All posts by Pat McKeough

Uncovering the Truth behind Short-Term Trading

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Short-term trading may seem appealing to beginning investors, but it’s unpredictable and can lead to significant losses

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Beginning investors may develop an unrealistic idea of how much money they can make by delving into short-term trading. It seems obvious to them that all it takes is some good advice from an expert.

However, any true investing expert understands that random factors play a big role in short-term stock price fluctuations. That’s why these movements are unpredictable. No outsider consistently profits from them.

In fact, there’s a lot of randomness in the stock market and a lot of conflicts of interest. You have to take that into account if you hope to succeed as an investor.

Many investors try to outperform the stock market by going in and out of it erratically, based on their assessment of risk and potential reward. The trouble is that these risk assessments rise and fall with day-to-day or month-to-month economic and business developments, which are also subject to the influence of random factors and conflicts of interest.

As a result, these investors tend to “buy on strength,” as the saying goes. That is, they do more of their buying when confidence is high and stock prices have gone up. By then, however, much of the rise they hoped to profit from will have already taken place.

They are also inclined to “sell on weakness,” when investors are generally nervous and prices have dropped. That way, they hold on to their stocks during much of the decline they hoped to avoid. They may even wind up selling at or near the bottom in prices.

It may seem like a self-evident truth, but it’s worth repeating. While it’s hard to outperform the market, it’s easy to underperform it. In fact, some investors do it almost every year.

Understanding the realities of short-term trading

Many people start out investing with unrealistic ideas of how much money they can make from short-term stock trading, and how quickly they’ll get rich.

Inexperienced investors are shocked when they learn that successful investors rarely if ever do any short-term trading. (That applies to everybody from “The Wealthy Barber” to Warren Buffett.) After all, many stockbrokers, investor newsletters, cable TV financial kibitzers and so on seem to talk about nothing but day-to-day or hour-to-hour market trends. They make it sound easy to GRQ (Get Rich Quick).

It’s easy to sort through yesterday’s investment news and pick out a reason that seems to explain why a stock or the entire market went up or down today. Trying to spot tomorrow’s winners today is vastly harder. Nobody does it consistently. Continue Reading…

The Four-year Rule: One of the Must-Know Stock Trading rules for Beginners

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Are you interested in stock trading rules for beginners? The “four-year” rule is an important one to understand for growing your profits

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Are you interested in stock trading rules for beginners? Most “market rules” turn out to be demonstrations of the fact that random events tend to occur in bunches. The “research” they grow out of generally consists of studying statistics until you find start-and-end dates of periods when a hypothetical indicator would have paid off.

In most cases, if you change the start and/or end dates, the market rules/indicators lose their advantage or go into reverse. Even if you stick with the same start and end dates, the indicator will still go into reverse eventually.

However, the four-year rule is an exception among other stock trading rules for beginners. That’s because it’s based on events that tend to recur in predictable phases of the four-year U.S. Presidential term.

Some statistics are worth a close look

From the election of Andrew Jackson in 1832 till the election of Donald Trump in 2016, the U.S. has gone through 47 complete four-year Presidential terms.

In the first years of each of these 47 four-year presidential terms (starting with the year after the Presidential Election year) the average result for the U.S. stock market was a gain of 3%.

In the second years (the mid-term election years), the annual gain averaged 4.0%. The average result for the third years (the pre-Presidential Election years) was a 10.4% gain. The average for the fourth years (the Presidential Election years) was a gain of 6.0%. (Source: Stock Traders Almanac 2022.)

This pattern probably comes about because of a couple of unchanging things about most U.S. Presidential Elections:

  • First, most U.S. political office holders, regardless of party, want to get re-elected, or pave the way to the election of a successor from their own party.
  • Second, U.S. Presidential Elections bring out many “swing voters” who might not bother to vote in less important elections. They tend to get interested in the Presidential Election because of the torrent of attention it inspires, in the media and in day-to-day conversation.

That’s why newly elected or re-elected presidents often introduce unpleasant necessities in the first year or at least first half of the term. (The best recent example is the need President Trump felt to confront China early in his term.) Swing voters (or voters generally, for that matter) will have had time to get over the shock of the news before the next Presidential Election. In fact, the unpleasant necessities of the first half of the term may have begun paying dividends by the second half. Continue Reading…

Learn to spot the investment Rules of Thumb that maximize portfolio returns

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Some investment rules of thumb will help your portfolio, while others will cost you money. Here’s how to tell the difference.

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You can find numerous investment rules of thumb that aim to tell you when to buy or sell. Most are based on chart-reading or technical analysis. All these work at times, but none work consistently. When they fail, the profits you miss out on are likely to overwhelm any risk they help you avoid.

Meanwhile, one of the top investment rules of thumb — that does work — is that you can cut way down on times when you really need to sell by consistently buying well-established, high-quality stocks.

These stocks can still drop sharply when the economy falters or bad news strikes, of course. But these are the stocks that snap back quickest and most reliably when the trend reverses and bad news comes less often. That’s why it generally pays to hold on to stocks like these through market setbacks.

Here are successful investment rules of thumb to help bring profits to your portfolio

  • Avoid buying and selling too often
  • Avoid buying too many low-quality investments
  • Avoid portfolio tinkering, especially when it comes to selling stocks that have gone up too far and too fast
  • Diversify across industry sectors
  • Avoid buying too many stocks in the broker/media limelight
  • Build a balanced portfolio
  • Utilize proven strategies for compound interest
  • Keep fees low with traditional ETF picks
  • Look for hidden assets
  • Look for dividend-paying stocks

One of the best investment rules of thumb is to stay out of new stock issues

Companies sell new issues (also called Initial Public Offerings, or IPOs) to the public when they feel it’s a good time to sell. That may not be, and often isn’t, a good time for you to buy.

In addition, the underwriting brokerage firms try to spark publicity about the new issue, and they pay extra commission (as much as double the regular rates) to spur their salespeople to sell the new issue to their clients. This tends to create a high-water mark in the price of the new issue. Unless the new company can follow up with business success, the price of the new issue may languish for months or years.

Some new stock issues — so-called “hot new issues” — depart from this pattern. They begin moving up as soon as they hit the market. Some even “gap upward” on their first day of trading: that is, their first public trading takes place well above the new issue price.

This possibility attracts buyers who fail to appreciate how rare it is. In addition, the underwriting brokers can generally tell when this is going to happen, by judging the reaction of their biggest clients (who of course get first pick on their new issues), and the media. They reserve most of their allotments of hot new issues to their biggest and best clients. Continue Reading…

Use these successful Investment Strategies for your portfolio success

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Are you trying to succeed with investments? Our Successful Investor approach teaches these 3 key rules we teach to subscribers.

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Successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably comes with well-established companies.

And now is a particularly good time to follow our Successful Investor investment approach. Our system of the most successful investment strategies has three key rules:

Rule #1: Invest mainly in well-established, profitable, dividend-paying stocks.

Our first rule in the most successful investment strategies will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses.

Recent standout losers include bitcoin and other cryptocurrencies; a disappointing crop of new issues (IPOs), which tend to come to market when it’s a good time for the new-issue company or its insiders to sell, but not a good time for you to buy; and slapped-together promotional stocks that hit the market thanks to the SPAC phenomenon, which offers a short cut to IPO status.

Rule #2: Spread your money out across most if not all of the five main economic sectors.

This is our key to successful diversification. The widely disparaged resource sector turned out to have some major winners last year, in Canadian oil and gas stocks. Nutrien Ltd., our top fertilizer recommendation, shot up in early 2022 as the Russian invaded Ukraine, which put a big dent in world grain supplies.

On the other hand, if you had disregarded resource stocks with the intention of doubling down on tech stocks, you might have wound up with excessive holdings in tech stocks just as they entered a plunge.

Rule # 3: Downplay or avoid stocks in the broker/media limelight.

We’ve recommended a handful of tech stocks and other broker/media favourites in the past few years, but we always advised against concentrating on them.

Rather than zero in on broker/media favourites, we prefer to apply our first and second rules. If you build a balanced, diversified portfolio of high-quality stocks, it’s hard to go too far wrong, even in a challenging year like 2022 that we’ve recently experienced.

Understanding successful investments

A successful investment is one that provides long-term gains for its investors. Profitability will mean different things to many investors. One key to making a successful investment is you need to disregard or at least downplay investment marketing messages. Continue Reading…

Retirement investments to avoid? Here are our thoughts on this critical subject

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Retirement investments to avoid include everything from bonds down to stock options. Here’s why.

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Our best retirement planning advice is to invest early and often — and don’t forget to use our three-part Successful Investor philosophy.

But if you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble on retirement investments to avoid like the ones we look at below.

Investing in bonds will hurt your retirement finances

As some investors near retirement, their advisors recommend switching to bonds and other fixed-income investments instead of holding stocks.

To some extent, this is an understandable retirement investing strategy, since bonds can provide steady income and a guarantee to repay their principal at maturity.

Unfortunately, we don’t think using bonds for retirement is the best strategy for Successful Investors. Bond prices and interest rates are inversely linked. When interest rates go up, bond prices go down, when interest rates go down, bond prices go up — and with inflation still high, there is pressure for interest rates to keep increasing.

We continue to recommend that you invest only a small part of your Successful Investor portfolio — if any — in bonds and fixed-income investments.

Investing in annuities can fall into the category of retirement investments to avoid

Here are 3 key drawbacks you should keep in mind when deciding whether annuities are a good choice for your retirement investment options:

  • It may be hard to get out if you change your mind: Unlike stocks, it can be difficult or impossible to sell an annuity if you decide it no longer meets your needs. Moreover, you will likely get a low price for your annuity because the date of your death is uncertain.
  • Link to interest rates makes today a poor time to buy annuities: The rate of return you receive on an annuity is linked to interest rates at the time you buy it. That makes periods of still relatively low interest rates an especially poor time for buying annuities. However, if you want to buy annuities, you could buy one annuity a year for the next five years. That way, your returns will increase if interest rates rise, as we expect.
  • Tax treatment: When you own an annuity, the income payments you receive are made up of interest and a return of your principal. The return of your principal is tax free, but the interest portion of the payment is taxed as ordinary income.

Retirement investments to (especially) avoid include penny stocks, junior mines, and stock options

Penny stocks: Penny stocks are cheap and that’s why many novice investors think they make great investments when they don’t have a lot of money. Here’s some insight: it’s much easier to launch a seductive penny stock promotion than it is to create a successful, lasting business. Most penny stocks are over-hyped. Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests. If you’re headed to retirement, stay away from penny stocks.

Junior mining stocks: One rule of thumb for mining stocks is that you have to look at 1,000 “anomalies” to find one “prospect,” and that fewer than one “prospect” in a thousand turns into a mine. In other words, finding a mineable deposit is a million-to-one shot. Continue Reading…