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10: The Essential Rules for Beating the Market
11/03/2008 11:28 am EST
There are sure to be a lot of ‘what-ifs’ and recriminations once the current market and economic turmoil level out. Investors—many who have seen more than 50% of their 401(k) savings fly out the window—will be asking their financial advisors some tough questions.
And who can blame them? After years of working and scrimping and following one ‘surefire’ investment plan after another, trying to latch onto the one that will assure a golden retirement, many investors are left absolutely stunned at the carnage of the last few months. Once the calm after the storm arrives, they will be wondering how they can restore their savings, and for that, they will need a solid plan.
Don’t worry—I’m sure that—right now—book publishers are being inundated with a host of new manuscripts that will be ready to fly off the shelves as soon as it appears the market has bottomed.
But I caution you to be choosy. This market crisis is the perfect time to reassess your financial goals and strategies. And to realize a couple of market truths: 1) There is no certain system guaranteed to make money in stocks all the time, and 2) If it sounds too easy—as well as too good to be true—it probably is.
That’s why I was happy to see Mike Turner’s latest book cross my desk. I’ve followed Turner’s work for several years now, have interviewed him a time or two, and know that he is a disciplined investor and money manager, who doesn’t hawk ‘foolproof’ systems to conquer the market.
His approach to investing doesn’t require an expensive software program that tells you when to buy and sell based on some internal calculation that would be impossible for most of us to understand. Nor does it require hours of study and elbow grease. However, it is not without effort.
Turner’s strategy is simply a combination of fundamental and technical analysis, with the fundamental portion telling you ‘what’ to buy and the technical work giving you a ‘when’ to buy or sell indicator. And he employs both schools of analysis to meet his goal: “Making consistent profits in the stock market by using a well-defined set of trading rules and discipline to follow them in good, bad, up, down or flat markets”. Now, I can’t vouch for his returns, but his strategy makes sense.
As primarily a fundamentalist, I can use ratios to find the best-run companies in the world. But if the technicals don’t indicate the time is right to buy a particular stock, I may be holding onto the shares of a wonderful company whose stock is going nowhere fast.
In his book, Turner takes a comprehensive approach to selecting and explaining what he calls his ‘demand’ fundamentals, including certain revenue, earnings and dividend ratios. He then moves onto the technical charts that are key to his strategy.
He spends several chapters discussing how to refine your investment decisions by setting stop losses and how to use insider buying and institutional holding criteria to siphon off the best potential stocks from the crowd.
One of the mistakes that investors often make is inadequately diversifying their portfolios, and Turner goes into great detail to illustrate just how diversification—as well as its sidekick, asset allocation—looks in a properly-structured portfolio.
The conclusion of the book focuses on using technical patterns to time the purchases and sales of your stocks, and includes Turner’s five favorite timing charts.
As a former civil engineer and owner of a software company, it stands to reason that Turner’s approach to investing would rely heavily on the numbers. And it does.
On the plus side, the majority of his 10 steps are fairly easy to implement, using an Excel spreadsheet to score all the indicators to determine which stocks to buy and when. It seems to make a lot of sense, but I fear the mechanics of the process may be just a little too much work for many investors who are easily daunted by spreadsheets and mathematics.
However, even if you never intend to follow the spreadsheet strategy as it is laid out, the book offers keen insight into the very fundamental and technical indicators that are of significant importance in determining the fate of a stock. And in my book, anything that helps us understand the workings of the market will come in very handy as we ready our minds, emotions, and pocketbooks to embark upon a new cycle that may be very different than any we’ve seen before.
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