Summary for stock market investment success by Darren Winters

The stock market is just a tool - in the wrong hands (someone who is blindly taking share tips, holding on to losing trades, cutting their profits short, getting over confident and using too much leverage) it can spell financial disaster. However, in the right hands (someone who has some basic investment education) it is a powerful tool that can be used to create vast wealth, a good second income and accelerate you towards your financial goals.

Here we have talked about how to avoid the simple mistakes that new (and many more experienced) investors tend to repeat over and over again. Just by mastering a few simple things you can avoid these errors and put yourself firmly on the path to greater investment success and wealth. We haven’t even talked about the many proactive things that can be done to boost your success but I feel that’s the topic for another issue of the newsletter – maybe ‘The 5 most powerful steps to maximise your stock market success” …

Regards Darren Winters

Common investment mistake No 5 By Darren Winters

Using too much leverage - (i.e. using more money than you actually have!)

There are many different ways to get leverage in investing. The obvious and fairly risky way is to borrow money from a bank, friend or anyone else who will lend it to you and then trade with it – the plan being to make enough profit to pay back the loan and have money over to continue investing. I have heard a few stories were this has worked tremendously well, but I have heard far more stories where this approach has ended in disaster! Other ways to get leverage include CFD’s, Options, using margin with a spread betting or brokerage account. All of these tools are extremely useful and valuable if used in a sensible way – however if used to stretch your money to it’s limits, in the hands of an inexperienced investor, leverage plus one or two losing trades, can very quickly eat away your money.

How to Avoid: Using too much leverage -

When you start investing with real money start with just part (not all) of your investment capital – this way if you make any mistakes, the lesson won’t have cost as much! Once you have been making good profits on a fairly consistent basis, you may choose to increase the amount of money you are investing. Having said all of that, I have just received a letter from one of my training course graduates who applied the investment strategies that I teach WITH leverage and turned £1000 into over £100,000 in less than 3 weeks! I guess if you are prepared to take a higher level of risk, the rewards can be very big.

Regards Darren Winters

Common investment mistake No 4 By Darren Winters

Getting over-confident after just one or a few early successes

Maybe it hasn’t happened to you (yet), but I’m sure a lot of you can relate to this situation:
You’ve just started investing, you’ve done a couple of great trades, and you start to have a conversation with yourself a bit like the following: “I sure am a hot investor, this stuff is easy, I’m a natural, I don’t know why I didn’t quit work years ago, at this rate I’ll be a Millionaire in just a few months or even sooner with a bit of leverage see mistake 5), just call me the stock market master, or supreme ruler of kingdom of wealth” – you get the idea.

How To Avoid : Getting over confident after just one or a few early successes –

You need to know the following. The stock market is just a game of probability. Even if you are the best investor in the World (and I know him personally so I can back this up!) you won’t win every time you do a trade. But if the odds are in your favour ultimately the more times you trade, the more money you will make. Unfortunately the reverse is also true, if the odds are against you (i.e. you don’t really know what you are doing) then the more you trade, ultimately the more money you with lose. Many people get a lucky streak when they first start out but don’t really have a good investment strategy, so they then go on to lose it all. How do we avoid this happening? Just being aware that you might have had a lucky few trades is a good start. The real answer is to make sure that you have some kind of investment strategy that you are following (a set of rules that you use to pick your shares that you can repeat). Once you have a strategy, you need to test how good it is, by properly paper trading it. Now what do I mean by paper trading? Trading with pretend money as though you were investing for real. How do you do it? Simple – choose the shares you would want to buy based on your strategy and then instead of actually buying them with real money, write on a piece of paper the date, price and amount of shares you would have bought. Then follow what happens to your pretend share trades – once the share reaches a place where you have decided (based on your strategy) you would have sold it, write on the paper the date and the price you sold at. You can then record your ‘paper’ profit or lose for that trade. Ideally you would want to do this for about 30 trades to give you a good idea as to whether your investment strategy is likely to make you a fortune or break the bank. Here is an example of what your paper trading sheet could look like the table below:



Regards Darren Winters

Common investment mistake No 2 & 3 By Darren Winters

LETTING YOUR LOSES RUN, (AND CUTTING YOUR PROFITS SHORT)

Lets tackle those run away loses first. Come on, own up, how many of you have bought shares that have started to drop and you have just held on to them as they dropped further and further. When I first started out, I initially fell into the same trap –

you know what I’m talking about - you have just brought the shares and maybe after an initial increase they start to drop. What do you say to yourself?: “Well the share has only dropped a bit, it’s a great share and I bought it at a good price, it’s got to be about to go up” - 2 months later and a further 20% drop in the share price: “If its gone down this far, it can’t go much further, it really is a great price now, it’s got to be ready to turn” - 6 months later and another 40% drop in share price: “Well it’s too cheap to be worth selling now, and my stock broker told me that it is for the long term any way – maybe I should buy some more?” 10 months later and the company is declared bankrupt ... maybe!

How to Avoid: Letting your loses run, and cutting your profits short

There is no reason that you should ever find yourself in this situation, if you just follow this one basic rule: As soon as you buy a share always place a sell stop order. For those of you who are new investors, what does this mean? A sell stop is simply an automatic order that you give to your stock broker (a real person by telephone or through the internet online) to sell your shares if they ever drop below a certain level that you set. Now you might be thinking to yourself “Well surely that means that if my shares are sold only when they drop below a certain level that guarantees that I lose money?” Well YES and NO. If your shares price drops far enough below the price you bought it at, you will lose money, but only a limited amount. However if your share goes up in price (after doing your fundamental checks / basic chart reading mentioned above, this should be the more likely scenario) your initial sell stop level isn’t reached. The trick is that once you have started to make a profit on the trade, you need to move your sell stop up to a higher price – thereby locking in your profit. Ideally you need a precise method of knowing how much and when to move the sell stop up. Two day graduates, you have already learnt how to use a trail sell stop on the most recent share price bottom.

Using a sell stop and moving it up as the shares price goes higher (called a trailing sell stop) takes care of common investing mistake number three – Cutting your profits short OR Selling a share too soon. Why do we do it – take our profits too soon? For the same reason that most stock market mistakes are made – human emotions – mainly fear or greed. A typical reaction once we have made a small profit is to want to sell the share out of a fear that we may lose it. Using a trailing sell stop makes sure that you hold on to the share for its full move up as your share will only be sold if it makes a significant drop down to you current sell stop.

Darren Winters

Common investment mistake No 1. By Darren Winters

ACTING ON ADVICE / A TIP FROM SOMEONE WITHOUT FIRST CHECKING IT OUT YOURSELF

Share tips from friends, stock brokers or in magazines, can be extremely valuable, but at the same time you need to have the knowledge to be able to evaluate how good (or bad!) the tip is for yourself. Acting on a hot tip without doing your own research can be very dangerous (not to mention costly!) My general rule of thumb is that the hotter the tip the more likely you are to lose money investing in it! If I had to guess I would say that about 9 out of 10 of the hot tips that people have given me have done exactly the opposite to what I was told they should do. (Tips can often be a very valuable resource for a contrarian trading strategy – but that’s another topic)I’m sure most of you have your own stories (or have at least heard someone elses) – “This share is a sure thing” (alarm bells should start ringing!), “Not many people know this, but this company is about to _____” (any of the following could fill in the blank – “get the go ahead for a new product”, “announce great profit results”, “be taken over by XYZ company”, plus any other great story you’ve heard!) Occasionally there may be some truth in the story, but you need to do at least some quick and simple research on the company that has been tipped before investing any of your money.

How to Avoid: Acting on advice / a tip from someone without first checking it out yourself

Two things that you would be wise to have a quick look at (this is just a refresher for those of you who have been on my 2 day training course): The company’s fundamentals: By fundamentals I meant the company’s financial facts and figures. At the very minimum, check that the company’s yearly profits and sales growth figures are reasonably healthy (i.e. positive and increasing). To get more advanced look for the following: yearly profits growth 20%+, yearly sales growth 15%+, and net profit margin 10%+. An easy way to do this for a UK company is by going to http://www.comdirect.co.uk/ and for an American company go to http://www.quicken.com/ and typing in the company name. The other thing that I would consider essential before purchasing any shares is to look at: The company’s Share chart. If you see anything that looks a bit similar to the five shown below on this page, that is generally a good sign that the share price has more chance of going up than down (you can certainly get more advanced than this but it is good to get familiar with the basics first). The charts are in order of their reliability, with the last chart pattern the most reliable
– after you see the section marked on the chart, the share price is more likely to continue up, than go down.Now turn the page upside down, if you see a chart that looks like any of these, the share price is now more likely to go down.

http://www.darrenwinters.biz/images/doublebottom.jpg

If all you do is check that the company you are considering has strong profits and sales growth and a half decent looking chart, you are already ahead of the vast majority of uneducated ‘investors’.

Darren Winters

Introduction to the 5 most common investment mistakes by Darren Winters

The stock market has created more Millionaires than any other market, yet many new investors have a tough time getting their share of the riches. We can go even further to say that the majority of uneducated investors will initially start by losing money. Now may this sound like a bit of a gloomy story but here’s the good news:

There are only a few fundamental mistakes that are common to most new investors, and once you know how to avoid these, the door way to wealth swings wide open. If you have already attended my 2 day training course you may read this article and then say to yourself - “well I have already learnt all of that!” I would reply: “Good – the more times I repeat the important basics the more chance you have of applying them in practice and making lots of money!” Our natural psychology actually sets us up to lose in the stock market, unless we take control and get educated in the ‘golden rules’ for investment success. In virtually any area of life there are certain ‘rules for success’ that if followed by anyone, will ensure that they get the best results possible. For example: let’s say you ate a great meal at a restaurant, and decided that you wanted to be able to cook the meal yourself. If you were given the exact recipe, and shown precisely how to cook it, you are also likely to be able to produce a great tasting meal. With investing, if you want to give yourself a kick start on your way to wealth it is useful to begin with the recipe for stock market success – the first part of this recipe is knowing the 5 most common investing mistakes that people make and how to avoid them.

Darren Winters

What is GDP? by Darren Winters

Here Darren Winters provides a jargon busting piece of education around that term that we here all to often but which few bother to explain "GDP"

When you have been investing for a while you soon slip into using the jargon. One such term we often use is GDP or Gross Domestic Product. Here we give a description of this well used indicator and explain the relevance to investors.

Simply put this is the measure of a country’s economic health. In more technical terms it represents an estimate of the total monetary value of all goods and services produced over a specific time period. This includes consumption, government purchases, investments, and the trade balance (exports minus imports). It is used to show the pace a country’s economy is growing or shrinking at. It is considered as the broadest indicator of economic output and growth.

GDP is normally measured on an annual basis although it is also reported on a quarterly basis. Results are published based on three levels of estimate, each becoming more ‘accurate’. For example, in the UK, the first quarter’s results (January, February, March) are initially reported around 4 weeks after the end of the period. This is referred to the 1st estimate. After a total of 8 weeks after the period end, a 2nd estimate is made based on more refined data. This is followed up with a 3rd estimate, which is released after 12 weeks. This report is classed as the final and is referred to as the UK’s Full National Accounts.

In the US they also have three different releases, again each becoming more refined. They are released on the last day of the quarter (Advanced report), followed up by the ‘preliminary report’ a month later with the ‘final report’ a further month later.

In both cases we are more interested in the Real GDP, which is adjusted for inflation.
Probably as an investor you might be asking, ‘why do I need to know about GDP?’ The GDP figures have a relatively high importance to the markets. If a country’s economy is growing at too slow a rate or in fact shrinking, it is not a good environment for the companies operating within it. Thus larger institutional funds may move their money into other markets or countries.
When individual quarterly results are released they can have quite an affect on the markets, even if it is only temporary. As with most economic forecasts the market does not like surprises. Even if you are purely a technical trader it is worth noting when the releases are being made due to the increased volatility during the day.

When countries like China report, they can also have a large impact on a number of sectors as we have witnessed more recently. When there were rumours of a slow down in the GDP, it was immediately suggested that there would be less demand for raw materials and the mining sector took quite a hit.

The table below shows the real GDP for 2004 and forecast for 2005. What is immediately obvious is that all of the forecasts are showing a slowdown in growth.


It is generally considered by economists that a GDP of around 2.5 to 3% is sustainable over the long run. However for developing countries such as China, India, Russia and the African continent, we would expect to see these larger rates of growth.

There are some problems with the GDP measurement, that obviously being it is a lagging indicator as it measures something that has already happened. Plus whilst the headline figure may be good, you need to look at the constituents such as inventories. Increasing inventories may suggest that growth is actually slowing as companies are building stock quicker than they are selling it. GDP forecasts are important in the short term, however as with any news, these figures are often quickly forgotten.

Darren Winters