, and I find that the more windows I have open the longer it takes me to move through stock analysis. This is especially true when using a lot of free websites that are supported by advertisements that slow things down. I almost always go with the fastest website that gets the job done and presents the chart clearly. Two options stand out.

The first is, which as we mentioned earlier is a pure technical charting tool. It’s my favorite.

The second is interactive charting tool on the I-Metrix website. The homepage shows all the new SEC filings for that day, but if you click on the “Company” tab and enter your ticker symbol of choice, you’ll be directed to the company’s “Summary” page, which gives you the company’s basic info.

In the upper right, you’ll see a little chart image. Click on it and you get a nice clean charting tool. The nice thing about this website is it also provides the basic company info for free, as well as access to recent SEC filings, all in one ad-free spot (the left sidebar has the navigation menu, and all items without a lock icon are free).

SEC Filings, Transcripts and Company Presentations

If a stock passes my high level technical and fundamental analysis check, I’ll add the stock to my “do more research” list. When I do more research, I rely on four sources. The first is SEC filings like 10Ks and 10Qs. These have all the juicy details on the company, including what it does and how well it’s doing it, what the risks are, details on financial performance and all kinds of other information. I usually find these in one of three locations; the company’s Investor Relations website, directly from the Company Filings website or from I-Metrix (select “All Filings” from the left-side navigation bar).

Two other useful resources for valuable tidbits are earnings call transcripts and company presentations. Seeking Alpha is a great source for free earnings call transcripts (search by ticker first then select the “Earnings,” then “Transcripts” tab. And if you navigate to the Investor Relations website for most publicly traded companies, they’ll have a recent company presentation available that gives a decent overview of what they do and their financial performance. These websites will also have a replay of the most recent earnings conference call available if you want to listen to it.

Lastly, I think it’s handy to see what analysts that are following a stock are saying. I find Analyst Ratings to be a good free resource for this. You have to close a couple of pop up adds, which gets annoying. But you can enter the desired ticker symbol and the site will tell you what the current analyst ratings are, and often what their price targets are. And of course, the “Analyst” tab on Yahoo! Finance is good for looking at analyst estimates in terms of dollar value and growth rate for the current quarter, next quarter, current year and next year.

Bottom Line

As you can see, there are plenty of good options out there. Which of these investment-site recommendations you end up using depends on what type of investor you are. To fully research a stock, you should sample one or two sites from each of our four general categories.

Thanks to the internet, and so much valuable investment information being just a mouse click away, investing on your own has never been more doable. You just need to know where to look. We hope this report helps steer you in the right direction.

Happy investing!

The Best Way to Invest $10,000 in the Stock Market

Okay, you’ve chosen to read this report, which means you have some extra money. It’s doing you no good sitting in a traditional savings account, money-market account or certificate of deposit (CD) - especially now that the Fed has lowered interest rates back to zero again in response to the coronavirus pandemic.

You want that money to do a better job of “working for you,” so to speak. So you’ve decided to invest some of it—say, $10,000—in the stock market. Good decision!

The catch, of course, is that you’ve never invested on your own before—or, at the very least, your investing experience is limited. You want to know the best way to invest that $10,000.

This report will teach you how!

Now, rather than simply give you a list of stocks to buy with your $10,000, I’m going to give you some very detailed tips to help guide your investment decisions. These are tips that have not only kept the Cabot Wealth Network afloat for nearly a half-century—through crippling recessions and countless market crashes—but enabled longtime subscribers to double their money 30 times over!

I hope these tips will help you have similar success in the stock market.

Let’s get started!

Eight Helpful Investing Tips

Tip #1: Don’t Argue with the Stock Market.

“Markets are never wrong; opinions are,” is a quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected traders of all time. We agree wholeheartedly with his comment, and we embrace his thinking. You should too, if you want to become a highly successful investor.

Human nature is the same today as it was in the 1920s and 1930s when Jesse Livermore was a major force on Wall Street. Investors have the same hopes and dreams today that they did then. Mr. Livermore saw that the opinions of many of his colleagues were often wrong, as the market went on its own merry way in a direction contrary to what they had expected. This, too, has not changed.

We learned long ago that it’s a mistake to argue with the stock market. To understand why, you need to remember that market prices are determined by the actions of millions of investors every day. Thus, if you believe that the market is wrong, you are actually saying that the net result of all the people participating in the market must be wrong.

Knowing that these investors include thousands of well-trained security analysts, technical analysts, insiders and friends of insiders—in short, a lot of smart people who know just how the stock market works—are you willing to say your thoughts are more insightful than everyone else’s? We think not!

Rather than fighting the action of the market, a much more rewarding strategy is to identify the current trend and stay with it as long as it persists. In other words, let the market tell you what the market is thinking. The only reliable way to uncover the net effect of all the various factors affecting the market is to look at the market itself. No fundamental market analysis will tell you more than the market will tell you. Believing in opinions and forecasts of the market will only lead to poor investment decisions.

It has been said that timing is everything. In investing, market timing may not be everything, but it is a big thing. By using market timing strategies, you can identify the best times to buy and sell your stocks, thereby maximizing your profits.

Tip #2: Buy Your Stocks at the Right Time.

Finding a great growth stock and getting in on the ground floor can be like finding romance. It’s full of intangibles and mystery. It can be exciting, with even your greatest expectations exceeded. And those pleasant surprises can keep on coming, often convincing you that the good times will never end.

Where do we find this romance? It’s usually concentrated in the market high-flyers (including some of our Cabot Growth Investor recommendations). Thousands of investors simply cannot understand why certain young growth stocks soar month after month to astronomical valuation levels, often no apparent reason. Sometimes, these stocks have growing sales but no earnings. The product or service may not be well understood by the masses. And yet, the stock continues to advance past everyone’s wildest expectations. “What does he see in her?” you might wonder.

An old Wall Street adage, one that we’ve found as useful as any, explains this phenomenon: A stock, like love, thrives on romance and dies on statistics. There are plenty of investors out there who are able to understand the long-term potential for the aforementioned growth companies. These investors see something exceptional and even revolutionary that other investors miss, and are willing to buy and hold onto the stock, even at prices that appear to be completely unreasonable and unjustifiable to other investors.

It isn’t until much later that the romance fades. At this time, the mystery and sexy expectations are replaced by cold, hard facts. This reality, even though it may be exceptional, seldom matches the dream. Reality, in fact, tends to suggest limitations. And that’s when the early investors usually jump ship, pushing the stock down and ending its run to record heights.

So how does all this help you make money? Our studies over the years have convinced us that you can make a great deal of money from a stock in its romance phase, before most investors realize the full thrust of the company’s story. If you wait for reality and a slew of fundamental facts (like growing earnings and a knockout of all competitors) to pour in, chances are you’re too late; the stock has already factored in the great news you’re just now reading.

Our advice is to look for exciting growth companies that are presently in their romance phase. Once invested, your job is to exit your position at the end of the stock’s romance phase, when, frankly, all of the news is usually excellent. The fundamental facts will begin to support the stock’s lofty price, and investor sentiment regarding the company will be outstanding.

However, you’ll notice the stock price and the relative performance (RP) line gradually eroding, unable to reach new highs. (Relative performance measures the stock’s performance relative to the market as a whole. More on this later.) Over a period of weeks, if the RP line falters, you’ll know the romance has ended, and reality is taking over. At this point, you’ll want to sell the stock and look for your next love affair.

Tip #3: Know When to Sell Your Stocks.

If we asked thousands of investors what their main desire was, the most popular answer would undoubtedly be, “to make money.” And who can argue with that? It’s why you’ve decided to shun traditional savings accounts and instead put $10,000 of your own hard-earned money into stocks. Increasing one’s wealth can help people pay for their children’s college tuition, a nicer house or a secure retirement. It seems the only plausible goal for investors.

But not everyone is like you. Believe it or not, our nearly 50 years of investment experience has taught us that one of the most pervasive desires of the average investor is actually something other than making money. Most investors have a secret longing to feel right. Now, at first glance, it may seem that these two goals are synonymous. After all, when you make money in the stock market, you feel right. But, in practice, these two goals are diametrically opposed. Let’s take a look at how a typical investor’s story progresses.

When an investor is getting ready to put his money to work, a lot of time is spent trying to find the best available stocks for purchase. Most investors will read various articles about certain stocks, page through a few annual reports and study earnings estimates. After what usually turns out to be many hours of research, the investor comes to a conclusion on which stocks to buy. He then commits his hard-earned money to these stocks, feeling confident (maybe even excited) about his prospects for making money in the stock market.

Naturally, not all of these investments go the right way. It’s most troubling as he watches some of the stocks he had the highest hopes for drop in price right after his initial commitment. Still brimming with confidence, the investor sticks with these losers, confident the decline is just temporary. Weeks pass, but these poor performers do not rebound; in fact, they sink to even lower levels. Stunned by this development, the investor tells himself that the stocks have become bargains. After all, if they were good buys when he bought them, they must be even better buys at these lower prices. Thus, he continues to hold on and perhaps buys even more of these stocks, hoping they will return to their previous highs.

On the other side of the ledger, the investor watches some of his choice selections soar from the get-go. He’s extremely pleased with this development, so much so that he’s eager to take his profits. His thorough research has obviously served him well, so the investor figures he’ll take the money off the table, garnering a quick gain of 30% or 40%. Feeling satisfied, he takes his wife out to dinner, and proceeds to tell her how good he is at making money in the stock market.

The two investment actions described above make the investor feel right. By taking profits out of a stock quickly, he feels as though his research was justified. After all, what can justify your efforts more than an increase in your brokerage account? And by holding on to the rest of his investments, which simply haven’t “come around” yet, he feels right by owning these well-researched and undervalued stocks.

It all seems so right, but there is nothing more wrong. This investor has sold his winning stocks while holding on tightly to his losers—the exact opposite of a strategy that will help you make money in the stock market. By following his emotions (his desire to feel right), he has sown the seeds of his portfolio’s demise. His portfolio now consists of a bunch of lemons and no good performers. Is that any way to make money in the stock market?

A quote from Reminiscences of a Stock Operator, which profiled the life of stock speculator Jesse Livermore, sums up our thoughts: “Experience has taught me that the way a market behaves is an excellent guide for the (investor) to follow. It is like taking a patient’s temperature and pulse, or noting the color of the eyeballs and the coating of the tongue.”

Clearly, holding on to your losers while selling your winners is the wrong way to go. The market is telling you that your losing stocks are losers for a reason—maybe because something is wrong with the company or new competition is coming on board. Conversely, your winning stocks are profitable for a good reason—namely, the market sees an ever-brighter future for those companies.

If you really want to make money in the stock market, you have to discard your desire to feel right all of the time. Instead of giving yourself instant gratification by taking small profits, work to let your winners run while cutting your losses short. This way, your portfolio will consist of a bunch of strong performers with few, if any, lemons. And that will position you to make more money in the stock market over the long run, which is the ultimate goal of investing.

Tip #4: Pay Attention to Investor Sentiment.

In life in general, and in investing in particular, we are all part of the herd. Investor sentiment is powerful, as we are all subject—to some degree—to the forces of mass psychology. When investor sentiment changes about a particular stock or about the market as a whole, the herd has the power to push its target sharply in one direction or the other. On the surface, it appears that by keeping in tune with the herd, we can garner huge profits.

This is true, to a point. In fact, we often preach the intelligence of not trying to predict how far a certain market move will go or how long it will last. Instead, we’ve found that it is much more rewarding to simply observe the current trend and stay with it. In short, you should stick with the herd.

But while riding the power of the herd is usually the most profitable way to go, there are times when it is the worst thing to do. How can this be? When a vast majority of the subjects of the herd feel the same way about an investment, a turning point is at hand. To understand why, we just have to look at basic supply and demand.

When an investor believes a stock, industry or entire market is heading higher, he naturally commits funds to those stocks. This only makes sense; he’s bullish. There’s nothing dangerous about that. But when most people become bullish, and they commit money to those same stocks, a problem arises. Because most investors have already bought in, the buying power to push the stock higher has disappeared—there is no one left to buy the stock. At this point, the sellers take control and prices fall.

Conversely, when pessimism is rampant, most investors have already sold out. They believe there is no money to be made on the long side of the market. When this extreme is reached, the buyers can take control, because there are no selling pressures ready to oppose them.

Our point in all this is to help you use contrary opinion in your investment decisions. Benton W. Davis, in his 1964 book, Dow 2000, explained contrary opinion in a unique way. Here’s some of what he had to say:

“Think of it this way. There is this great big pasture stretching up and down on a long hillside with a fence all around. Today there are eighteen to twenty million sheep in this pasture, the majority quite unseasoned. In fact they would seem to be, at times, conducive to panic. If someone appears shouting ‘wolf,’ these sheep can take off as one, in a cloud of downhill dust and thundering hooves, to wind up a shivering, shaking mass, stopped only by the bottom wire.

“It then took considerable time, considerable coaxing, and factual existence of a great bull market to get these sheep out of their bottom huddle. But, when they finally got started they galloped back uphill almost as fast as they had charged downhill, gathering recruits on the way up, before too long winding up against the top wire, in complete reversal of outlook, a now happy herd of panting optimists.”

What you want to avoid is being the sheep that’s running downhill with all the other sheep just before you reach the bottom wire. And you sure don’t want to be the last panting optimist at the top wire! It all comes down to staying on the right side of shifting investor sentiment until mass perception reaches an extreme level.

While it’s very difficult to pinpoint tops and bottoms based on sentiment, contrary opinion can nonetheless help you become a little more conservative near tops and a tad more aggressive near bottoms. And while these small adjustments in your portfolio may seem insignificant, they become a big help to your portfolio performance because they come near market turning points.

So what should you look for to identify extremes in investor sentiment? There are a number of technical indicators, ranging from the put/call ratio to Investors Intelligence’s survey of the bullishness or bearishness of investment advisory writers. Beyond those indicators, newspaper and magazine headlines and a general willingness to buy on the part of friends and relatives can give you a hint as to where we are in the market cycle. (Is your brother-in-law giving you hot stock tips every time you see him?)

By watching for extremes in the level of investor sentiment and adjusting your investments accordingly, your investment results are sure to improve.

Tip #5: The Charts Don’t Lie.

Learning how to read stock charts is a skill that all investors can benefit from. Technical analysis of stock trends helps investors to determine how the markets in general, and their stocks in particular, are likely to behave in the days ahead. When deciding whether to buy (or sell) a stock, examine both the fundamentals of the company and the technical health of the stock.

Here are some of the terms you’ll need to know to understand how to read stock charts:

Momentum: We measure a stock’s momentum by examining its Relative Performance (RP) line. The RP line compares the stock’s price to a market index. If the RP line is trending higher, that stock is outperforming the market as a whole. If the RP line is falling, the stock is underperforming the market as a whole. At the Financial Freedom Federation, we compare all stocks to the S&P 500, the benchmark U.S. stock index.

Price Chart: We prefer to look at bar charts, which show the high, low and closing prices of a stock for every day (or week, or month, depending on the chart you’re looking at).
Volume: The number of shares of the stock that have changed hands that day (or week or month). This number can usually be found on the price chart.

Moving Averages: Moving averages smooth the fluctuations in a stock’s price. To get a moving average, you simply add up all the closing prices for a stock over a certain time period (say, 50 days) and then divide by the time period (50). You will get the average price at which the stock has closed over that time. Do this calculation every day, for the previous 50 days, and that’s how you get the ‘moving’ part. We usually watch the short-term (25-day), intermediate-term (50-day) and longer-term (200-day) moving averages.

There are a bunch of other technical indicators you can look at, but many of them serve to confuse rather than enlighten. You really want to analyze longer-term stock charts, which capture the real picture of the supply and demand relationship for a stock.

Stock Selection and Momentum

Our system for selecting growth stocks is based on momentum analysis. Any new stock we buy must have positive momentum. A stock has positive momentum if its RP line has been advancing for at least 13 weeks (the number of weeks in a quarter). We’ve found that this period of time is usually enough to establish a new momentum trend, and once a trend (either positive or negative) is in place, it tends to stay in place for a relatively long period of time. That’s why you want to own stocks that are going up!

Once you’ve selected a few stocks that have positive momentum, you need to take your search to the next level. At this point, look for stocks that have particularly strong RP lines, indicated by corrections of two weeks or less. Brief corrections (time-wise) tell you that there are lots of buyers in the market who are willing to snap up the stock on any decline. This is exactly the type of situation you want to be invested in! Ideally, the corrections should be both brief and shallow, but brevity is more important than depth.

Once you’ve selected stocks with a positive RP line, analyze their strength by asking: How long have the corrections been over the past six to nine months? How deep have the corrections been? How steep is the RP line? (The steeper the line, the more the stock has been outperforming the market.)

How has the RP line acted during market corrections? (A stock whose RP line remains strong when there is turmoil in the general market indicates super-strong buying pressures.)

All in all, you should only be buying stocks with positive momentum. The perfect RP line will have a steep slope, with corrections that are brief and shallow. Finding stocks with strong RP lines is half the battle when seeking successful investments.

Stock Price

After examining the RP line, we shift our attention to the stock price. Often, the price chart and the RP line will look similar. But sometimes they will differ, often during market corrections. The strongest stocks hold up the best during corrections, and have price charts that resist the downward pull of the general market. In this case, you’ll see the price trending sideways but the RP line will be heading toward the heavens! This is because, relative to the overall market, the stock is making a lot of progress.

When looking at the price chart, you’re looking for the same characteristics you looked for in the RP line—brief and shallow pullbacks with an overall steep uptrend. And steep rebounds after corrections are also a telltale sign of strong sponsorship by institutional investors.

As a side note, checking the new highs list in your newspaper on a daily basis is one of the best ways we know of to discover new stock ideas.

Trading Volume

Studying trading volume is helpful, but there are no hard and fast rules when using it. In general, you want the stock’s volume to confirm its uptrend by rising to a higher level on days when the stock advances, and falling to a lower level when the stock declines. This indicates that the supply and demand relationship is truly in your favor, since there’s lots of buying power but little selling pressure.

Volume tends to confirm your convictions rather than leading you to a great stock idea all by itself. Once in a while, though, a stock will soar or plummet on massive volume, which is what we call a “volume clue.” It’s a sign that big investors are getting in or out. In particular, look for stocks that rise 10% or more the day after reporting earnings—these stocks often have further to run.

Moving Averages

We look primarily at the 50-day moving average because it’s long enough to allow for corrections but not so long that the trend hasn’t turned down by the time the stock touches it. But there’s an even better reason: great growth stocks tend to find support (meaning that they stop declining) when they reach this moving average. Buying a stock as it’s bouncing off this moving average is often a good strategy. Any stock you’re considering for purchase should have stayed above its 50-day moving average for most of the past few months.

The 25-day moving average isn’t as vital, but it, too, often lends support to the strongest market leaders. In a powerful situation, contained drops to the 25-day moving average can offer buy points.

A Stock is Never Too High to Buy

Here at the Financial Freedom Federation, we have no preconceived notions about the stock market or any individual stocks. We’ve learned from experience that the big winners are usually the stocks that have already appreciated many times off their lows. And just when people start thinking that a stock is “too high,” it usually begins its next major advance!

You always want to buy on reasonably short pullbacks of, say, 5% to 15% off a stock’s high, but don’t think a stock can’t rise further just because it’s had a few good months. Don’t let your emotions about a stock’s value get in your way. Focus on using our proven system of technical analysis instead.


We’ve covered a lot of material in this investing tip, and it’s pretty complex, so don’t expect to fully grasp all of it at once. It’s going to take some practice with your own money before you are comfortable with (and can get the most benefit from) our momentum system.
Let’s review the main points:

  • When looking for potential purchase candidates, look at both fundamental and technical analysis. (We’ll cover fundamentals in the next tip.)
  • When doing technical analysis of stocks, you should focus primarily on the stock’s momentum and price chart, along with its volume pattern and 50-day moving average.
  • A growth stock MUST have positive momentum before you consider buying it. Your goal should be to find RP lines with steep slopes and corrections that are brief and shallow.
  • When looking at stock prices, look at the price chart, not just the daily fluctuations of the stock. Look for price charts that have steep upward trends, with brief and shallow corrections. These are the same characteristics a desirable RP line has.
  • A stock’s volume pattern can confirm your initial opinion of a stock, but is unlikely to lead you to a great stock idea all by itself. Look for heavy volume on up days (showing accumulation) and lighter volume on down days.
  • The 50-day moving average is a helpful stock market indicator in two ways. First, your potential purchase should have held up above this line for the past few months. Second, look for a pattern of sharp rebounds after touching the moving average, and then time your purchases after the stock begins to bounce off the moving average.

Tip #6: Perform Fundamental Analysis.

Once you understand the technical side of the equation, your next step is to examine a company’s fundamentals to see if it qualifies as a super-growth stock. Unlike technical analysis, the fundamental analysis of a company’s financial ratios involves making some judgments about future growth potential. So it takes a little practice. After reading this tip and putting its principles to work in real life, you’ll get the hang of it.

A Stock, Like Love, Thrives on Romance and Dies on Statistics.

In Tip #2, we explained the importance of romance in the stock market. Specifically, we told you that a great growth company can see its stock soar to unheard of heights—on the back of what appears to be questionable fundamentals. This happens because savvy investors are able to understand the longterm potential of a firm, and thus purchase and hold onto its stock. They’re buying the future, the potential. It isn’t until much later that the sexy growth forecasts are replaced by cold, hard facts. More often than not, this is when a stock will reach its point of maximum perception and begin to head lower for many months or even years.

We’ve learned from experience that the biggest and fastest profits for investors often come when the stock is in the romance phase. Thus, it’s critically important that most of your potential purchases have the fundamental characteristics that support a huge burst of romance in the stock.

A Big Idea Creates Fuel for Romance.

Knowing that romance plays such an important role in a young growth stock’s life, you shouldn’t be searching for a particular statistic (growth rate, size of its addressable market, profit margins, etc.), although examining those figures is helpful. Start by looking for a company that has a big idea— one that leaves few, if any, limits on its future growth potential. It’s these big ideas that create an atmosphere that can push a growth stock to dizzying heights!

But how do you determine if a company has a big idea? Well, there’s no science here, but here are a few characteristics you should look for:

Huge Mass Market. Your target company should have a virtually unlimited market to sell into. This should be measured in terms of dollars (at least a $50 billion market) and customers (hundreds of thousands or more). The dollar potential is more important, but we prefer to see both.

Barriers to Entry. Once you know that a company is targeting a gigantic market, you want it to have that market all to itself! Of course, there are no monopolies out there anymore, but ideally, it will be difficult for a new competitor to make inroads. Barriers to entry can come from a strong patent position, high switching costs (i.e., it’s expensive or time-consuming for a customer to switch to a competitor), a high level of required expertise, or simple market dominance.

Recurring Income. Most of the big winners over the past half-century have been firms that have a recurring revenue stream. The classic example is the razor-and-blade model, where Gillette sells you a few razors and you keep buying the blades for life. Many service firms exhibit recurring income, as customers become dependent on their services (phone companies, for example).

Margin Potential. Just how profitable can this business become? Is it heavily dependent on manufacturing, which usually lends itself to lower margins? Or does its business model add incremental customers and revenue at a low cost? You don’t need to rule out every firm that has lower than average margins, but remember that your biggest winners are likely to be those that can be extremely profitable and become virtual money-making machines.

Statistics. The potential for romance is the most important thing to consider, but fundamental analysis isn’t complete until you study the company’s growth. Here are a few numbers you’ll want to check before you put a stock on your buy list:

Revenue Growth. Considering the number of companies operating at a loss these days, revenue growth has become almost as important as earnings growth. Ideally, you want to see revenue growth over 100% year over year. Acceleration of that growth over the most recent few quarters is also a great sign. For real hyper-growth firms (growing revenues, say, over 300% per year), you’ll want to track the quarter-over-quarter revenue growth figures as well.

Earnings Growth.
For those true growth companies that have earnings, you should look for the same trends as with revenue growth—triple-digit growth and an acceleration of growth.

Profit Margins.
We’ve already talked about the importance of upside potential for a company’s margins. But you also want to see what those margins actually are! If a company is profitable, its margins should be growing on an annual, or, better yet, quarterly basis.

We track two other metrics that don’t fall within the definition of fundamental or technical analysis. But they are still helpful to include in your overall analysis.

Management Ownership. It’s good to see a healthy percent (15% or more) of the total outstanding shares owned by insiders. Beware of newly public companies, though, because insiders are often restricted from selling any of their shares for about the first six months (the “lock-up” period). A company that went public less than six months ago, for example, may have a large percentage of insider ownership, but that may represent possible future selling pressures on the stock when the lock-up is over.

Mutual Fund Ownership. How many mutual funds own the firm’s stock? Has the number been growing in recent quarters? You want to see at least a couple of dozen mutual funds on board to ensure the stock has some institutional support. And you like to see that the number of funds has been steadily increasing, as these large purchases will drive up the price. But beware—if too many funds own the stock, it may be a signal that it has already had its major advance.

Putting it All Together

Now we have discussed the important fundamental and technical characteristics that are found in most great growth stocks. The key is to use fundamental and technical analysis together. A great chart is nice to look at, but the company may not be worth investing in unless it also has a terrific long-term growth story. Likewise, a company may have a terrific fundamental story, but its stock chart (which is really what you’re buying) may not look so good.

Only if both the fundamental and technical analysis look outstanding should you consider devoting a portion of your $10,000 to buying the stock. By sticking to this system, you’ll automatically focus on only the very best growth stories with stocks under intense accumulation. By buying into these situations, you’re one-third of the way to a great investment.

Tip #7: You’ve Got to Know When to Hold ‘Em.

Here’s the situation: You have completed your research on your preliminary list of stocks. You have narrowed it down to stocks that each have a big idea, and the potential for fast sales and earnings growth. Technically, you selected those with a strong RP line and price chart. So, with some cash to invest, you took the plunge and bought a couple of great growth stocks. After all, that’s how the stock market works, right? You buy, you sell, you pocket the profits.

Not so fast. After buying a stock, the next step in the ownership lifecycle is to hold that stock. It sounds easy to sit and watch your stocks that are going up, but you may find holding stocks harder than you think. And although it sounds passive, there are some things to focus on, like gunning for profits and practicing patience. This lesson will help you learn about holding stocks for as long as their major growth phase lasts.

The One Thing You Need to Follow

In our opinion, the most interesting thing about the stock market is all the factors that influence it. If you read the newspaper each day, or follow one of the investment news websites, you’ll find articles about inflation, interest rates, the U.S. dollar, the Fed, money supply growth, international economies, housing activity, federal budget deficits or surpluses, unemployment data and much more. Many of the articles you’ll find will focus on how these things influence the stock market.

In addition, there is plenty of investment news that relates to specific industries or companies. They usually focus on how trends in the economy or a specific sector can help or hinder these companies and their stocks. Some of those stocks might be ones that you own. After reading a few news articles, investors can easily become unduly influenced about a stock or an industry, to the point of buying or selling because of it. This is not the right way to go about investing.

We know for a fact that, instead of guessing (and that’s really what it amounts to) about what effect these numerous fundamental factors will have on your stock, the best thing to do is simply to watch your stock. This will help you determine if your stock is being accumulated or distributed, which is the only thing you need to know!

Why? Because the only way to tell how all of the fundamental factors will influence your stock is by simply watching the stock itself.

Here at the Financial Freedom Federation, we stay focused on the market. While that may sound obvious, it can be difficult to do considering the two or three newspapers and dozens of online articles we read every day. Most of these articles don’t simply relay news. They also give opinions. (And the ones that do relay news may not always be objective!) So we make sure to keep our focus on our stocks and not let the various opinions get in our way. After all, if the stock is heading higher, who cares what one or two people think of our stock, its industry, or even the market as a whole?

Welcoming Bad News

As a matter of fact, we welcome bad news about our stocks. Of course, we’re not talking about actual bad news, such as a drop-off in business like so many are experiencing now or a missed earnings projection. We mean negative opinions (which are often confused with news) about our stock. When a few analysts or commentators dislike a stock we own, that’s fine with us. We’ve learned from experience that great growth stocks don’t top until most investors believe they are a good investment—much like the market as a whole. It’s simply the theory of contrary opinion: the fewer bulls there are, the less the potential buying power to push the stock higher.

Therefore, we don’t mind one bit if some analysts or commentators say that our stock isn’t a good buy or that it should be sold. These types of opinions breed skepticism, which is what growth stocks thrive on.

So don’t focus much on the media one way or the other. The only thing that should affect your judgment of a stock should be the stock itself.

What to Watch for in Your Stock

Now you know that you just need to watch your stock. But what are you looking for? Simple. Look to see if it continues to show the same type of positive technical patterns that attracted you to it in the first place.

First, watch the stock’s RP line. If the RP line is hitting a new peak every week or two, just hang on tightly and enjoy the ride. This type of RP line is telling you that your stock is under intense accumulation (assuming that the broad market is healthy), which should put to rest any thoughts you might have of taking action. Even if there is an occasional four- to five-week correction, you shouldn’t worry at all.

Next, watch the price action of the stock. Is the price itself hitting new highs along with the RP line? If so, then go outside and enjoy the weather. Again, like the RP line, it’s reasonable to see the price pull back for a few weeks. But the shorter and shallower the corrections, the better the situation. Keeping an eye on the price of your stock helps you determine its actual supply and demand situation. Remember that the RP line can actually move higher even as the stock loses ground if the broader market is falling faster than your stock’s price.

Another part of the supply and demand situation for your stock is its volume pattern. You want to see volume rise when the stock price rises, and volume ease when the price eases. This indicates that your stock is under accumulation and can continue to move much higher.

That’s it! You really don’t need to analyze much else. In fact, just as others’ opinions can affect your judgment, so can a slew of technical indicators, such as a stochastic, MACD histograms, candlestick chart patterns, etc. You can always find a reason to be bullish or bearish on a stock or the market, and often times searching for them can cloud your thoughts. Our advice is to stick with the stock’s RP line, price chart and volume pattern.

Aiming for Big Winners

Our next tip will cover the goals you should have when holding a great stock. Now that you understand that you should shut out all the ‘noise’ out there, you’re ready to formulate your investment goals. And that’s the first step toward attaining the big market winners that make all the difference to your portfolio over time.

Tip #8: Be Patient.

As we mentioned in the previous tip, the toughest thing for many investors to do is nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action. Since you bought the stock, you’ve probably read numerous investment news stories on the market in general and your stock in particular. And even if you are only watching your stock (as we advise), you’ve taken in many days of price, volume and relative performance (RP) action. With so much input, it’s easy to have your thinking swayed, which creates temptation to take action.

Another way to say it is that most investors lack patience. That’s a shame, because almost every successful investor we’ve ever met or read about has an abundance of patience. After all, if you’re correct on a stock, what’s the point of rushing things?

So the focus of this tip, the second one dedicated to holding great growth stocks, is on practicing patience. Many times, the stocks you purchase don’t do an awful lot for many weeks after your initial purchase. But if you have the guts to stick with those stocks, some can turn out to be huge winders. And in the end, those big winners are what make all the difference.

Making Money the Easy Way—By Doing Nothing!

Here’s a quick tidbit that most investors forget from time to time. The way you make money in the stock market is by holding stocks, not buying or selling them. Sounds obvious, doesn’t it? That’s just the how the stock market works. The value of your portfolio rises when a stock you own rises. So you have to be holding on to a stock if you’re going to take advantage of its appreciation.

Through our conversations with subscribers over the phone and e-mail, we know that many are slowly becoming more short-term oriented. But we urge you to have patience once you’ve committed money to the stock market. Oftentimes, a stock will start moving ahead just after most investors have thrown in the towel. Don’t be one of them!

The message is simple: Practice patience and give your investments a chance to grow into mighty oaks.

What’s Your Goal?

When buying great growth stocks, your goal for every purchase should be to develop a huge winner. By huge, we’re not talking about 30%, 50% or even 100% profits. Instead, you should set your sights much higher—300%, 500%, 1,000% profits and higher. All you need is a couple of these big winners every year or two to produce spectacular portfolio returns.

That last point is an important one: All you need is a couple of big winners every few years to produce spectacular portfolio returns. Knowing this, you shouldn’t agonize over a few small losses, or worry if your last few purchases haven’t turned out the way you had hoped. Instead, by shooting for big profits, you put yourself in a position of power, only needing to find a couple of good stocks to produce great returns. Contrast that with the investor who’s eager to take any profit he can get his hands on. He must find perhaps 10 stocks each year that show him good (but not great) profits to garner the same returns you’ll attain by getting only one or two huge winners.

This is why we never use target prices for growth stocks. When you set a price target, you’re automatically limiting the profits you’ll take out of any one stock. And that’s something we will never do!

Remember that if your goal isn’t to develop huge profits, you’ll never attain them. So aim high!

How Practicing Patience Leads to Huge Winners

Clearly, you cannot develop winners without practicing plenty of patience. Developing big winners often takes months or even years. It seems like a daunting task. But our Profit Curve shows us that it’s easier to get 1,000%+ profits than you might think.

The main idea behind the Profit Curve is compound growth, sometimes referred to as the eighth wonder of the world. Compound growth is the reason that the Profit Curve is, well, a curve, as opposed to a line. It means that the growth of your profit in any stock increases each time the stock moves higher.

For example, let’s say you buy a stock and watch it double. Great! You now have a 100% profit. Now assume your stock works its way still higher, doubling again. After your second double, your profit expands, not to 200%, but to 300%. A third doubling would yield a 700% profit. And a fourth would give you a whopping 1,500% profit.

It’s not impossible to attain these huge profits. Believe it or not, dozens of stocks have grown manyfold in just the past two years. Whether or not that type of growth will happen again is anyone’s guess. But the fact is, the market provides a never-ending stream of opportunities for new investors like you.

Now You’re Ready to Invest Your $10,000!

Eight tips and 7,000 words later, I think you’re ready to start investing on your own. Whether you want to spend $10,000, $1,000 or $50,000 on your investments is your prerogative; regardless, I hope the above lessons will you make good decisions with the money you spend in the stock market.

At this point, you’ve probably heard enough from me. So get out there and start looking for stocks you think have the potential for high returns!

I hope this report has helped give you a better idea of how to invest in the stock market— and how to achieve the highest possible return from those investments!

The Ultimate Guide to Choosing, Owning and Selling Master Limited Partnerships

Why Invest in Master Limited Partnerships (MLPs)?

Interest rates have been at historically low levels for years, which makes it easy for companies to raise money by issuing debt (which is supposed to help the economy grow) but makes it hard to live on the income from a portfolio of safe treasury and investment-grade bonds—as many retirees had always expected to do.

In response, many investors have broadened their definition of income investments, turning to dividend-paying common stocks and more aggressive assets for income.

One of these vehicles is the Master Limited Partnership, or MLP. MLPs are popular among income-seeking investors because they offer very high yields. No surprise there: MLPs are actually specifically designed to pass cash flows along to investors.

But a lot of investors don’t fully understand MLPs. And in this pandemic market era, more risk could be tied to them than usual.

Why are their yields so high? Are these yields sustainable? What are all these tax complications I’ve heard about with MLPs? And if they’re so great, why doesn’t everyone just hold all MLPs?

Don’t worry, the answers aren’t that complicated. And they’re all here.

What is a Master Limited Partnership (MLP)?

A Master Limited Partnership is a unique type of business allowed under the U.S. tax code. They’re similar to a “regular” limited partnership, with a few differences.

In addition to a limited partner or partners, who provide the MLP with capital and get a share of its cash flow in return, MLPs also have a General Partner (GP) that runs the business. We’ll talk more about the importance of the GP a little later.

In addition, MLPs are publicly traded, by definition. The limited partners are public shareholders—who are called unitholders. The unitholders are entitled to a share of the MLP’s cash flow, which is paid

to them as distributions. From an investor’s point of view, these distributions are similar to common stock dividends: their amount is usually declared (announced) at the beginning of the fiscal year, and the distributions are then paid to the unitholders quarterly or monthly.

There are some differences though, and most of the differences are related to the taxes you pay on those distributions.

That’s because the primary benefit of organizing a business as an MLP is that MLPs don’t pay corporate taxes on their revenue. Instead, the company’s cash flow is distributed, almost in its entirety, to its unitholders ... who are then responsible for some taxes.

That makes MLPs a very efficient way to pass along the cash flow of an income-generating enterprise to public shareholders. And that’s what accounts for their large distributions and very high yields.

It does make your taxes a bit more complicated. But we’ll get to that in a bit.

First, one more note on what makes an MLP: not just any business can be organized as an MLP. The tax code requires MLPs to derive about 90% of their revenue from natural resources, commodities or real estate. In practice, many MLPs own energy transportation or processing facilities, like oil or gas pipelines, although there are also MLPs that own unique assets like cemeteries. Any business in one of these industries that generates high regular cash flow, whether from rent, fees or simply selling goods, can make a good MLP.

Indeed, this dedication to the energy and real estate sectors seems obviously unattractive during the current pandemic market. But if you can stomach the patience through the stabilization and long term, the unusually low unit prices may be worth considering depending on your mix.

How to Assess MLPs

Evaluating a Master Limited Partnership is a little different from evaluating an ordinary stock. While your questions will be similar—like, “can the MLP keep paying its distribution?”—you’ll find the answers differently.

Distributable Cash Flow

Cash is an important consideration, but for MLPs, traditional measures like earnings per share (EPS) and profits don’t tell us much, in part because of the companies’ massive depreciation of assets. Instead, we look at Distributable Cash Flow (DCF), which is calculated by subtracting interest and capital- spending costs (cash expenses) from earnings before interest, taxes, depreciation and amortization (EBITDA).

Distributable Cash Flow (DCF) = EBITDA – Interest – Capital Spending

DCF gives us a better picture of an MLP’s income situation than earnings or net income because the MLP usually keeps its depreciation, interest and capital spending deductions as high as possible to lower their tax liability. Most MLPs own significant physical assets, like pipelines, and they claim significant depreciation of these assets every year. Sometimes, EPS are actually negative because depreciation and other non-cash “expenditures” are larger than cash flow. But it’s cash we care about, not the non-cash stuff.

DCF is also important because that’s the number the MLP uses to determine its payout to unitholders (usually distributing a specified percentage).

The Distribution Coverage Ratio

Likewise, because MLPs are designed to pass almost all of their income onto unitholders, the usual payout ratio is not a useful measure of whether an MLP can “afford” its distributions. Instead, look at the percentage of DCF that is being paid out as distributions, sometimes called the Distribution

Coverage Ratio. If the ratio is less than 100%, the MLP should be able to pay its distributions going forward. If it’s over 100%, find out why, and decide if the MLP is likely to continue overextending itself, or if the situation will be resolved in the next quarter or so.

Fees vs. Commodity Prices

One reason MLPs are prized by income investors is their consistency. Most MLPs are structured as simple pipelines (sometimes literal pipelines), earning lots of cash and passing it on to their unitholders. The more reliable an MLP’s revenues, the more reliable your distribution will be.

To find the most reliable cash generators, look for MLPs with primarily fee-based income. Those MLPs are getting most of their cash from fees for things like using pipelines or storage facilities.

By contrast, MLPs that get most of their revenue from commodity-price dependent sources, like propane production or mining royalties, are more likely to experience fluctuations in revenue.


You should also look at what industry the MLP is in: cemeteries are pretty much as non-cyclical as it gets, while energy demand can change significantly.

Distribution Increases

Just as with common stocks, you want your income from your MLP holdings to keep rising. Frequent or recent distribution increases are a sure sign that the MLP is confident it can continue to afford its payout. Distribution increases are also a great indication of a growing business with increasing cash flow.

The General Partner

Another important factor to consider before buying an MLP is the partnership’s relationship with its General Partner (GP). As mentioned above, investors like you are an MLP’s limited partners. But MLPs also have a General Partner, which is a person or another company (sometimes also public) that’s responsible for running the MLP.

The General Partner has a direct stake in the MLP, like you, but usually also has incentive distribution rights, which entitle the GP to extra payments from the MLP. The amount of these incentive distributions is based on how much cash the MLP handed out to unitholders—so the more money unitholders get, the more money the GP gets. It’s the GP’s job to run the MLP, so it makes sense that the more cash it generates, the better it’s paid.

But some incentive distribution formulas are more unitholder-friendly than others. A good formula incentivizes distribution growth by rewarding the GP for increases in distributable cash flow, particularly early on, without ever becoming too generous to the GP. If the formula becomes too generous toward the GP at high distribution levels, unitholders may not see much additional cash when their MLPs start earning more. Before buying an MLP, always be sure you understand the incentive distribution formula, and how it’s likely to affect your payouts going forward. You can find the formula in the MLP’s registration statement.

So how does a good GP help their MLP grow distributable cash flow and distributions? One important tool is the dropdown acquisition. In a dropdown acquisition, the GP sells an asset it already owns— like a refinery, a shipping terminal or just land—to its MLP. Since the GP is a part owner of the MLP, and what’s good for the MLP is good for the GP, the GP usually sells the asset at a very advantageous price, usually described as “immediately accretive to distributable cash flow” in industry parlance.

Previous dropdown acquisitions made at advantageous prices and integrated successfully are a good sign for MLP investors. They mean that the MLP has good support from its general partner and may be able to grow its DCF and distributions with future dropdown acquisitions.

How do I pay taxes on my MLPs?

Because MLPs don’t pay taxes at the corporate level, you will owe tax on any MLP distributions you earn. But the distributions are heavily tax-advantaged, with most of your tax burden deferred until you sell the MLP. Here’s how it works.

MLP distributions are made based on the MLP’s Distributable Cash Flow (DCF), which is similar to free cash flow (FCF).

This is important because an MLP’s DCF is usually much higher than its net income. That’s because MLPs have significant depreciation and other tax deductions, which lower their taxable net income significantly. (This is why certain types of businesses make better MLPs: huge tangible assets like oil pipelines have very high depreciation expenses.)

Here’s how it works: Revenue comes in, the MLP pays it out as distributions to you and other unitholders, then the MLP takes deductions on the revenue and reports its taxable net income to the government.

And, as you may have guessed, you only owe taxes on the portion of your distribution that came from the MLP’s net income—which the MLP will inform you of in an annual form called a K-1.

You then have to pay regular income taxes (not the lower qualified dividend tax rate) on that portion of the distribution. While having to pay the regular income tax rate may seem disadvantageous, you’re usually only paying that rate on 10% to 20% of the total distribution.

What happens to the other 80% to 90% of the distribution?

The other 80% to 90% of the distribution is considered Return of Capital. Return of capital is not considered income, instead, it’s treated as if the MLP is simply giving some of the money you’ve invested in it back to you. As such, you’re not taxed on this portion of the distribution. Instead, it reduces your cost basis in the MLP.

Here’s an example:

Let’s say you buy an MLP for $50, and receive an annual distribution in your first year of $3.50, of which $0.30 is considered taxable net income. You owe regular income taxes (not the lower dividend tax rate of 15%) on that $0.30, but the remainder of the distribution, $3.20, is return of capital. Your cost basis in the investment will be reduced by $3.20, to $46.80.

And your cost basis will continue to be reduced by the return of capital amount (sometimes called shielded income) each tax year.

What happens if all my capital is eventually returned?

Since most of the MLP’s distributions are considered return of capital, eventually the total amount of these distributions may exceed your original cost basis in the investment, making your adjusted cost basis zero. If this happens, you can no longer decrease your cost basis, and you can no longer treat any distributions from that MLP as return of capital. Instead, you must pay taxes on the full amount of the distributions, at your regular income tax rate.

The K-1

At tax time, any MLPs you own will send you an annual K-1 instead of a 1099-DIV or similar form. The K-1 tells you what percentage of your distribution was return of capital and lists your pro-rata share of each income and expense item of the partnership. The form should also provide you all the information you need to enter this information into your taxes. (You likely will report these items on Schedule E, instead of the Schedule B where payouts from stocks, bonds and mutual funds are reported.) Some MLPs even allow you to download the data directly from your K-1 into your tax preparation software.

You can also take your K-1s to any decent accountant for help, or call the MLP’s investor relations contact for help.

If your state has an income tax, it likely will require you to either complete similar state versions of the form or attach a copy of the federal forms to your state return.

What happens when I sell the MLP?

As mentioned above, the primary tax advantage of holding an MLP is being able to defer most of your taxes on the investment until a later date—specifically, when you sell the MLP.

So when you eventually sell an MLP, you have to pay two types of taxes.

As with stocks, you have to pay long-term capital gains taxes on your profit on the investment. If you bought the MLP for $50 per unit, and sell for $70 per unit, you’ll have to pay long-term capital gains taxes on the $20 per unit you made from the price appreciation. n

You also have to pay the income taxes you’ve deferred over the life of the investment. That means you have to pay taxes, at your regular income tax rate, on the difference between your original purchase price and your reduced cost basis.

Let’s say you buy an MLP for $50 per share, and your distributions that qualify as return of capital average $2 per share every year. If you decide to sell the MLP after 15 years, your cost basis per share will be $20, or $50 – ($2 x 15 years). You now owe income taxes on the $30 difference between your adjusted cost basis per share and your original price.

This might not seem attractive, but there are myriad reasons why deferring taxes, or paying them later, is preferable to paying them now. Working investors may be trying to defer their taxes until they retire and their income tax rate is lower. Retired investors may be trying to minimize the taxes on their current income. And any investor can see the logic in hanging onto the cash so you can invest and grow it now, and then pay the tax bill with it later.

Plus, there’s a little perk for investors who plan to pass some of their investments on to their heirs. For tax purposes, the cost basis of MLP units is “reset” to the current market value if the original unitholder dies and passes on the investment. So the new owner won’t owe income tax on the difference between the original cost basis and the adjusted cost basis. This quirk can make MLPs a useful estate-planning tool.

Do I have to pay taxes in every state where the MLP operates?

This is a common rumor about MLPs, and while technically true, it actually rarely affects individual investors.

It’s true that when you own an MLP, you are considered to be earning income in every state in which the MLP operates.

However, you’re rarely going to “earn” enough income in any single state that you will have to pay state income taxes on it. Most states have a minimum income amount below which you do not have to pay state income taxes. And other states, including some where MLPs are especially active, like Texas, don’t have state income tax at all.

Your K-1 will include a state-by-state breakdown of where the MLP’s income was earned. If you have a particularly large stake in the MLP, it’s possible you may owe income tax to one or more of these states, but usually that is not the case.

Can I hold MLPs in my IRA?

This is a common question from investors considering buying MLPs for income.

While you are allowed to hold MLPs in a tax-advantaged account like an IRA, it is generally not recommended (and the same applies to Roth IRAs).

That’s because the IRS considers MLP distributions paid into an IRA Unrelated Business Taxable Income, or UBTI. And if your IRA earns over $1,000 in UBTI (total from all sources, including distributions from different MLPs) in a single year, your IRA will be liable for paying tax on that income at corporate tax rates.

Some investors still hold MLPs in their IRA and don’t find themselves hitting the $1,000 limit—your experience will depend


on the size of your IRA and how many MLPs you’re interested in holding. But if

you do most of your investing through an IRA and would like to add the yield-boosting powers of MLPs to your account without worrying about UBTI, you might consider buying an MLP fund, which doesn’t pass the tax liabilities onto shareholders in the fund.

Some Examples

Here are some tables showing how some hypothetical MLP investments might play out.

The first theoretical investment is in an MLP that costs $50 and is held for 29 years. Here’s a simplified picture of what your tax liability would look like over the life of the investment (note that the last two columns only shows the income on which you would owe tax, not how much tax you would owe: that depends on your income tax rate).

My second table shows the same example, but in this scenario, the investment is passed on to an heir after 29 years instead of being sold. Note the difference in the tax obligation the final year (I’ve also abridged this table by excising 10 years in the middle).

Lastly, here’s an example where the investor sells after 12 years, before his cost basis is reduced to zero.


You’ll note that these are simplified examples, using made-up data. Future price and dividend payments are impossible to predict.

However, the bottom line is clear: MLPs are good long-term investments for investors who want to defer their taxes and earn high, low-tax income now, and make an especially powerful tax shelter when passed on to heirs.

How to Squeeze an Extra 50% Profit Out of Every Trade

The #1 Rule for Growth Stock Investors

Most investors have rules and tools when it comes to investing, things that they believe put the odds more in their favor and, over time, result in bigger profits. We’ve been around more than 40 years and have quite a few rules and tools of our


own. But the #1 rule that has kept us thriving for four decades is simple: We cut every loss short.

That one rule—cutting losses short—is the best way to make money in the long run. “But Mike,” you ask, “how can taking losses help me make more and bigger profits?” It’s a bit counterintuitive, but the reason it’s true is because, if you never lose big, it’s almost impossible for you to get too far behind the curve. Said another way: If you don’t lose big, you dramatically increase the value of all your winning trades. One 50% winner (a good trade), for instance, makes up for five 10% losses (bad trades).

It’s like having a great defense as a football team; if the opponent can never get in the end zone, all you need is a couple of good drives each game to get a victory. Thus, be sure to cut each and every loss, usually in the 8% to 12% range, but certainly no more than 20% from your buy point. Doing so will automatically put you ahead of 90% of investors!

Focus on the Best Stocks

Most investors earn nothing-to-write-home-about returns for one simple reason: They invest in nothing-to-write- home-about stocks! You know what I’m talking about— companies that have sub-par growth, lots of competition, or simply a promise of something better down the road. Hey, if investing in those companies worked, I’d be all for it. But that just isn’t reality.


The fact is that the stocks that do best—what we like to call leading stocks—almost always have certain characteristics in common. They sport fast sales and earnings growth, along with the promise of better growth in the quarters to come. They offer a unique, possibly revolutionary product or service. They have big profit margins, a sign that management is capable and competition is at bay.

And, importantly, they have a stock that acts well—one that is generally outperforming the market. That tells you that big investors (mutual funds, pension funds, etc.) are picking up shares on each pullback, anticipating great things for the company as the weeks and months pass. You should work hard to focus solely on both successful companies and successful stocks—it’s the combination of the two that allows you to consistently find stocks capable of making big moves.

Market Timing Matters

Gone are the days of the 1990s, when every two- or three- month dip was buyable and even so-so stocks ran up with everything else. Today, after a decade with two punishing bear


markets that ravaged many investors’ portfolios and retirements, you know better—market timing matters.

At Cabot, we have a successful history of timing the market’s major moves. Our system is simple: We analyze the intermediate-term and longer-term trends of the market. When the trends turn down, we turn defensive by selling our worst performers, cutting back on any new buying and holding cash. And when the trend turns back up, we start buying again. Like we said, simple.

The big benefit of such an approach is that you are guaranteed never to miss a major market upmove, and you’re also guaranteed never to remain heavily invested during a prolonged downmove. (We were 90% in cash by the time the September 2008 Lehman/AIG meltdown occurred.) On the flip side, there will be the occasional whipsaw—a signal that is quickly reversed—but because we only get a handful of signals each year (if that many), it’s not a big drawback.

Besides, any whipsaw is a tiny price to pay for assurance that you’re going to be in every bull market, while sitting out the vast majority of any bear markets that come along. Bottom line: Pay attention to and respect the market’s trends.

Patience Precedes Profits

Most beginners in the stock market think the more they trade, the more money they’ll make … when just the opposite is true. It turns out that the best investors are extraordinarily patient in two different ways.

The first is in waiting for the right opportunity to come along, both in terms of the right stock (with all the characteristics we look for), a low-risk buying set-up (possibly after the stock has pulled back for a couple of weeks and is trading quietly) and the proper market environment. In other words, the best investors wait for days, weeks, even months for the proper time to make their move.

And then, once they make their commitment and are off to a good start, they practice patience with their winners… giving them chances to turn into big winners that really make a huge difference in their portfolio. Thus, most of investing is identifying top stocks, waiting for the right entry point, and then sitting with winners. Plenty of patience needed!

Plan your Trade, and Trade your Plan

In life, emotions are a great thing. In the market, not so much. It’s a simple fact that if you invest based on how you feel, you’re going to lose money … probably a lot of money.


When you’re most excited, it’s likely to be near a short-term top. And then, when you feel like stocks are heading through the floor, they’ll begin to rally.

Thus, you need a plan—maybe not a daily plan (unless you fancy yourself a day trader), but a set of rules and tools, as well as specific buy and sell points for selected stocks. That way, when the news is flying fast and furious, and your stocks are heading up, down and all around, you’ll have your trusty plan to follow.

This doesn’t mean you have to spend an hour every night looking at hundreds of stocks (that’s our job!). But you should have a plan in place to deal with contingencies, whether it’s trailing stops, potential buy points or market timing levels.

Getting to Know Charts

Many investors believe that stock charts are not only confusing, but worthless. Others believe charts are able to forecast a stock’s or a market’s future movements. We fall somewhere in between; they are a vital piece of the investing puzzle … but only if you know how to use them.

The big benefit of charts is that they give you a view of the stock’s supply/demand situation. No matter how good you or anyone thinks a company is, the stock won’t go up unless there’s enough demand for the shares. The company, in other words, is not the stock!

Back to charts, half the battle is in making sure the stock you’re interested in is in an overall uptrend; as we wrote in the above section “Focus on the Best,” chasing downtrending stocks is not the best way to make money. In fact, it’s usually a good way to lose money. So, getting in the habit of checking a stock’s chart to make sure it’s trending generally higher is a good idea.

But there’s much more to charts than that. The more you study them, the more you’ll discover that they can help you identify abnormal action—either abnormally good (such as a powerful breakout of a tight trading range on huge volume), or abnormally bad (such as big-volume weakness through a key support level, like the 50-day moving average).

Using charts is more art than science, and as we wrote above, charts are a key part to the investment puzzle (but not the only piece). The more you work on chart-reading skills, the better an investor you’ll be. We’re happy to help you along the way.

Let (Most of) Your Winners Run

Psychological studies have shown that investors’ minds don’t seek to maximize profits … they seek to maximize the probability of making a profit. That means that when the average investor has a profit of a few points, he tends to book it (locking in the gain), instead of giving the stock a chance to develop into a bigger winner (but taking the risk that the small profit could disappear).

In our experience, that’s the wrong thing to do. Sure, seeing a profit of 5% or 10% go up in smoke is never fun, but the fact is, if you’re going to make big money in the market, you’re going to need to develop a few big winners. And the only way to do that is to give some of your initially profitable trades a chance to keep running and running.

Now, you’ll notice in the title of this section we mentioned letting most of your winners run. If you’re running a fairly concentrated portfolio, it’s ok to take a few chips off the table on the way up from time to time. If you get a decent profit, you might sell one-quarter or one-third of your shares, putting some profit in the bank while still attempting to hit a home run with your remaining shares. Doing that is a logical compromise if you still want to book profits when you have them.

Hey! What’s the Big Idea?

The big winners of bull markets aren’t just random companies. Sure, there might be a few low-priced darlings that race up the charts on merger speculation or something like that. But the vast majority of big winners have big sales and earnings growth, and the reason they do is because the companies have big ideas.

By that, we mean that the company offers a potentially revolutionary product or service that is serving a huge mass market. In other words, there’s little ceiling on a firm’s potential growth—the product is changing the way we live or work, so if management executes, the sky’s the limit.

Of course, in a bull market, you’ll find lots of good stories; just remember that while most big winners have big stories, not every big story leads to a big winning stock. In other words, you shouldn’t be buying solely because the story is good. Pipe dreams aren’t allowed! You should combine a good story with good numbers—most big winners show great sales and earnings growth before they lift off—to raise your odds of success.

Concentrate in Your Best Ideas

Most everyone on Wall Street advises you to diversify, but the truth is that when investing in growth stocks, it’s best to do the opposite—to concentrate in relatively few positions, and then to watch them carefully.

So what is “relatively few positions”? We’ve always thought that, when fully invested, owning between five stocks (on the most aggressive end) up to 12 stocks (less aggressive) is the right mix. Maybe if you have lots of experience and time, you could go up to 15 names. But, at least for growth investing, you want to avoid having 20, 25 or 30 stocks. The reasons for that are many.

First and foremost, by its nature, growth stock investing is really about finding a handful of big winners—fewer holdings means you’ll get more bang for your buck from your winners. A second benefit comes from market timing; when the market turns down, you want to raise cash. With just a handful of stocks, selling two or three make you defensive in quick fashion. But if you own 30 stocks, selling two or three (or even four or five) won’t do much to shield you from a big drop.

Of course, having fewer stocks means your portfolio will be more volatile … not always the most pleasant thing. But if you can handle it, having fewer eggs in your basket will allow you to better focus on your best ideas, follow them more closely, and earn better returns in your portfolio.

Never Stop Learning

OK, so the last of our 10 ways to make more money in growth stocks isn’t any secret portfolio management or stock picking trick. But it’s just as important as anything we’ve written about. Most investors put together a plan and start buying and selling stocks … but when they make a bad trade (as we all do), they don’t revisit it or learn anything from it.

That’s a big mistake—in fact, just by eliminating one major fault from your trading every year (say, buying stocks when they’re extended in price, or buying low-quality stocks, or ignoring market timing and buying during downtrends, etc.), your returns should skyrocket over time. Also important is learning what you do best, and making an effort to emphasize that in your trading.

But the only way to improve is to set aside some time every few months, examine some of your best and worst trades during that time, and learn how you can do things better. This is the real difference between great investors and average investors—the great ones are always learning and improving their skills.

Know When to Hold ‘em and When to Walk Away

It’s easy to a buy stock, and it’s generally a pleasant experience. The purchase can make you feel excited, optimistic, even triumphant!

However, the day will come when you own a stock that disappoints you, or even scares you. The share price stagnates or falls or collapses. Panic can set in.

Why does it keep falling? When will the price go back up? Why cant I find any news on the stock? Doesnt Wall Street know what a great company this is?!”

Yet, with a bit of planning, you can mitigate these potential negative scenarios. Yes, stocks can be volatile. But that volatility is not caused by voodoo. There are reasons that stock prices go up and down.

Let’s talk about developing a sell strategy, so that when things go awry – much like we’ve been seeing all year – you aren’t the last person in America left holding a stock that’s fallen 80%.

There are two types of bullish stock investors: buy-and-hold investors and opportunists.

Buy-and-hold investors would be wise to have a written investment policy statement pertaining to their stock investing. Since they’re generally neither comfortable nor experienced with selling stocks, it’s important that they know, in advance, under what circumstance they will sell.

Here are some examples of simple investment policy statements regarding selling stocks:

  • I will sell stock if the company’s earnings per share (EPS) are expected to grow less than 10% in each of the next two years
  • I will sell stock if its dividend is reduced or
  • I will sell stock if any particular industry makes up more than 20% of my total equity

Opportunists are more actively focused on wealth creation than are buy-and-hold investors. They’re less willing to withstand market downturns, and less willing to wait out a company’s period of slow earnings growth.

Opportunists can benefit greatly from market cues that are provided through technical analysis, the study of stock price movement.

The easiest way to identify entry and exit points for a novice chart-reader is to look for predictable trading ranges; then simply buy a quality growth stock when the stock’s at the support level, and sell when the stock’s at the resistance level.

For example, on January 2, 2015, I told investors to hold their shares of FedEx (FDX), and “expect it to trade sideways between 164 and 183 for the time being.” The stock proceeded to

trade exactly between 164 and 183 for five months. It briefly rose to 185 on June 12, then fell back down to price support.

For slightly more advanced chart-readers, an optimal time to purchase a stock is when it breaks above a stable trading range, because it’s likely to experience a nice run-up in the ensuing days and weeks.

Here’s an example. On April 30, 2015, I told traders to buy Avery Dennison (AVY).

I wrote, “AVY shares were in a stable trading range for four months, until April 29, when the stock broke through upside price resistance. Based on previous chart patterns, I believe the stock could climb to 61 before meeting additional upside resistance, at which time it would likely establish a new trading range.”

The stock rose as high as 63.42 on May 27.

On June 9, I wrote, “AVY’s recent price run-up is likely over. Buy-and-hold investors should hold their shares. Traders should have already had an exit strategy in place.”

And sure enough, the stock commenced trading sideways again. On May 14, I gave this advice about Juniper Networks ( JNPR):

“In my April report, I told investors, ‘There’s medium-term price resistance at the February 2014 high of 28.39. Now that the share price is approaching that number, shareholders should be prepared for some sideways trading.”

“Most current shareholders should hold their stock, which is currently undervalued.”

“Traders might jump out at 28, because the near-term upside is rapidly waning.”

“If the stock price trades down to 25 without any bad news, growth and income investors, value investors and traders should buy JNPR.”

The stock price subsequently reached 28 four times in May and June, before pulling back.

Technical analysis not only facilitates trading activity, but it can be used to protect your capital in the event of a sudden or prolonged drop in the share price. Go back to the chart of Avery Dennison above. One logical place to put the stop-loss order would have been just under price support, around 59.50. Even a novice chart-reader can see that if the stock fell to 59.50, it would represent a negative change in the trading pattern.

Some people use stop-loss orders at a fixed dollar amount or a fixed percentage below the current stock price. Then, as the stock rises, they raise the stop-loss order. The stock will eventually have a pullback, and it will automatically sell on the next trading day after it hits the stop-loss price.

Stock market opportunists use stop-loss orders because they are in the market to make capital gains. They don’t fall in love with their stocks and they don’t want to “go down with the ship.”

One of the biggest reasons I use stop-loss orders is that I love buying low during market corrections. If I occasionally have one stock sell via a stop-loss order, I tend to immediately reinvest the capital into another bullish stock opportunity. But if I have several stocks sell via stop-loss orders within a few days of each other, that’s when I know that the market’s about to have a correction. At that point, I let my money sit in cash, and I wait several days or weeks for the market to bottom. Then, I buy!

How do I know that the market has bottomed? I look at the technical charts of the market indexes. The charts show me where the next support level will be, and I expect the index to bounce there. Then I start buying my favorite undervalued growth stocks while they’re on sale!

You can improve your stock portfolio performance by formulating a sell strategy. What’s more, there’s something very satisfying about having cash available to buy low during market corrections.

Don’t let your stock price hemorrhage when the company’s earnings outlook falls apart.

“But the price will return to my cost basis eventually, right?”

Maybe. Maybe not. But look at it this way: ignore the name of the stock, and think of it as a chunk of money. Then ask yourself, “will this chunk of money grow more quickly if I leave it in this current, falling stock or will it grow more quickly if I invest it in this other stock that has strong future earnings growth and a bullish chart?” Frankly, the answer is a no-brainer. You pull the plug on the losing stock and purchase a stock that can potentially deliver immediate capital gains.

Stock investing is about making money. It’s not about falling in love with an idea, a product or a company, and it’s not about you being a superior, wildly intelligent person versus being a dumb person who loses money. All stock investors have stocks that go down! You can’t avoid it! But you CAN minimize your losses by making wise investment decisions up front and by having an exit strategy in place.

Have a plan. Write it down. And when it’s time to pull the plug on a stock, based on your written rules, don’t let fear paralyze you. You’re never going to improve your stock portfolio performance unless you improve your stock selection strategy and/or your stock exit strategy. That takes practice.

You did not become great at your career or hobbies overnight. You studied and practiced for many years. Your stock portfolio management and performance will benefit greatly when you apply the same intellectual diligence to stock investing that you’ve been applying to your career and talents. You can do this!

Secrets to Finding the Market’s Best Bargains

“I like to invest in companies that I know.”

“I like to invest in businesses that I understand.”

“I want to buy Apple because they’re introducing a new iPhone.”

I know that people like to invest in companies that give them a feeling of comfort, an illusion of control. I’m not going to argue with that approach. There’s a lot to be said for owning stocks that you can relax with, as opposed to owning stocks that confuse or worry you.

Instead, I’d like to tell you how I select successful stocks:

I continually screen about 1,100 stocks to identify undervalued growth stocks. I use Wall Street analysts’ consensus EPS estimates to find stocks that are expected to attain strong EPS growth over the next two years. Next, I screen the stocks for comparatively low price/earnings ratios (P/Es) and debt ratios. Finally, I make my buy recommendations based upon technical analysis, a.k.a. price chart activity.

Please note that I did not say that I review companies’ past EPS growth. A company’s earnings history does not necessarily bear any correlation to its future prospects. However, Wall Street analysts’ consensus EPS estimates give investors a relatively accurate view of how companies are expected to perform financially for the next couple of years. Why would anybody guess at the future by looking at the past, when they can easily see the future by reviewing consensus earnings estimates?

I stopped looking at corporate earnings history long ago. Those numbers are somewhat useful in determining annual price/earnings (P/E) ranges, but they’re not remotely useful in identifying companies that are about to have aggressive earnings growth.

After I identify companies with strong future earnings growth, I then review their stocks for moderate or low P/E ratios, and moderate or low long-term debt-to-capitalization ratios.

The P/E is important because it measures valuation. Undervalued stocks generally carry much less price risk than do overvalued stocks. My investment strategy is all about lowering risk while seeking capital gains. Therefore, I concentrate on stocks that are fairly valued or undervalued.

There are several reasons that low debt ratios help the stock price. When companies have a lot of debt, much of their cash flow is allocated to debt and interest payments. That restricts companies’ abilities to hire workers, build facilities and invest in R&D.

But low debt ratios do the opposite. A low debt burden frees up cash flow for business investment. It also allows for dividend increases and share repurchases. And every now and then, a cash-rich balance sheet will spark a corporate buyout, which is usually quite profitable for the shareholders.

That’s it. Future earnings growth, P/Es and debt. After 32 years of stock investing, I’ve figured out that those are the three numbers I need to focus on, in order to beat the S&P 500 and the Dow Jones Industrials.

I go through this stock-screening exercise with blinders on, paying no attention whatsoever to company size, location or industry. If the stock passes those three numerical screens and has a bullish technical chart, it lands on my buy list.

Most growth stock investors would ignore railroad company Union Pacific, because they have a preconceived idea that Union Pacific is too large, and its industry too boring, for the stock to “do anything.” But I’ve learned that my screening process shows me exactly which stocks will most likely outperform the Dow and the S&P 500. If Union Pacific lands on my buy list, I don’t second-guess that decision. I welcome the stock into my portfolio!

Lots of investors also ignore companies that they don’t understand, and those that don’t present quick name recognition.

“Pressure-sensitive materials, engineered components, communication infrastructure, therapeutic application of cell therapies … what the heck are these things?! Can’t we just invest in cell phones, soda pop and sneakers?”

No. Not if you really want to outperform the stock markets. You need to be willing to step outside your comfort zone, and own stocks that require a little extra brain work. Because if you’re going to ignore all the different kinds of companies that don’t make you feel warm and fuzzy, you’re shutting yourself out of a multitude of capital gain opportunities.

The Beginning and Purpose of the Stock Market

The first publicly-traded stock was the Dutch East India Company, which debuted on the Amsterdam Stock Exchange in 1602.

In the U.S., investors began trading stocks on May 17, 1792, when 24 New York City stockbrokers and merchants gathered under a Buttonwood tree outside of 68 Wall Street to form the New York Stock Exchange (NYSE). There were just five publicly-traded securities, with the Bank of New York being the very first listed company.

Today, there are some 79 major stock exchanges in the world, dominated by the NYSE, which accounts for about 40% of the total market value in the world.

The purpose of stock markets remains the same: to raise capital for businesses. In turn, both retail and institutional investors have the opportunity to invest their monies and profit as the companies grow. And, as you can see from the following 100-year chart (courtesy of macrotrends) of the Dow Jones Industrial Average (Figure 1), investors have done very well.


When the Dow Jones Industrial Average (DJIA, an average of 30 large, publicly-traded stocks) was first published in the mid-1880s, it traded at 62.76. Today, the DJIA is around 36,000. That’s a pretty handsome return—and much higher gains than you would receive in pretty much any other investment.

For example, CIBC Wood Gundy calculated the gains of stocks vs. bonds for 100 years. The result: “Data from the University of Chicago shows that, over the past 100 years, if you owned equal amounts of every U.S. stock excluding the smallest 20%, you would have enjoyed average annual growth of 11.5%, for an inflation-adjusted (real) return of 8.3%. Over the same period, fixed-income investments averaged 4.3%, or real returns of just 1.1% per year. So, the real returns from equities were nearly seven times higher than those of bonds.” Stock markets are key to financing companies across the globe, creating wealth, and stimulating economies, worldwide.

These averages are wonderful, but they are just that—averages. Some investors have done much better (take Warren Buffett, Chairman of Berkshire Hathaway (BRK-B), for example). And others have not fared nearly as well. The process of investing requires a little study before jumping in.

First Things First—What is Your Investing Temperature?

It’s critical to take your investing temperature so that you know how much of a risk-taker you are; this will help you determine your investing strategy. I’ve devised a simple questionnaire to help you determine your investing style and risk temperament. You can access it here. It’s an important first step along your path to investing. Once you’ve taken the quiz, you’ll know if you are an aggressive, moderate, or conservative investor. And that will drive your investing decisions.

Does Your Age make a Difference?

For many years, investment pros recommended a drastic decrease in stocks with an aggressive increase in bonds, as folks aged, with as much as 80% in fixed income during your retirement years.

But as the longevity has increased, your money has to last longer, so today, investment advisors are recommending retaining more stocks and fewer bonds as we age, with a portfolio holding 30-50% equities even into your 70s.

Of course, your allocation will depend upon your personal risk profile and investment goals. These are just guidelines.

Choosing the Right Brokerage

For most beginning investors, your number one concern is cost. What is the fee to trade a stock? But you should also consider a company that makes it easy to trade, offers mobile trading, and promotes investor education. As you progress on your investment journey, you’ll have other needs, but in the beginning, it’s best to keep it simple.

I’ve found this comparison of the major online firms which you may find helpful. The survey is just a brief excerpt of the complete comparison table. Use comparison tool to compare 17 online brokers and over 4,000 data points. Investors can compare ratings from the 2021 Review as well as trading costs and over 150 individual account features.

The majority of these brokers offer no account minimums, no-fee stock trades and only $0.65/contract options trades.

Why Should You be in the Driver’s Seat?

There are plenty of investment advisors that want you to think that you cannot invest on your own. Most advisors want you to turn over all of your hard-earned money to them. And some of them are fantastic money managers. But many are not. And their fees—usually a percentage of your assets—can rapidly eat away at your gains.

And then there’s pooled investing—mutual funds and Exchange-Traded Funds (ETFs), where your monies are ‘pooled’ with other investors so that you can invest in a basket of stocks. Don’t get me wrong; those vehicles can be an excellent way to invest in areas such as foreign countries that limit investment to outsiders and offer an entrée into sectors in which you want to invest, but don’t have much expertise. And they are a good way to diversify your portfolio, as I will discuss later in this investing series. But, bottom line, you won’t, generally, enjoy the gains with funds and ETFs that individual stocks will offer you.

The alternative—learning a bit about investing—can be much more rewarding, and a lot of fun. As history proves—individual stocks hold the greatest opportunities for the largest gains—as long as you are willing to expend a little effort. And once you have a good handle on how investing works, you can sort through the reams of investing advice that is available and choose the investment pros who offer ideas that align with your strategies.

There’s an Investment Style for Everyone

This survey to determine your investing style and risk temperament (available here) should give you a good idea if you are an aggressive, conservative or more moderate investor, as dictated by the amount of risk you can tolerate. And, for most investors, your current age will also play a part in forming your investment strategy.

Now that you’ve got a handle on your personal investing style, let’s begin our discussion of the various investment strategies—starting with Growth and Value—that will inform your individual investment selections.

Both Growth and Value investors focus on capital appreciation. But how they go about it is very different.

Growth Investing: A growth stock is a stock whose earnings are expected to outpace the market average, or, often, companies that are not yet profitable, but are seeing tremendous revenue increases. Earnings growth (or the expectation of earnings growth) is the biggest determinant of stock price appreciation. Consequently, companies whose earnings are growing—or anticipated to grow at a fast pace, all other market and economic factors being equal—should also enjoy above-market returns on their share prices.

The average annual market gain for the S&P 500 Index (an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ) is 9.8% over the past 90 years. Therefore, a growth stock would be expected to enjoy higher returns than the market average.

Examples of growth investments may include smaller companies that have high potential for growth such as start-ups, cutting-edge technology firms, biotech businesses with promising new drugs, emerging market stocks of less-developed countries, and companies that—for one reason or another—have fallen on hard times, but are now ‘turning around’.

Legendary growth investors included Thomas Rowe Price, Jr., often called ‘the father of growth investing’ due to his comprehensive research on growth stocks, and Philip Fisher, author of the 1958 book, “Common Stocks and Uncommon Profits”.

As those two gurus would confirm, growth investments can be extremely profitable. For example, a $100 investment in Apple (AAPL) stock in 2002 would have been worth around $42,000 at the end of 2021. Likewise, if you bought shares of Facebook (FB) in 2012, you would be sitting on a 790% gain right now. And a 1992 investment in Starbucks (SBUX) would have given you a 26,569% return!

And while that sounds phenomenal—who wouldn’t want to invest in growth stocks?—that’s not the whole story. High-flying stocks also come with some big risks. After all, my mother always said, “what goes up, must come down,” and she was mostly right.

Because growth stocks typically trade at a higher premium (due to demand), those lofty valuations tend to be volatile, and are much more susceptible to rapid declines than their value peers.

Consequently, while a growth investor can reap amazing rewards, be prepared to ride out some wild swings if you are a dedicated growth investor.

I’ll discuss analysis and valuation in more detail in another chapter, but for right now, here are the four primary characteristics that interest most growth investors:

  1. Robust historic and forecasted growth rate, usually 10% or more.
  2. Strong Return on Equity (ROE, or net income divided by shareholder’s equity). Compare the company’s ROE with it five-year average as well as the ROE of its industry.
  3. Solid advances in earnings per share (EPS) or revenues, in the case of newer companies that have not yet posted profits. A subset of EPS is the pre-tax profit margin, which should surpass the industry average and the company’s five-year average.
  4. Analysts’ estimated future stock price should indicate growth at least in the double digits, but true growth investors often look for a double in five years.

One more caveat to growth stocks. The higher growth companies do not usually pay dividends, or if they do, they generally have dividend yields less than 2%. (A dividend yield is the annual dividend paid to shareholders divided by the share price). That’s because growth companies usually reinvest their earnings in order to accelerate their growth over a short-time period.

On the other hand, Value investors believe that the market is efficient, that stocks reflect all there is to know about that company, meaning they are always priced at their true value. That’s called the efficient-market hypothesis. But successful value investors like Warren Buffett, chairman of Berkshire Hathaway, have disproved that concept many times over. They know that occasionally stocks are underpriced or overpriced relative to their true value, providing investors with great opportunities to ‘buy low’.

Value investors seek these undervalued stocks, or shares that trade for less than their intrinsic values. They believe that stocks move sometimes, simply due to overreactions to good and bad news (or investor irrationality), and not because of their inherent fundamentals.

For example, an earnings report that is perceived by the market to be less than expected can cause a solid, fundamentally strong company’s shares to plummet—many times, temporarily. And a company that beats analysts’ earnings estimates can also decline, if revenues or forward guidance didn’t meet expectations. Those movements provide opportunities to buy in when the stocks are discounted.

However, just like with growth investing, value investing also comes with warnings, including:

  • Value is in the eye of the beholder. With the same information, two investors may estimate the value of a company very differently. Some consider only current earnings and assets, without taking growth into account. Others calculate forecasted growth and the cash flow it will generate.
  • Just because a company is cheaply priced doesn’t mean it’s undervalued. Many value investors concentrate on the price-to-earnings ratio (P/E)—a calculation of four quarters of the company’s earnings, divided by its current stock price—to determine valuation. But a low P/E does not tell the entire story. The stock may be trading cheaply because it’s a dog. Consequently, further analysis is required. Having said that, if you determine you have a good value candidate, make sure that it’s P/E is indeed low, compared to its industry and its five-year historical average P/E.

So, where do you start when looking for an undervalued company? As I mentioned above, you do begin with a low P/E, which should be in the bottom 10% of its peers.

Next, the Price to Earnings Growth Ratio (PEG, or the P/E divided by the earnings growth rate over the same period of time)—which should be less than 1.

And lastly, the share price should be less than tangible book value (tangible assets divided by total number of shares outstanding). Tangible assets are assets that you can physically see and touch, such as buildings, machinery, cash and inventory—not patents or goodwill, or other assets that cannot be liquidated for cash.

That’s a short and simple analysis, but there are much more elaborate models to determine value, too.

Certainly, as mentioned above, there are investors—even famous investors—who favor one strategy over another. But for the average investor, it’s essential to note that markets cycle up and down. Sometimes, growth stocks are the big winners, but in other instances (say, an economic downturn, or just a period of uncertainty), investors prefer value-oriented companies.

Some of those cycles are depicted in the following graph (Figure 5).
Figure 5: Russell 1000 Annual Returns


You can see that no one investing style—value or growth—is always the best strategy to follow. That’s why many investors seek a more balanced portfolio that will include both styles—as well as others.

For example, Peter Lynch, the pioneer of the wildly-successful Fidelity Magellan fund, created a hybrid model of growth and value investing—the growth at a reasonable price (GARP) strategy. From 1977 to 1990, Lynch averaged a 29.2% annual return, making Fidelity Magellan the most successful mutual fund in the world.

Bottom line, a balanced portfolio is optimal for most investors, skewed toward whichever style suits your personal risk assessment. But growth and value are not the only strategy selections that you need to know about—there are lots more!

Sector, Cyclical, and Seasonal Investing

Here we’ll discuss a few strategies that are favored by long-term investors as well as folks who may be interested in short-term investing.

Sector Investing

Some investors like to trade stocks, based on their predictions for the economy, certain industries, or the market as a whole. Those focused on buying stocks in ‘bullish’ sectors or industries will pay attention to the current economic cycles.

As you can see from the chart below (Figure 15), during certain market cycles, some sectors do better than others.


Fortunately, for investors trying to capture the biggest gains during the bullish periods, there are hundreds of sector mutual funds or exchange-traded funds (ETFs) from which to choose.

The list of available sector funds usually includes technology, financial, consumer cyclical, consumer staples, utilities, energy, natural resources, healthcare, real estate, and precious metals. Note that each of these can be subdivided into even smaller sectors.

There is voluminous data on successful sector strategies, such as the huge gains from technology investing in the late 1990s and real estate investing in the early-to-mid-2000s. But we all know what happened to those sectors when technology went bust, and when the most recent recession hit. That’s the risk in sector investing. When the decline happens, it usually occurs quickly and is accompanied by significant drops.

You only need to look at the sector’s beta (volatility, as compared to the S&P 500) to ascertain the predicted volatility of the sector. In September of 2018 several important changes were made to the Global Industry Classification Standard (GICS®), changing the forecasted beta of several sectors as shown in the graph below (Figure 16).


The advantage to sector investing is diversification using a professional manager when you are not well-versed on a particular industry, as well as the potential for substantial gains when that sector excels. But the downside is significant risk, should you be on the wrong side of the bet.

For prudent investors, you might consider adding sector investing to your portfolio, but keep the allocation to maybe 5% of your holdings for each sector. You can also diversify by employing certain sectors for longer-term investing (those that are least volatile) and others for your short-term, more speculative funds.

Cyclical Investing

Like Sector Investing, Cyclical Investing is a strategy dependent on certain economic cycles. But in Cyclical Investing, instead of using mutual funds and ETFs, many investors prefer to buy and sell companies whose fortunes grow and wane, according to specific economic cycles.

For instance, let’s look at my first chart in this section, depicting sectors that do well during different economic cycles. In an Early Bull market cycle and Economic Trough, investors generally favor Financials, for example. Consequently, during those cycles, you may want to buy investment and asset managers. With the idea that the economy will be improving, more folks will flock to the stock markets, sending the shares of brokerage houses higher.

Yet, between an Economic Recovery and Recession, and a Middle Bear stock market, investors will favor safer, more staid stocks, such as Utilities.

The following chart (Figure 17) shows that we are still in an expansionary economic phase, and we continue to be in a bull stock market, but we may be beginning a move into the next phase. If that is correct, we’ll see investors becoming more conservative, favoring larger, established companies, especially those that pay dividends.


The key is to be aware of the macro environment for the stock market as well as the economy. The old adage of ‘buy and hold’ no longer works in our global economy, where news from across the world can rock our markets.

Seasonal Investing

This section is more appropriate for short-term investors, or traders, than for long-term holders of stocks. And there are many seasonal trends (movements during certain times of the year) that traders watch to produce incremental gains.

One of the contributors to Wall Street’s Best newsletters is Jeffrey Hirsch, editor of The Stock Trader’s Almanac. Jeffrey—like his father Yale, who founded the newsletter—is a statistician. He parses market data and is an expert of seasonal trading. In his newsletter, Jeffrey often addresses many of the old stock market adages, including:

  • Santa Claus Rally (stock market rallies in December, usually the last week). The truth: According to The Stock Trader’s Almanac, since 1950, the average gain for this period of the year has been 1.3%, and since 1969, it has generated positive returns 75% of the time.

  • Sell in May and Go Away (November 1 – April 30 are considered the best months of the year for the markets). The truth: A report by Barclays found that average returns from 1970-2017 were stronger between November and April than they are in May through October.

  • The January Barometer (as goes January, so goes the rest of the year). The truth: According to Fidelity, in regard to the U.S. markets, “an up January has generally been bullish for stocks, particularly when the market has gained more than 5% in January.” Since 1945, the January barometer held true 75% of the time when the market was up in January. But, declines in January have not reliably predicted a weaker year.

  • The Presidential Market Cycle (first year following a presidential election is usually the worst, with the third and fourth years seeing above-average performance). The truth: History bears out the cycle; but with President Trump, the pattern changed. Whether or not that will continue into the future remains to be seen.

  • October is a Scary Month (many market crashes have occurred in October—Panic of 1907, Black Tuesday 1929, Black Thursday 1929, Black Monday 1929 and Black Monday 1987). The truth: October is the most volatile month. According to CFRA Research from 1950 to present day, “The S&P 500 on average registers more daily moves of at least 1% in October than in any other month.” On the flip side, however, going back to 1950, the S&P 500 has averaged a gain of 0.7% in October, according to The Stock Trader’s Almanac.

In addition to these market adages, there are many other seasonal trades, such as in commodities—sugar, natural gas, heating oil, grains, coffee, copper, etc.—that are influenced by seasonal weather, as well as patterns, cycles and trends in consumption, supply and demand. And there are companies like amusement parks whose profits are made in the spring and summer, giving their stocks a seasonal boost. Or retailers whose big months are the end of summer and holidays.

But as with sector and cyclical investing, timing is everything and no one is perfect at market timing. These investment strategies can be high-risk, so make sure they comprise only a small portion of your overall, long-term strategies for successful investing.

REITs: Real Estate Investment Trusts

It’s important that we as investors expand our dividend investing world to include Real Estate Investing Trusts (REITs), which currently average a dividend yield of 3.04%, as represented by the FTSE NAREIT All REITs Index (^FNAR)—considerably higher than the 1.3% average yield of the companies in the S&P 500 Index. After the subprime mortgage crisis decimated the real estate market a few years ago, it seemed like housing prices would never recover. But as you can see in the following chart of real estate prices, the national average has recovered very nicely since then.


S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis;, December 14, 2021. Importantly, with the economy continuing to improve, and interest rates still very low, most economists believe there is still plenty of room for growth. And the growth is not just in residential real estate. Just about any subsector you can think of—apartments, offices, healthcare, and hotels—have all prospered with the recovery. Many investors have reaped those rewards. But, let’s face it, most of us don’t have deep enough pockets to be able to invest heavily in real estate, and we probably couldn’t comfortably weather a major downturn, waiting for the next up-cycle. And both of those reasons—high investment dollars required, as well as the associated risks—have played an important part in the rapid expansion of the REIT industry. REITs were created in 1960 by an act of Congress to allow individual investors to participate in the ownership (and profits) of large-scale, income-producing real estate properties. Like mutual funds, they allow individual investors to “pool” their monies to invest, while sharing the risk of the investments. They are also excellent tools when used to diversify your portfolio as well as to allocate your assets. And, as with mutual funds, they are professionally managed. But REITs have one tremendous selling point not shared by most mutual funds—high dividend yields. By law, REITs must return at least 90% of their taxable income to their shareholders, annually, which generally translates into very nice yields for the REIT investor, making these investment vehicles very attractive. But dividends tell just part of the story. For the 20 years leading up to the pandemic, REITs have more than held their own against the broad market, gaining 13.3% (FTSE NAREIT index, including appreciation and dividends), compared to the S&P 500’s 7.7% return. And during periods of stock market volatility and economic uncertainty, REITs will generally outperform the broader markets. There’s a REIT for Everyone Most real estate investment trusts (REIT) own—and usually operate—income-producing properties. There are three primary types: Equity REITs primarily own and operate income-producing real estate, but have become diversified into additional real estate activities, including leasing, maintenance and development of real property and tenant services. Mortgage REITs lend money directly to owners and operators of real estate or acquire loans or mortgage-backed securities. Many of them also manage their interest rate and credit risks using derivative strategies such as securitized mortgage investments and dynamic hedging techniques. Their best-known investments are Fannie Mae (FNMA) and Freddie Mac (FMCC), government-sponsored enterprises that buy mortgages on the secondary market. Hybrid REITs own properties and make loans to real estate owners and operators. Today, there are some 185 REITs that trade on the New York Stock Exchange, with a total market capitalization of $1.104 trillion. As you can see from the following table (Figure 9), REITs tend to specialize in a particular type of real estate property.


What about Rising Interest Rates? REITs are often discarded when rates are rising (like they are now), but that strategy is frequently misguided. Many investment pros sound the alarm on REITs in rising interest rate conditions, making investors fear not only the loss of generous dividends, but also potential stock collapses. That misconception is far from the truth. Why? It’s based on the assumption that as rates rise, REIT profits will erode, and stock prices will decline. In theory, that looks right, as generally when rates rise in a fixed-income instrument like a bond, prices generally fall. And with mortgage REITs, that’s sometimes true. Many are leveraged to the hilt, so rising rates will usually negatively impact their prices. But for some mortgage REITs and most equity REITs, that notion doesn’t prove out. The following graph (Figure 10) was published in Forbes and shows a more complex picture. It plots monthly data over the past 10 years between 10-year U.S. Treasury Futures and the MSCI US REIT Index (RMZ) and indicates that while there is some correlation between rate hikes and REIT price declines, the most significant correlation is when rates suffer a sharp hike. In contrast, with gradual rate increases, the correlation declined. That’s because gradually rising rates indicate an improving economy, and for REITs, that can mean rising rents and lower vacancy rates, which leads to more profits, and better stock prices.


For the investor, however, when rates begin to rise, REIT investors tend to panic, and that may cause REIT prices to temporarily slide—a buying opportunity, in my opinion. So, the question is, which REIT categories will likely do just fine in a rising rate environment? The tables below (Figure 11) show REIT beta (a measure of volatility) to the S&P 500, as well as to yields. (A higher beta indicates a higher level of volatility.)


You can see that hotel REITs are the most volatile as compared to the S&P 500, which makes sense, as they are also very economically-dependent, but the least volatile when it comes to yield, and that’s because their cash flow is short-term. As long as the economy continues to improve, hotel REITs should also, as consumer discretionary buying rises. Alternatively, Net Lease REITs show the most volatility to yields, which also seems right, as their long-term contracts—while inflation-adjusted—may not keep up with quick rate rises, but they are the least volatile, compared to the S&P, because they have long-term steady cash flow. But these REITs have been known for dividend safety, good steady income, with decent rates, so gradual rate increases shouldn’t bother them too much. So, it’s obvious your investing decision in REITs is not just a function of beta. It’s more involved than that. While rates and economic factors are important, investors must also pay attention to the fundamentals. That means a bit of research, including:

  • Revenues and earnings should be growing at a sustainable level. Debt should be reasonable, and the leverage should be used to grow the REIT’s top and bottom lines.
  • Compare four quarters of funds from operations (FFO) to the REIT’s annual dividend payments. That is the dividend coverage ratio, which should be more than 1:1, meaning the REIT is earning more than it pays out in dividends.
  • Dividend track record—is it stable? Has the dividend been cut? One important note: If the yield looks outrageously high compared to the industry, it may be an indication of too much risk.
  • Review the portfolio, including the vacancy rate history, credit ratings of its holdings, and diversification. Find out the geographic regions in which the REIT invests. Check out housing prices, condo conversion rates and the current apartment rental market.
  • Valuation of REITs is every bit as important as with any other stock. It’s best not to overpay; that way, you get the benefit of appreciation plus a handsome and steady cash flow.

If your REIT idea meets most of these criteria, exhibiting fundamental strength and value, then this may be an opportune time to add some steady cash flow to your portfolio. I’ve always loved real estate; in fact, I own a small real estate franchise. I love the idea of a diversified real estate portfolio and REITs fit the bill. They have been excellent investments for my subscribers over the years as they offer the perfect opportunity to buy real estate with very little capital. And I believe the boom cycle in real estate is far from over, and REITs make an ideal investment—without the costs or risks associated with actually owning real estate. This concludes my Dividend Investing focus.

How to Invest in Mutual Funds & ETFs

The first investments that many investors purchase are the mutual funds their employers offer as part of their 401(k) plans. Mutual funds pool money from a group of investors and then invest that money in stocks, bonds, and short-term debt (as well as alternative investments like commodities and gold). And for many investors, these accounts add up to the majority of their investment dollars.

Yet, through my years of helping friends, families and associates make sense out of these programs, I have discovered that many people do not have a good understanding (and sometimes, none at all!) of just what they are being offered. Instead, they just check off boxes, deposit their money every pay day and hope for the best.

Mutual funds are not just for 401(k) plans. As you can see by the following chart (Figure 18), as of mid-2018, there were 7,950 mutual funds in the world (and 2,143 ETFs, but more about those in a moment). That’s a lot of money going into a vehicle that most people just don’t quite understand.

So, let’s just zap the mystery right out of mutual funds.

Mutual funds offer a number of categories, investing styles and strategies, including:

The most popular are equity funds. They are just what they sound like: Funds that invest in stocks. They are categorized as follows:

  • Large cap (>$10billion)
  • Mid cap ($2 - $10 billion)
  • Small cap (<$2 billion)

Additionally, each of these categories may be further divided into the following:

Index funds are for investors who want funds that follow the broader markets, have lower operating expenses, and lower turnover. These funds offer portfolios constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500).

Value funds include equities that are priced low, relative to their earnings potential.

Growth funds consist of companies with high growth, but also are more volatile and riskier than value stocks and generally priced at a higher premium.

Blended funds are a combination of both value and growth equities.

Sector funds concentrate on one particular sector of the economy. There are sector funds for just about any industry or subsector of any industry. Oil, energy, financial, pharmaceutical, semiconductors, hardware, software—you name it—there’s probably a sector fund for it. While the concentration in one industry can bring fabulous rewards, it can also cause significant losses, making these funds more appropriate for investors who can handle more-than-average risk.

Bond funds, which invest in fixed-income securities, are also very popular, especially for investors who are more conservative with their money. These funds are available in short-term (< 5 years), long-term (>10 years) or intermediate-term (5 – 10 years). And bond funds come in a few varieties also:

  • Government and government agency: The ‘safest’ (in terms of recouping your principal), but generally pay the least amount of interest.
  • Municipal: Bonds issued by state and local governments and their agencies, in the form of general or revenue issues. Tend to be fairly safe, but investors should pay attention to their bond ratings before investing. For easy access to the major bond rating firms’ rankings, go to:

  • May be safe or risky; ratings should be checked.

High-yield: Pay higher returns, but also tend to be much riskier than investing in regular corporate, government or municipal bonds. Investors should pay heed to their ratings.

Balanced funds may include a combination of equities and fixed income investments, ‘balancing’ out risk, but also reducing returns.

Foreign funds offer investors the opportunity to own stocks and bonds of companies outside the U.S. Selections include:

  • Global funds may also encompass U.S. stocks and bonds. Of all the foreign investments, they tend to be some of the safest, since many contain U.S. investments.
  • International funds have no U.S. investments, and they run the gamut from safe to risky.
  • Country-specific funds will generally invest in one specific country or region and can be very volatile.
  • Emerging market funds invest in undeveloped regions of the world. They can offer tremendous growth, but also significant risk.

Money market funds tend to be very safe since they invest in very short-term securities, but also offer fairly low returns (there have been some notable exceptions to this, primarily due to fraud unfortunately).

Alternative funds (alt funds) invest in non-traditional investments, such as global real estate, start-up companies, or commodities such as gold or oil.

Additionally, more mutual fund categories have evolved in recent years, including:

Target-date funds in which you choose one fund to diversify your investments in stocks, bonds, and cash (the allocation) throughout your working life. The fund’s name includes a date—your targeted date for retirement. And it is managed by a professional manager who has the discretion to buy and sell, according to your age (younger folks get more aggressive investments). But be aware, these funds often come with higher fees, and sometimes, more risk than you desire.

Lifestyle funds also have a targeted date, but your allocation to different investments is based on your risk tolerance and remains constant throughout your time frame. This, of course, is a very risky plan, as nothing stays constant in the market, and your personal risk tolerance can also change often.

Now you have a handle on the major categories of funds. To prepare for your selection, you will need to consider your time frame for investing (i.e., how long before your retirement) and then make a decision as to just how risk-averse you are, so you can determine the types of funds and strategies with which you would be most comfortable, and also consider the parameters for evaluating your funds.

Evaluating Your Mutual Funds

As with any investment, several critical factors must be examined:

Performance: The funds’ actual returns (investment appreciation + dividends) are key comparison measures. In a great market, a large percentage of mutual funds will do well; that’s why it is extremely important to look at a fund’s returns over a multi-year period.

I suggest you compare returns on a 3-year, 5-year and 10-year basis. And it is best to look at the annual numbers, not the cumulative figures, as they will disguise the true fund returns and won’t tell you a thing about the consistency of the performance. For example, if the fund had one really great year, but nine so-so years, the 10-year return might look pretty good, but that would not give you the accurate story of the fund.

As well, offers ratings (1 to 5 stars) on mutual funds, based on how well they’ve performed (after adjusting for risk and accounting for sales charges). There are many websites that offer these statistics, but this is one of the best:

Very importantly, please be aware that—just like any other investment—past performance is not a guarantee of future success.

There are several Costs & Expenses associated with mutual funds:

Loads: Some funds charge front-end loads, ranging from 3.75%-5.75% of the monies you initially invest. Note that funds may also charge a front-end load for reinvesting your dividends back into the fund.

Back-end loads may range from 4%-5.75% of the funds you redeem or cash out, in the first year of ownership, but then may subsequently decline until they reach zero, in about the sixth year.

Some funds do not have front- or back-end loads, and are called No-load funds.

Expense ratios: These expenses are the cost of doing business, and include administrative and management fees. They are calculated as a percentage of net assets managed. And while they have been declining (mostly due to the proliferation of less expensive ETFs), the current average for actively-managed funds is 0.5%-1.0%, but may go as high as 2.5%.

12b-1 fees: These fees are marketing and distribution expenses. They are included in the fund’s expense ratio, but often separated out as a point of comparison. They are charged in addition to loads, and even no-load funds may have them.

Taxes: When a fund manager sells a stock from the fund at a profit, the gain is taxable. Short-term gains (for investments held less than one year) are taxed higher, at your individual income tax rate, while long-term gains (for investments held more than one year) are currently taxed at an approximate 15%-20% rate, depending on your income. Many investors tend to forget about taxes on funds since they aren’t privy to the fund manager’s everyday buying and selling of investments and the losses and gains accrued, and are often surprised by the tax bite at the end of the year. Consequently, it would be wise to pay attention to the next important item on our list…

Turnover: This refers to the frequency of trading undertaken by fund managers. The more buying and selling they do, the higher the turnover, and the greater the potential tax bite. This is another area in which index funds are advantageous, as their managers generally trade less than actively-managed funds, so they usually accrue lower tax bills.

Portfolio Strategy is of utmost importance when comparing funds. It will do you no good to compare the returns and expenses of a growth equity fund with that of a bond fund; you must compare apples to apples.

And one warning: It would be to your benefit to double-check the funds’ holdings and see if they are in line with the stated portfolio strategy. I’m rarely surprised to find the majority of holdings in something other than what the fund’s prospectus dictates but it can happen.

You can find all of this fund information on the Morningstar website. And for additional help in calculating mutual fund fees and expenses and comparing them, try this site:

Here are just a few more helpful hints when deciding on the funds you want in your portfolio:

  1. You might want to avoid smaller funds, as expenses may be high. For the same reason, steer clear of new funds unless they are part of an established fund family, as investors often find themselves subsidizing a new fund’s startup costs.
  2. Think twice before buying the largest funds, as they may be so unwieldy to manage that their returns may not be as good as similar, smaller funds.
  3. Take a look at the experience and tenure of the portfolio manager. If he is new to the fund, find out if he came from another fund and what his experience and performance was at his former employment.
  4. Compare the holdings in the fund’s portfolio with similar funds, as well as with the other funds you are considering. I have often found that many funds overlap their holdings and investors are frequently investing in very similar funds although their stated strategies may be very different.
  5. Beware of funds that rationalize their high costs just because of the type of funds they are. For example, the expenses at some growth funds are higher than value funds, for no reason that I can come up with. Similarly, sector funds often cost an investor more than diversified funds, which, since they must take fewer experts to run them than a fund covering more industries, absolutely makes no sense.

All about Exchange-Traded Funds (ETFs)

First pioneered by the American Stock Exchange in 1993, exchange-traded funds (ETFs) have seen their numbers rise by 10% in the last five years, and as my earlier chart shows, there are now 2,143 ETFs in existence.

An ETF is a basket of investments that track a stock index, a commodity, bonds, or a diverse group of assets. For the most part, ETFs offer the same type of diversity as mutual funds, allowing you to choose different investment strategies and goals.

But there are some significant differences between ETFs and mutual funds, including:

  • ETF expenses are significantly less than most mutual funds. Unlike mutual funds, you buy ETFs through a broker, so you will have to pay a commission. However, the total expenses (unless you are an active trader—and if that’s the case, you shouldn’t be in ETFs), are, on average, much lower than the expenses of mutual funds investing in similar asset categories. The average annual expense ratio for ETFs and mutual funds is 0.518% (down from 0.562% in 2016, according to Morningstar), and for ETFs alone, is 0.44%. Some of the largest indexed ETFs have expense ratios near 0.10%.
  • Liquidity and transparency. ETFs can be traded all day long, instead of just once daily for mutual funds. You buy and sell them just like stocks. And unlike mutual funds, with ETFs, you can use limit orders; you can sell them short; and you can trade options.
  • Fewer capital gains distributions. Investment turnover in ETFs is not as frequent as in mutual funds, lending them to lower capital gain distributions; hence, a smaller tax bite for most investors.

Investors can help themselves to market-, dividend-, earnings- and sales-weighted ETFs. You can also find plenty of commodity, country, and sector exchange-traded funds. Actively-managed ETFs are growing in popularity, and during the economic woes of the recession—with sectors like housing and financials under fire—short ETFs grew considerably.

To evaluate an ETF, investors should pay attention to performance, expenses and risk. As with mutual funds, Morningstar rates ETFs with their 1-5 star system, based on the fund’s past performance, the fund manager’s skill, risk- and cost-adjusted returns, and performance consistency. The ETFs are evaluated for up to three time periods: three, five and 10 years, and then combined to create an overall rating for the fund. Morningstar does not evaluate funds with less than three years of history.

Three are plenty of additional sites that evaluate and screen for ETFs, but Morningstar’s is one of the best (and oldest):

Additionally—just as with mutual funds—the same investigation as to portfolio manager tenure and the composition of the fund should be analyzed.

Mutual funds or ETFs—it’s up to you, whichever you prefer. Many investors have both. And with mutual fund fees declining (to make them more competitive with those of ETFs), you have a very wide choice of funds and ETFs in which to finetune your investing strategy and goals.

Fundamental and Technical Analysis

My major in college was Finance, where I learned how to analyze stocks from a fundamental point of view. I’m still mostly a fundamental analyst, but in recent years, I have begun incorporating some technical analysis into my stock research. And having interviewed many financial pros through my work with the Money Show, I’ve discovered that most analysts—especially those that hold stocks, rather than trade them—use a combination of both types of analyses.

Let’s compare these two diverse schools of thought.

Fundamental analysis focuses on the company, as well as sector, market and economic events. It attempts to analyze the company’s future prospects and estimate the value of its shares, based on a wide variety of factors, including historical and forecasted financial ratios, competition, company management, prospects for its industry and the current as well as future economic developments.

On the other hand, technical analysis doesn’t give two cents about the value of a company, its financial characteristics or who runs it. Instead, technical analysts simply focus on supply and demand in the market to determine what direction, or trend, prices will continue in the future.

Both fundamental and technical analysts have conducted elaborate studies to prove that they alone are the only methodology for successful investing. Each school of thought has reams of data illustrating their success. But we’re not taking sides here. In my opinion, each type of analysis has its advantages and disadvantages. My purpose here is to just introduce the basic concepts of both fundamental and technical analysis to you.

Graham and Buffett—Legendary Value/Fundamental Investors

The most famous fundamental or “value” analyst is—hands down—Warren Buffett. He learned about investing from his Columbia University teacher, Benjamin Graham, the father of security analysis.

In 1934, at merely 40 years of age, Benjamin Graham (with his colleague, David Dodd) co-authored Security Analysis, the primer for Value Investing. Many editions later, the book has become the bible of security analysts nationwide.

Graham felt that too many investors were speculators, buying or selling simply because a stock or the market went up or down, investing in “hot” stocks, and margin buying—all trends of the era in which he grew up. He saw—with his own eyes—the debacle of the ’29 crash, the bank closings, and the utter loss of confidence in Wall Street. He knew that investors had lost sight of the reason that the stock market was established: to fund corporate expansion. He decided that to restore confidence, investors would have to change their thinking, and advised that, “If an investor wanted to enjoy a reasonable chance for continued better-than-average results, he must follow policies which are inherently sound and promising and are not popular on Wall Street.”

His definition of an investment: “Upon thorough analysis, an investment promises safety of principal and an adequate return.” Anything else was mere speculation.

In other words, Graham proposed that the foundation of sound investing should not change with the whims of trends or the winds of time, but should be altered only as a result of important economic and financial changes. Such events might include changes in interest rates, inflation, the trend toward conglomerization of corporations, or significant bankruptcies—all occurrences which might alter the way a stock is to be valued. That’s quite a different train of thought than what was then espoused by the “professionals.” You might imagine how popular that advice was with the Wall Street crowd!

Graham further stood the investment community on its head when he stated that “the rate of return should not depend on the old and sound principle that it should be more or less proportionate to the degree of risk an investor is ready to run. Instead, it should be dependent on the amount of intelligent effort the investor is willing and able to bring to bear on his task.” That was heresy on Wall Street — Graham was actually telling investors they could figure it out for themselves; they didn’t need the pros!

And Graham was most definitely not a market timer. He stated that “the only principle of timing that has ever worked well consistently is to buy common stocks at such times as they are cheap by analysis, and to sell them at such times as they are dear, or at least no longer cheap, by analysis.” In other words: It’s the company that counts, period.

He felt that a good investment should be a company that was worth considerably more than what its stock was selling for. He calculated this “value” of a company by estimating its future earnings as well as taking into account the worth of its assets; in other words, what the value of this business would be to someone interested in buying it.

And even though there were analysts (then as now) building mountains out of molehills with reams of ratios to analyze a single company, Graham felt that just a few—the most important— criteria would do the job.

Graham especially liked to invest in companies whose earnings were reasonably stable, with good growth prospects. Additionally, he required that they be conservatively financed, large companies that paid dividends, with price-earnings ratios of less than 25. And he found legions of such companies—many selling for less than their net working capital (current assets – current liabilities). But for some reason, the stock market and the market pros were underestimating, or undervaluing, the potential of the companies’ earnings, resulting in an “undervalued” stock price.

Graham’s success was legendary. During his most active years—from 1936 to 1956—he consistently posted annual returns of 20% plus, while the S&P 500’s performance ran around 14%.

And his legend lives on in Warren Buffett. While Benjamin Graham introduced Value Investing to the investment community, his student Warren Buffett actually formed a company whose sole purpose is to “value invest.” Buffett is chairman of Berkshire-Hathaway (BRK-B)—a company that is essentially a portfolio of the stocks of businesses he has bought over the past 57 years. And along the way, he has expanded on Graham’s version of Value Investing.

Like Graham, Buffett looks for those companies that are undervalued, in terms of today’s numbers. He certainly looks at future earnings but doesn’t rely solely on them to make a buying decision. He expresses this concept by saying, “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.” His secret to Wall Street riches is simple: “You try to be greedy when others are fearful, and you try to be very fearful when others are greedy.” Alternatively stated: Don’t follow the crowd.

Buffett feels that research is the key; nothing beats old-fashioned elbow grease. He disregards “hot tips,” sets his goals and targets for the company at the time he buys the stock, and believes that too much diversification—what he calls the Noah School of Investing, or buying two of everything—is not prudent. In fact, Buffett tends to take rather large positions in the companies that he owns in his Berkshire-Hathaway group, and keeps his portfolio fairly lean, in terms of the number of companies.

That focus on a smaller group of investments led to one additional criterion that Buffett added to Graham’s model and ultimately made his trademark—he believes in really getting to know the companies in which he invests. That means personal visits and conducting ongoing communication with the decision-makers. But Buffett takes that step even further. He also gets to know the company’s customers, suppliers, and its competitors.

Another expansion of Graham’s strategy is Buffett’s addition of qualitative factors to the investment equation. While Graham certainly considered whether or not management was strong, efficient, and cost-conscious and that the company’s products seemed worthwhile, Buffett also looks at more intangible qualities, such as franchise or brand name value. For example, before he bought Disney stock for the first time, he factored in the value of Disney’s huge movie library, which did not show up in Disney’s financial statements at that time.

This led to Buffett changing Graham’s concept of the worth of a business, by adding such intangibles to a company’s book value, which is basically defined as a company’s assets minus its liabilities, or the capital that has gone into a business, plus retained profits. Together, the actual balance sheet figures plus the intangibles add up to the “intrinsic value” of the company.

And lastly, Buffett enlarged Graham’s definition of risk to include the risk of paying more than a business would prove to be worth.

Buffett has often been maligned in the media for his conservative investing practices. In the late ‘60s, he was attacked for staying out of the “hot” electronics sector and retaining his old-line retail stocks. But he had the last laugh then, just as he had during the recent technology boom.

And Buffett has the juice to back up his strategy. Since he took control of Berkshire Hathaway in 1964, the stock has generated 20.9% annualized returns—more than double that of the S&P 500.

As I mentioned earlier, while there are many ratios you could use to evaluate a company, Graham felt you really needed no more than a handful. Certainly, there are sector and industry ratios that will help you better define your analysis, but for the most part—after my three decades in the markets—I agree with Graham.

And now I want to share with you my favorite fundamental analysis ratios.

The 7 Critical Steps to Profitable Investing

You only need to turn on the TV to see gurus and best-selling authors who can’t wait to sell you their latest stock market gimmicks that promise you “instant millions.” Their ‘guaranteed’ technical trading systems, proprietary methodologies, complex economic models, and even some that chart astrological systems, are generally not worth the paper they are written on.

In my years of investing, I have yet to see any of these “systems” consistently beat a good old-fashioned look at a company, its industry and how it relates to the current and projected economic realities.

If a business is fundamentally strong (i.e. it actually makes money), has a diversified product line, and is in a solid position in its market, you are 90% of the way to finding a good investment. The remaining 10% is a matter of looking at a few parameters – no matter what the company does – to determine if it’s the best stock for your investment dollars.

Here, I want to discuss seven key metrics you should review before buying any stock. These indicators should help you get most of the way in understanding a company, its operations, and its underlying business.

1. Institutional activity. Pension funds, mutual funds, hedge funds, insurance companies and corporations that buy and sell huge blocks of shares can create tremendous volatility in prices. To lessen this risk in your investments, try to buy shares in companies where institutions own less than 40% of their shares. You can find this information at

2. Analyst coverage. Another indication of future share volatility is the number of Wall Street analysts covering a stock. Analysts—like the big institutions—have a herd mentality. When one sells, often, so do the rest, resulting in great numbers of shares changing hands, and usually leading to price declines. It’s best to avoid companies with more than 20, or fewer than two analysts following them. (You need some analyst interest, or you may be waiting a long time for price appreciation, even in the strongest and most undervalued company). You can locate the number of analysts at; then select Analysis. Many times, the companies in which you are interested will also publish which analysts cover their stock, on their Investor Relations page.

3. Price-earnings ratio (P/E). The price of one share of a company’s stock divided by four quarters of its earnings per share (usually the last four quarters, the trailing P/E ratio), the P/E ratio is of utmost importance in determining if a company’s shares are overvalued or undervalued. For the best perspective, go to, enter your stock symbol, then select Financials and compare the current P/E of the company to its average P/E for the last 3-5 years, to its estimated future P/E and to the average P/E of its industry or sector.

One note: If a company’s P/E is more than 35, be careful – it might be too pricey. You may want to stick with companies that are trading at lower P/Es, particularly if you are fairly new to investing. Almost any financial website will feature trailing P/E ratios and forward P/E ratios for a given stock. Reuters has almost 50 comparative ratios on its site.

4. Cash flow. One of the most important parts of a financial report is its Statement of Cash Flows, which is a summary of how the company made and spent its money. Go to, Financials, then to Cash Flow and select Annual or Quarterly, depending on which period you want to review. Then find Total Cash Flow From Operating Activities, which represents the cash the company took in from its primary business operations. If it sells clothes, it’s the cash collected from selling clothes.

It’s important that this number be positive, or at least trending positive over the course of a year. After all, if the business isn’t making money from its primary product—not from investing in real estate or the stock market—you probably want to pass it by.

5. Debt/equity. This ratio is how much debt per dollar of ownership the business has incurred. Compare the firm’s historic debt/equity ratios, so you can find out if its debt level over the past few years has been rising too rapidly. Debt isn’t bad, as long as it is used as a springboard to grow sales and earnings. Next, contrast the company’s ratio with its competitors and its industry so you can further determine if your company’s debt position is reasonable. These ratios can also be found at, under the Financials

6. Growing sales and income. A rule of thumb that has always served me well: Buy shares in companies whose sales and net income are growing at double-digit rates. I cannot emphasize this enough, as appreciation in stock prices is generally precipitated by growth in earnings (which usually follows expansion of sales). It’s certainly possible to buy stock in a company that has no earnings growth (a new business, or a tech company in the late ‘90s, for example) and still make money on the shares—short term—but it’s not a formula for serious, successful long-term investing. This ratio can also be found on, on the Financials

7. Insider activity. Investors will also want to review the buying and selling activities of a company’s insiders—its top officers and directors. A sudden rush to sell large quantities of the firm’s shares may be a good indicator that the business is falling on rough times. Likewise, a large increase in purchases may mean good news is on the way. The website,, under the Insiders tab, lists all the recent insider activity at the company, as well as the number of shares remaining after the sale—an extremely important figure.

I would like to leave you with one last thought on using these indicators: Remember that no one ratio will determine the validity or potential of your investment. It’s of utmost importance that you take a complete look at a company’s financial strength and its future prospects, by conducting a thorough analysis—over time—usually a 3-5-year track record.

With these seven critical factors in hand, it won’t be long before you feel very comfortable in analyzing stocks in almost any industry.

My Favorite Technical Analysis Indicators

There are myriad approaches to technical analysis, including theories such as Elliott Wave, Pivot Analysis, and Candlestick Charting—complex theories that are beyond the scope of our mission here. Suffice it to say, they are all strategies of predicting price movements, but the study of them is best left to more advanced traders.

Instead, I want to introduce you to some of the most widely-used technical indicators that will help you get started in learning about technical analysis.

While technical analysts use many tools, price charts are key, as they will help in searching for patterns of upward and downward trends, as well as overall market and industry sentiment.

Traders use indicators in three ways: To alert, to confirm and to predict price movements. Learning to read them is more of an art than a science. And while there are many high-priced, mechanical trading systems out there that purport to eliminate the human element from trading, most experienced, professional traders still rely on the skills they have honed over decades of trading in good, bad and ugly markets.

Therefore, I am simply going to give you a brief picture of a few of the most used indicators, accompanied by their common interpretation. One thing I’ve found—just as in fundamental analysis—one indicator alone does not an analysis make. With those caveats in mind, following are a few of the basic technical indicators commonly used in technical analysis:

Trendlines are used by traders to determine the direction of the market movement. Prices move in three directions: up, down, and sideways. By looking at historical prices—via plotting a trendline—you can decipher a pattern. Traders see uptrends when their trendline connects a series of successively higher highs and lows, and downtrends when the line connects a series of successively lower highs and lows.

Trendlines connecting the highs can also be drawn to indicate the top of the established trend or channel and indicate the major zones of resistance. Resistance is the price level at which selling is so strong that it prevents the price from rising further. As the price gets closer to resistance, sellers become more inclined to sell and buyers less inclined to buy. When it reaches resistance, the theory is that supply will overshadow demand and prevent the price from breaking through resistance.

Likewise, trendlines connecting the lows create a line of support, the price level at which demand is so strong that it prevents any further price declines. As the shares become cheaper, buyers are more willing to buy, and sellers become less inclined to sell. When the price reaches support, demand overshadows supply and prevents the price from falling below support.

Moving Average (M/A) is an average of the price of a stock over a stated period. That period can be basically whatever you want it to be, but many technical analysts use the shorter periods like 20- and 40-day averages, and fundamental analysts like me prefer longer periods, such as 200-day averages. There are four different types of moving averages: Simple (also referred to as Arithmetic), Exponential, Smoothed and Linear-Weighted. The most common and simple interpretation is this: When the price rises above its moving average, a buy signal is indicated, and when the price falls below its moving average, a sell signal is indicated. (See Figure 19)

Accumulation/Distribution (A/D) is determined by the changes in price and volume. It is used to confirm price changes by measuring the respective volume of sales. When the indicator increases, it means accumulation (buying) of a particular security is related to an upward trend of prices, and vice-versa. Divergences between the Accumulation/Distribution indicator and the price of the security are an indication of a price change. If the indicator is increasing and the price of the stock is falling, traders expect that a turnaround in the price will take place.

You may have heard the term Oscillator, which is an indicator that fluctuates above and below a centerline or between set levels as its value changes over time. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period. There are several types of oscillators:

Moving Average Convergence/Divergence (MACD) is a centered oscillator that fluctuates above and below zero and indicates the correlation between two moving averages—the difference between a 26-period and 12-period Exponential Moving Average (EMA). The further they move away (diverge) from each other, the higher the reading. Traders use these signals to buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. The MACD has been most effective in wide-swinging trading markets. (See Figure 20)

Relative Strength Index (RSI) is an oscillator that ranges between 0 and 100. It compares the average price change of the advancing periods with the average change of the declining periods. A reading greater than 70 would be considered overbought and a reading below 30 would be considered oversold. The 14-day, 9-day and 25-day RSI’s are widely used. (See Figure 21)

The Stochastic Oscillator is a momentum indicator that relates the current closing price to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure). Typically, a reading above 80 indicates an overbought condition and a reading below 20 indicates oversold.

This is just a brief overview of a handful of technical indicators used by traders. Believe me, there are scores more! I hope these will serve to whet your appetite, and if nothing else, you may find you can maximize your portfolio performance by employing just a few of them to help you determine optimal buying and selling ranges.

Over time, as you become more experienced, you will, undoubtedly, select your favorite ratios—both fundamental and technical—that work best for your investing style and strategy. Just remember—one indicator doesn’t tell the complete story, so make sure you continue doing your homework, looking at the complete picture, before you make an investment.

Protecting Your Portfolio

From the market low of 6,433.27 in 2009 (at the end of the recession) through 2021, the markets had a fantastic ride. The Dow Jones Industrial Average had gained more than 437%—up some 29,000 points since then. As you can see from the following chart, the ride has not been without periods of volatility (including the sweeping highs and lows of 2018 and the pandemic-induced 2020 correction).

After the initial rebound following the recession, the market nosed down in the last half of 2011, again in 2015 and 2016, leaving investors wondering if the bull market was coming to an end. Of course, it wasn’t, and the markets have continued to set new highs since—albeit with some significant volatility, especially in 2020.


I’m no soothsayer, but here at Cabot, we always pay attention to the markets. We can’t predict tomorrow, our fellow analysts are really good at interpreting market signals, and they saw the environment at the end of 2018 and early 2019 as a time to remain defensive in your portfolios.

As well, the expert contributors to my newsletters are investment pros with decades of profiting during wild market swings. In every issue, I include a sampling of their market views, including this one from Jon Markman, editor of Tactical Options, from one of my recent issues.

“Time to Trim Riskier Options. A combination of fast-rising bond yields and continuing trade fears has stirred investors to cut riskier stocks from their portfolios, who are worrying that the huge profit margins among many of these companies will fall.”

Jon was talking about rebalancing portfolios, a very important strategy to combat volatility.

We all love it when the markets go up, up, up, but inevitably, they also go down. And when that happens, many investors gather at one of two extremes: 1) Cash in everything; or 2) Do nothing. And both of those are usually the exact wrong moves during downturns.

Most investors who sell out of their portfolio will miss out on the up days and will get back in way too late to take maximum advantage of the market turn (which always comes!). And those who “stay the course” during the down days will needlessly suffer the emotional stress of what can be a very wild ride.

After my years in the investing world, I’ve decided that it’s just human nature—we hate to plan. And that avoidance makes us love to buy stocks and hate to sell them. When the market is in an upward trend, we often become so excited that we begin to buy stocks, willy-nilly, with no thought to a balanced portfolio. And when the market drops, we become frozen, not knowing whether we should continue to buy more, to take advantage of the lower prices or just bail out and sell everything.

The result is usually this: When under pressure, investors will generally make exactly the wrong decision!

So, it just makes sense to realize that what goes up must come down, and while my newsletters are all about finding fabulous—and profitable—recommendations for our readers, we would be remiss if we didn’t also offer ideas to protect your portfolios, in times of pullbacks or excessive volatility.

Bottom line: You don’t have to make the same mistakes mentioned above. Instead, with a little thought and planning, you can create an all-weather portfolio.

In 2018, investors saw some huge market swings. And in such volatile markets, it’s more important than ever that investors not only consider investing for gains, but also invest in protecting their existing portfolios.

Planning is no guarantee that you won’t ever lose money, because there are no guarantees in the stock market. But there are steps you can take to minimize your losses and also maximize your profits.

Step #1: Setting Price Targets

Set a price target the day you purchase your stocks. Your target should be based on the P/E of your stock, multiplied out by expected future earnings. I recommend that you at least think about what price your stock can achieve within 18-24 months. And that should at least be a 30%-50% gain. If it doesn’t have that potential, keep looking.

Going forward, when the stock hits your target, reevaluate it and determine if it has the ability to continue double-digit price gains or if you would gain more by cashing in now and using those funds to purchase a different stock with more potential. Many of the contributors to my newsletters make this decision easy for you, by providing targets for their recommendations, and often cash in just a portion of the holding to take some profits and let the remaining half ride toward a new target.

When I speak at Money Shows across the country, I am frequently asked about how I set my target prices. If it’s not the most common question I get, it’s certainly up there in the top five.

First of all, I can’t emphasize too strongly that it is essential to set a target at the time you buy a stock. If you don’t, then how the heck do you know when your stock has appreciated enough to sell it?

I always ask my workshop attendees how many set price targets on their stocks, and I never see more than two or three hands go up. That’s a shame, but I think it’s because folks just don’t know how to set targets, rather than them not wanting to. So, let me tell you how I do it. But keep in mind that, like all investing, it is not black and white. It’s a combination of science, art and experience. Most of all, it’s easy! No complicated math here—just a few assumptions.

Let’s walk through an example step-by-step. For this example’s sake, we’ll set your holding period at three years, max.

You’ve done your research and have selected the stock you want to buy—the Widget Co. The price of the stock is $10 per share, the company made $2 per share in the last four quarters, so its price-earnings ratio (P/E) is 10 divided by 2, or 5.

The company’s earnings have been increasing at a 20% annual growth rate for the past five years. With a little calculation, you can project out over the next three years, and if that same growth rate continues, the company’s earnings will look like this:

Year 1: 2.00 x a 20% increase = $2.40 per share

Year 2: 2.40 x a 20% increase = $2.88 per share

Year 3: 2.88 x a 20% increase = $3.46 per share

So, at year 3, your company is earning $3.46 per share. Now, if its P/E ratio remains the same (5), the projected price of the shares can be found by mere substitution into the P/E equation, and solving for P:

P divided by E (3.46) = 5. So, a little algebra later, P = $17.30. Wow—that’s a 73% gain! Most investors would be tickled pink by that.

However, should you believe that the company’s earnings may grow even faster than 20% annually, due to some event such as a tremendous new product, gains in market share, new markets, etc., or that one of those occurrences might drive the company’s price greater than $17.30 (even without the requisite earnings growth), you would be even happier.

To be on the safe side, it’s also smart to calculate what would happen should the Widget Co. not grow as quickly over the next three years as it had for the past three.

Easy as 1-2-3, right? OK, it’s time to practice this exercise. I’ve shown you each step of the process in the following worksheet (Figure 23), so you can see exactly where I got the data and how I’ve come up with these projections.

Figure 23: Price Targets Worksheet


Now, you can substitute those results into the following equations to obtain the projected price of the company’s stock in three years:

Scenario 1

Expected Price = Current P/E x Year 3 EPS projection $_17.30____

Scenario 2

Expected Price = Current P/E x Year 3 EPS projection $_19.55____

Scenario 3

Expected Price = Current P/E x Year 3 EPS projection $_15.60____

And there you have it!

So, now you can use a similar methodology on all of your stocks. But remember, the targets are a result of the projections you estimate, and if you alter those estimates—even a little—you will change your results. After all, I did say investing was also an art!

I hope you’ll have some fun with this and also share it with your fellow investors. I think setting a target is one of the most important ingredients for success as an investor. The process will make you very familiar with your holdings, teach you to be disciplined, and help you determine when to sell your stocks.

Step #2: Setting Stop-Losses

Set a stop-loss limit the day you purchase your stocks. For aggressive investors, the stop-loss could be 30% or more. For more conservative investors, you might be happier with a stop-loss of 10%. The actual percentage is not as important as being disciplined in exercising the stop-losses. Sure, no one likes to lose money, but a stock riding momentum down can clean you out in no time, so it’s best to take your losses. If the stock bounces back, you can always buy back into it. Many of our advisors provide stop losses for you, but it’s always a good idea to consider your own investing strategies when setting your stop-losses.

A stop-loss is simply an order—either formally placed with your broker or a ‘mental’ reminder—to sell your stock when it reaches a certain price threshold.

It’s painless to place when you buy your stock through your broker’s website, or, if you prefer, you can just set an alert on whatever portfolio tracking website you use, so that if the stock reaches that price, you can make an instant decision on whether to cut it loose or keep it. That’s what I call a ‘mental’ stop.

I’m a big believer in stop-losses for one simple reason: If your stock doesn’t go the way you think it will (up, in most cases!)—for whatever reason—this little tool will limit your potential losses.

Sure, it’s true that if you’re diligent in the use of stop-loss orders, you can be stopped out of what could turn out to be a very good stock. But you know what? You can always get back in, and more importantly, stop-losses can also save you money—as well as lots of sleepless nights—if market or industry forces cause your stock to take a nosedive.

The actual percentage you set is up to you, according to your personal risk tolerance. Very conservative investors may want to place their stops at a level that is 10%-15% below their purchase prices. Moderate risk takers would probably feel most comfortable setting stop-losses at 15%-25% below their buy prices. And aggressive investors who have a longer time frame and the ability not to panic at short-term losses, may desire to set stop-losses at 25%-35% of their purchase prices. To easily determine your risk tolerance, use my Investor Profile Survey available at

Here’s how it works: If you buy a stock at $3.00, and use a 20% stop, you would be stopped out at $2.40 (20% or $0.60 less, in this case, than you paid for it).

In normal times, I often find that a 20% stop is sufficient for most stocks; up to 35% if the company operates in a fairly volatile industry.

But in a bull market, you may want to use trailing stops—stop-losses that continue to move up as your stock rises—rather than stops based on the absolute value of your purchase price. A trailing stop is more flexible than an absolute stop, as it continues to allow you to protect your portfolio in case the price of your stock declines. But as the price rises, the trailing stop is based on the new price, helping you to lock in your gains and reduce your overall risk.

It works this way, using the above scenario: You buy a stock at $3.00 and place a 20% trailing stop. If the stock falls to $2.40, you are stopped out. But let’s say it rises to $3.50. Your new stop would be 20% of $3.50, or $0.70. So, if the shares then fall to $2.80 ($3.50-$0.70), your stop will kick in. But now, you see that instead of losing the $0.60 that you would have with the absolute stop, you only lose $0.20 (your original investment of $3.00 minus the stop price of $2.80).

There are plenty of advisors who don’t believe in stops. But I believe wise investors should use all the credible tools at their disposal. And I have found that stop-losses have worked very well for my subscribers and are a great tool for stemming potential losses.

With technology and biotech stocks—which tend to be more volatile than many non-tech companies—it’s a good idea to set your stop-losses a little wider. For example, with those kinds of stocks, I would usually suggest a 30% trailing stop. That way, if the market just causes the shares to slip a bit one day, it allows you to ride out a temporary drop, without inadvertently cashing out of a company with excellent long-term potential.

Step #3: Diversifying

Diversify your portfolio to reduce your overall portfolio risk, as well as volatility. That means creating a portfolio with non-correlating assets, which, theoretically, results in assets that react differently to market catalysts. When market action causes some of your assets to decline in value, others should rise, effectively providing protection against your entire portfolio declining at the same time.

Consequently, you should own small-, mid- and large-cap stocks; companies in different sectors; and value and growth stocks.

And while you may think you are properly diversified because you have 10 different technology stocks that operate in totally different segments, remember that they are all still technology stocks—companies that tend to do very well when the economy is steaming ahead, and folks have plenty of money to upgrade, but don’t fare as well in a stumbling economy.

You should also have exposure to international stocks, either through owning multinational companies, mutual funds or via exchange-traded funds. See sections 5 and 7. And don’t forget about fixed income investments. In rising rate cycles bonds can be attractive. As well, some investors may want to add currencies, commodities and real estate to their portfolios, as hedges against stock market volatility.

And if you choose to subscribe to my newsletters, with 40 or more recommendations coming your way each month in Wall Street’s Best Digest, you won’t have any problem choosing stocks from almost every industry to help you diversify your holdings.

Of course, the actual composition of your portfolio will depend on your personal investment goals, your age, and your risk profile, so make sure you know the kind of investor you are so that your portfolio will match up to your goals.

Step #4: Dividends

Put some dividend-paying stocks in your portfolio. See section 3. They are a great hedge against inflation and provide terrific portfolio gains in down market cycles. Years ago, during the tech boom, I began adding dividend stocks, such as regional banks and Real Estate Investment Trusts to my portfolio. The payoff was great! When the tech stocks hit the dust and the market took a downturn, I was still earning some great returns on my dividend stocks. Many investors neglect these companies as they think they are too boring. But, what’s boring about making money?

With so much cash available to companies over the past few years, stocks from every genre—including technology and emerging markets—will often pay a dividend. And that just adds to your profits.

Step #5: Rebalancing

Rebalance and reposition your portfolio. This is a step that so many investors ignore—to their peril. During the tech boom of the early 2000s, technology companies were chased to the stratosphere by investors who had no idea what they were buying; they just saw triple-digit overnight gains, and jumped right in. But the signs of the bust were everywhere. I saw price-equity ratios as high as 1,500.

Tellingly, Warren Buffett stayed out of the fray, cautioning investors not to buy “what they couldn’t explain to their grandmothers”. I interviewed a founder of the Real Estate Investment Trust industry during those heady days and asked him if he was buying any properties in the Silicon Valley area. He laughed, and said, “No, I wouldn’t touch them with a 10-foot pole. Companies in the high-tech corridor have no cash; they want to pay rent with their stock options!”

So, pay attention to the sectors in your portfolio, too, and load up on steadier stocks in more mundane industries during periods of volatility, while trimming your positions in riskier assets. Taking a flyer on speculative stocks is often a lot of fun, but it’s best to keep those to a small portion of your holdings—especially during erratic markets.

Step #6: Options

Consider buying put options as insurance in case any unrealized gains you have don’t turn into losses. As I mentioned in section 10, these options provide protection by betting that the underlying stock will decline. They give you the right (not the obligation) to sell the stock at a certain price at a specific future time. Most investors don’t use options, because they can be expensive and complex and have a reputation as risky. As well, employing options requires a more-active style of portfolio management that many investors do not want to undertake. But simple options can also help protect your portfolio on the downside and also improve your returns in a bull market.

There are additional methods for portfolio protection, including trading the VIX, a volatility index, which trades at a low price in steady markets and increases in value in volatile times. And leveraged ETFs have also found a spot in portfolios in which investors are seeking protection against downside risk. However, both of these protections are best left for more experienced, sophisticated investors who are willing to be active managers of their portfolios.

Wrapping it All Up

For most investors, following the above six steps will help you create a portfolio that will thrive through normal up-and-down market cycles. While an undiversified portfolio can give you tremendous gains—IF you are lucky enough to choose only “home-run” stocks—the plain truth is investors, individual or professional, don’t have a crystal ball. And stocking your portfolio with just one type of company or sector—no matter how promising—is a recipe for failure, long-term.

Do yourself a favor and take advantage of the tools that are available. With today’s technology, it’s never been easier to take command of your investments.

Stock Screeners and Other Resources

You’ve received a lot of information on various investing vehicles and styles, ideas on how to create your best investing strategy—driven by your personal risk profile, a primer on how to analyze stocks, suggestions on protecting your portfolio, and how to maximize your retirement savings.

I’m going to wrap up by answering these two important questions:

  1. How do you find investing ideas?
  2. What are the best resources for researching those ideas?

Pay attention and listen to the chatter around you…

Peter Lynch ranks as one of the best investment managers of all time. He took over the Fidelity Magellan mutual fund in 1977. When he retired in 1990, the fund had a 29% average annual return, beating the S&P 500 index in 11 out of 13 years and building the fund’s assets from $20 million to $14 billion.

He often said, “Our greatest stock research tools are our eyes, ears and common sense.” Lynch found many of his investing ideas by walking through stores, watching TV, listening to the radio, driving down the street, reading the newspaper, and talking with friends. In other words, he paid attention to what people were talking about and what they were buying.

If you love a particular product, investigate it. Is it a publicly-traded company? After all, who among us didn’t love Home Deport the minute we walked through its well-lit aisles with helpful salespeople? Some of us were smart enough to investigate the company and buy the stock.

This is a great way to gather ideas, but they are just ideas and must be investigated further to determine if they are valid investment choices and if they fit into your investing strategy.

Use Stock Screeners…

A stock screener allows you to narrow down the list of publicly-traded companies to a manageable number, by choosing certain ratios or parameters that fit your investing style or strategy.

For instance, you may be interested only in companies that pay dividends. That’s doable. Or you might be looking for growth companies, so you would want to get a list of companies whose sales and earnings are increasing. Or you might ask the screener for companies that are value-oriented, trading at low price-to-earnings (P/E) ratios. Or you may only be interested in stocks trading for less than $10 a share. The combinations are almost endless!

The screener runs your choices against its particular database of companies and returns a list of stocks that fit your parameters. With stock screeners, you can get as complicated as you want, and you can spend a lot of money on them. But if investing is your hobby, not your business, there are several very free screeners that are still quite good.

My number 1, go-to screener is Finviz,

The site has more than 50 different criteria you can choose to analyze your stock ideas. It includes both fundamental and technical parameters, as well as descriptive characteristics. You can also see charts and quotes.


Zacks has a rating system and is also very robust, but I think it is more difficult to use if you are asking for a lot of parameters, and screening for ratings requires a subscription. However, it offers some items that Finviz doesn’t, such as earnings surprises and analyst views on stocks. You can also save your screens and export results to a spreadsheet, which you can’t do with Finviz’s free screener.

Yahoo Finance,

Yahoo’s screener is a good one for folks new to investing. It’s fairly simple to use, and allows you to set a number of parameters.


This screener is also simple, albeit less robust than some, but it’s a good way to get your feet wet.

I like to start with a broad range of parameters, and then narrow them down manually. However, if you are just starting out in your investing life, I recommend you start small. Just play with the screeners, see what you come up with, and then investigate them further on the following websites.


There are scads of financial websites out there, many with some fantastic data on hundreds, if not thousands, of companies. The investment brokerage with whom you place your trades, undoubtedly, has a website—and often a stock screener—that will help you in your research. But over my years of investing, I’ve collected a few favorites. Here is my list, and why I like them:

Big Charts,

This is a great website for finding charts—current and historical.

Yahoo Finance,

Not as robust as it used to be, Yahoo Finance is still my number one choice for getting quick data on a company. It gives you trading history, current stats like insider and institutional holdings, 52-week highs and lows, company profile, recent analyst ranking changes, current news about the company, and a whole lot more.


This site gives you more than 50 ratios for the company of interest, along with comparison ratios for its sector, industry and the S&P 500.


The Nasdaq site offers information on frequency of dividend payments, analyst research, charts, financial reports, stock comparison tools, and much more.

Market Watch,

This site has a lot of the same information that the others do, but I particularly like it for its sector and economic statistics. Here, you can easily see all the federal reports, estimates, and actual numbers that the government reports each week.

Now, for those of you who are interested in the technical side of investing analysis, these two sites, and will give you lots of charts and technical indicators that can help you decide if the time is right to buy or sell.

Analyst Reports

I love to read the reports issued by Wall Street analysts. There is an amazing amount of useful information to be had, including:

  • Current rankings of stocks—can give you great ideas to investigate
  • Rating changes or initiations—if you hold the stock, you’ll find out the reasons for upgrades or downgrades
  • Number of analysts following a stock and their rankings—stay away from companies with too few or too many analysts following them (too volatile)
  • Guidance changes—again, a good indicator of good or bad events
  • Management changes or additions—could be good or bad
  • Industry or sector information—analysts write fabulous industry reports, so if you happen to be a customer of a brokerage firm with a research department, I recommend that you definitely take advantage of reviewing the industry/sector reports they issue. They usually go into great detail, and will give you a fabulous overview of any number of industries.

But what I don’t do is consider that the analyst report is the Holy Grail of stock analysis. Here’s why:

Analysts are Predisposed to Highly Recommend the Companies that bring Business to their Firms

The 1929 stock market crash brought to light the blatant and unregulated insider trading that permeated Wall Street. One of the results of that catastrophe was the Glass-Steagall Act of 1933, which created the Chinese Wall—the “supposed” separation between a brokerage company’s research and its investment banking divisions.

Until then, brokerage firms were in their heyday, underwriting and issuing stock for companies, and their research departments hyped it to their retail customers, always with glowing recommendations—whether or not they merited it. You see, the goal was to sell the stock and make their investment clients and themselves—not their retail customers—rich.

The Glass-Steagall Act and the Chinese Wall were supposed to end that wholesale bias of research “ratings”, preventing the investment bankers from interacting with the research analysts. But in reality, that never happened.

In most brokerage firms, the majority of the research reports are still written on behalf of the firm’s investment banking clients. And even in the boutique brokerage firm for which I plied my trade in the ‘90s, it was routine for a research analyst to be “not-so-gently-persuaded” to write up a positive report on one of the firm’s investment banking clients.

Because the system makes it difficult for complete objectivity, investors need to be ultra-vigilant when it comes to digesting analyst reports.

Analyst Recommendations aren’t all that Accurate

According to S&P Global Market Intelligence, two-thirds of the companies in the S&P 500 index tend to post earnings per share that are higher than the consensus analyst estimate.

A study a few years ago by found that more than 70% of the analysts’ “buy” ratings were accurate. But when it came to “hold” ratings, only 20% were correct. And forget about “sell” ratings! In analyst parlance, that term hardly ever appears. After all, they can’t put a “sell” rating on the shares of their investment banking clients, can they? That would definitely lead to a boycott of that firm.

Consequently, most companies whose shares the analysts don’t like are given “hold” ratings and those “sell” ratings are generally confined to companies that don’t do business with the brokerage firm. In NerdWallet’s report, the number of sells was so small (33 out of 883), they were statistically irrelevant.

Does Outperform Mean Buy?

One of the biggest complaints I hear from investors is they can’t understand the analysts’ ratings. That’s because their terminology is often obscure. Just look at this chart FINRA put together (Figure 24) in an attempt to explain the ratings systems of three brokerage firms:

Figure 24: Rating Systems of Different Brokerages

Firm AFirm BFirm C
BuyStrong BuyRecommended List
OutperformBuyTrading Buy
NeutralHoldMarket Outperformer
UnderperformSellMarket Perform
AvoidMarket UnderperformerMarket Underperformer

Clear as mud, right? The only thing that’s clear is that it’s almost impossible for an investor to interpret these ratings to actually determine if a stock is a buy, hold or sell.

Now, I’m not beating down all analysts. The fact is, as NerdWallet showed, they’re right 51% of the time. And sometimes they do go against the herd.

My point is this: Don’t take analyst ratings (if you can figure them out) to heart. There are just too many conflicts inherent in the system. Instead, utilize them for the unbiased information they contain.

Investment Newsletters

Now, I admit to being a wee bit biased as I’ve been in the investment newsletter business for more than three decades. Consequently, I’ve seen a lot of good newsletters and many more bad ones. But you can bet that those who have survived—and prospered—for many years have excellent track records and deliver for their subscribers.