Low-Risk Trading in Financially Strong Stocks (Part 1)

10/05/2009 10:29 am EST

Focus: STRATEGIES

Trading in Strong Stocks

This five-part series is a simplified guide to investing in stocks with returns of 20% or more per year and minimal risk. The strength of the American economy is built on the growth of financially strong companies. So the first principle for low-risk investment strategy is to invest in sound companies. Why? Because the stock of a solid company will go up.

The next four articles will show how to identify financially strong companies, maximize returns and minimize risks, understand the psychology of trading, and formulate a trading business plan—so you can trade like a professional.

Most Americans are overinvested in mutual funds that, at best, ride the wave of the market. Your fund manager is paid handsomely to beat the market, often by a small percent. Consider the following: In the last ten years, the S&P 500, the key market indicator fund managers are judged against, has dropped from 1400 to 900. That represents a 36% drop in value. Fund managers haven’t done much better.

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Click to Enlarge

Refer to Figure 1 above, which compares the value of the S&P 500 to the stock prices of strong and weak companies. During the last ten years, financially strong companies like Monsanto (MON) and Devon Energy (DVN) have outperformed the S&P 500 by 200% and 500%, respectively. During the same time frame, weak companies like DuPont (DD) and Sara Lee (SLE) have underperformed the market.

After 20 years, a $20,000 portfolio returning 20% annually (compounded) would yield $766,752. That represents earnings of $153,350 per year, or $12,779 per month. Most of us could live well on this.  You can still have fun speculating in commodities, options, forex, or other instruments, but don’t forget about your future. The turtle wins this race, and at some point, your investments will provide more than adequate cash flow.

In tomorrow’s article, you will learn how to easily identify financially strong companies and set up a trading market basket.

Dale Brethauer, trading mentor, Pacific Trading Academy.

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