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Special update: Since I originally wrote this essay, I've use one particular technique more than any other to help my Retirement Trader readers make incredible gains. It's one of the safest and most effective ways to make money in the markets.
Now, I've teamed up with Porter Stansberry to share the secret behind this technique with our most loyal subscribers. You can watch our brief presentation here.
Three Simple Trading Rules Every Retiree Needs to LearnBy
Friday, July 29, 2011
At first glance, it sounds ridiculous... 28 for 28... a 100% win rate.
I never thought I'd be "that 100% guy."
I've been investing and trading for over 30 years. I've read investment advisories for nearly that long. I've worked at several of Wall Street's most prestigious firms. And I can tell you from experience that when someone claims to win 100% – or even 90% – of the time, you should brush them off as delusional, using "massaged" numbers, or a criminal who trades on illegal insider information.
The stock, commodity, and futures markets are simply too big and complex for someone to win all the time. Even for great traders, a 60% win rate is more realistic. Heck, traders who make sure their wins are huge and their losses are small can make millions by being right just 30% of the time.
With this warning in mind, I do think it's worth pointing out a secret we've used in my Retirement Trader service to generate a perfect trading record (28 out of 28 so far):
We think like long-term investors.
There's a lot that goes into that – more than I can discuss today. But I can explain the most important pieces and show you an opportunity that fits perfectly into our strategy...
First, we take fundamentals into account. Often, when folks look to make short-term profits in the stock market, they focus exclusively on chart patterns and complicated computer programs. While several successful traders I know rely on this kind of "technical analysis," most folks will start seeing patterns that don't really exist. And a "can't lose" system can turn into a "can't win" system overnight.
Instead, I look at how "healthy" a company is. I check cash flow, profit margins, debt, and so on. I look to place leveraged trades (using options) in great companies like Coca-Cola and Intel.
The second advantage we have over most traders is we only bet on companies that treat their shareholders right. Most traders get excited about the latest IPO, the hottest penny stocks, and riskiest resource investments. Sometimes, these can be high-reward trades. But they're incredibly risky. The IPO can flop, the penny stock can collapse, and the next big gold mine can turn out to be just another empty hole.
I'd rather have the deck stacked in my favor... So what I do is look for companies that buy back shares, have a history of increasing dividends, and bring in enough cash to keep doing both. These are the marks of a solid, conservatively run company. After all, you can massage a financial report a hundred different ways to fake a profit. But you can't fake a cash dividend. When you're buying a company that has a long-term-focused corporate attitude, the chances of a catastrophic loss are much smaller.
Finally, when we don't see the right setup, we WAIT. In short, a lot of amateur traders hop in and out of positions, incurring fees and sweating to catch the next big win.
But I don't take a trade unless the "stars are aligned." In fact, I made it a condition of my contract before I signed up to write Retirement Trader. I refused to agree to publish a "hot trading tip" every week. Safe investment and trading opportunities don't pop up just like that... The markets don't adhere to anyone's schedule. And success only comes from waiting patiently for what billionaire investor Warren Buffett calls the "fat pitch."
One fat pitch we just took a swing at in Retirement Trader is health care giant Johnson & Johnson. This company is a perfect trade...
It's selling for about 13 times forward earnings. And at 10 times operating cash flow, it seems reasonably priced. It's shareholder friendly, buying back shares and paying dividends to the tune of $19 billion over the past three years. And recently, its stock price has risen along with the health care space.
In short, everything is lined up. And we played it by selling puts, which should hand us a 6.7% return in two months. (That annualizes out to 40%.)
If you're ready to start safely doubling or tripling the trading gains you normally make in your retirement account – with much less risk – these are the kinds of trades you need to make. You need to think like a long-term investor... and stick with these three simple rules.
Here's to our health, wealth, and a great retirement,
Doc Eifrig
Further Reading:
For more words of investing wisdom from Doc, check out these essays on how to save, protect, and even grow your money in good times and bad...
"If you can master this technique, you can avoid a huge amount of worry and wasted time and set yourself up to make extraordinary returns."
Doc has found an investment that makes money whether stocks tank or rally higher...
"In the past 30 years, I've seen Wall Street lie and cheat... from Blodgett to Madoff," Doc says. And now, he shows you the most effective way to fight back.
Market NotesAN URGENT UPDATE ON CLEAN ENERGY STOCKS Regular DailyWealth readers know we monitor a small group of investment funds for our informal "World's Worst ETF" contest. We keep up this contest because knowing what not to buy is even more important than knowing what to buy.
The popular natural gas fund (NYSE: UNG), for instance, often manages to lose money even when natural gas prices are rising... while charging investors fees for the service. Another losing idea is the popular clean energy fund PBW. This fund has drawn in hundreds of millions of dollars with the pitch that investors will make a fortune in stocks that deal in clean energy, like solar and wind.
We're all for pristine air and water. We'd love to live in a world that runs on clean energy. But we know solar energy has a problem called "night." We know wind energy has a problem called "calm." We know corn-based ethanol is a ridiculous, "clean" boondoggle. And we know most clean energy firms have such poor economics that we can say they are "perfectly hedged." They are able to lose money and market value in both good times and bad.
Our chart today is an update on this perfectly hedged idea. It shows the last 12 months of trading in PBW. While the broad market is still near its yearly high, PBW just hit a yearly low. Place money in your average clean energy stock? No thanks. Give us the stupendous cash flow, dividend, and compounding power of Big Oil, cigarettes, and Band-Aids.
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