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Why You Don't Need To Be A Professional To Beat The Market 

10/29/2014

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Too many people are easily sold on the belief that without a professional to guide them, they will be doomed to mediocre returns.

They entrust their savings to fund managers, believing that these managers have mystical, esoteric knowledge that will give them the edge to beat the market. What they don't realize is that they already have what it takes to get large returns.

One of my favorite stock anecdotes is from Peter Lynch’s One Up On Wall Street. Lynch tells the story of a husband, too fascinated with some hot stock, who ignores the shopping habits of his wife. If his wife pointed out that she'll be buying from a certain store more often, he pointed out that Wall Street is in love with this new, flashy equity. If she said that the company is opening up new locations, he speculates in the sexy stock and loses money. The moral of this is twofold: listen to your wife, and use what you already know to give you an edge in the stock market.

If you're a doctor who learns about new drugs and secured patents before they hit the market, why would you ever gamble with oil stocks? Pay attention to your industry and profit from it - you'll know key factors long before Wall Street. This applies across the job market, too. If you're working in a shoe store, pay attention to shoe developments and retail trends, so when the opportunity presents itself, you grab it!

This is an advantage that you have over the professionals. Of course, every new company that comes to your town isn't going to be a winner, but if you look at the fundamentals (like debt to equity, a strong niche, etc.) and they all check out, go for it. By the time the pros on Wall Street wise up, you could have captured some big gains. In the anecdote above, the wife could’ve recognized that her new favorite store was geared for fast growth and promptly invested.

Your advantage is knowing your own backyard. Taken literally, it can be applied to real estate investing. You have the opportunity to know your community better than anyone else. When you see a house up for sale well below comparable sale prices, you can act and profit. Remember that you have “acres of diamonds” in your own backyard, as long as you dig for them.

One of the biggest advantages that you have over the big fund managers is something that is often overlooked. It's so simple but investors often don't do it. Remember that half the battle in building wealth is protecting against losses – you have a superpower in this regard, so use it.

You can convert to cash.

Fund managers don't do this! They actively trade and chase returns, even in a correction or bear market. When things start to go south, they mitigate their losses by switching over to blue-chips. Even the blue-chips sink in a bear market. You can avoid this completely by converting to cash and when the market dips, buy all the bargains! Recently, QQQ (a NASDAQ ETF) hit a dip which bottomed on October 16th. If you had a cash position and bought in at that date, you were greatly rewarded with an 8% return in two weeks.

When the talking heads are screaming “sell, sell, sell” and that the stock market is crashing, why not buy? While fund managers are gritting their teeth and bearing the losses (no pun intended), you’ll be comfortably cash, putting you in a much better position to snatch up bargains.

Combine your inherent advantage of knowing your backyard with the ability to sit on cash and you’ll be sure to find diamonds. 


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Netflix Stock Plummets! Should You Pounce?

10/16/2014

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Netflix stock has taken a beating recently. Is it a bargain now?

Netflix stock plummeted after hours on Wednesday (October 15th), falling over 100 points, largely because the number of new users grew at a slower pace than investors expected.

The company added over 3 million streaming customers in the third quarter, missing its goal of 3.69 million. Nonetheless, Netflix ended the quarter with 53.1 million members and revenue of $1.22 billion (beside an expectation of $1.41 billion).

Keep calm – this isn’t Netflix’s first horror movie…

In October of 2011, Netflix stock plunged 35% because it lost 800,000 subscribers in the third quarter. Simply missing a goal pales in comparison to losing subscribers. At that time, Netflix earned $822 million in revenue.

Since then, Netflix has definitely recovered. Shares are up 49% in the past year due to expansion and success of original content, including “Orange is the New Black”. The company remains optimistic, expecting to gain 4 million subscribers in the fourth quarter and even more in 2015. On January 1st, 2015, Netflix plans to make the entire collection of “Friends” available for streaming.

Critics are quick to call Netflix overvalued, pointing out the high P/E ratio 96 (which is after the stock decline) and that the stock growth has been too much, too fast. An investment after the 2011 drop could have returned as much as 650%. What happened Wednesday can be construed as the stock’s “cooldown”.

Netflix’s long-term prospects look promising, as it has firmly positioned itself in the consumer’s mind as the leading streaming service and has consistently shown growth. For now, just grab the popcorn and watch the ticker. 


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Seven Years to Break Even? Protect Yourself During a Stock Correction

10/15/2014

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PictureThe CNN Fear & Greed Index shows that investors are extremely fearful in early October.
Since October 1st, we’ve seen the S&P 500 drop over 6% and the NASDAQ close to 7%. To put it in 
perspective, if you had a respectable $50,000 invested, that’s $3,500 gone.  

The question is… will it get worse? If it does, how can you be protected?  

As a general rule of thumb, you should be bullish when others are bearish, but that’s a tired cliché. To be more specific, the market has been very bearish these few weeks. People are always looking for ways 
to analyze market sentiment and one of my favorites is the CNN Fear & Greed Index. At the time of writing, this index has been zero. That’s extreme fear and the index can’t get lower than that. The 
sell-off has begun.  

To make matters worse, a lot of technical trigger points have been reached, such as breaching the 200-Day Moving Average, which is a psychological signal that makes even the most seasoned technical analyst anxious. A lot of computer trading is done based on the charts and moving averages, so once these points are reached, it’s not uncommon to see selling happen almost instantaneously.  

A stock market correction is defined as a 10% decline in a relatively short period of time and has 
historically occurred every few years. The last stock market correction occurred in 2011, so you could say that we are due for one. The Russell 2000 index for small-cap companies already corrected on October 1st, as it was down 10% from recent highs.  

During the 20th century, the stock market has returned an average of 10.4% per year. An average! This means there have been better years and worse years. The 1950s gained 19% per year, while the 2000s gained 1%. If you invested at the peak of the market in 2000, it would’ve taken you seven years to get back to square one.  

Do you have seven years to wait? If you converted to cash at the peak and invested at the bottom in 2002, you would've doubled your money in 5 years. I don’t expect anyone to be an expert on timing the markets, so here are two things you should consider. 

1. Dollar-cost averaging. If you are investing a fixed dollar amount every month into an account, 
you are dollar-cost averaging. Because more shares are purchased when prices are low and fewer shares when prices are high, the average cost per share of the security gets smaller and  smaller. This lowers your risk of investing a large amount at the wrong time.  However, the edge for dollar-cost averaging shrinks as the market rises.  

2. Convert to cash and buy on the come-up. I am intrigued by Berkshire Hathaway, which currently has the most cash located in the U.S. of any corporation in the country. It seems like Mr. Buffett Is holding out for more great opportunities to present themselves – at bargain prices! As an investor, don’t get hypnotized by dollar signs. The most important thing is to make sure that you protect your assets. Remember that “bulls make money, bears make money, pigs get slaughtered”. Because it’s very unlikely that you will buy at the bottom of the market, simply wait until the market shows signs of recovery. If you convert to cash from higher prices, you’ll be able to get more per dollar when you purchase at lower prices.  




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    James Pollard

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