Newsletter
March 10, 2007
Changing Your Mind Set
Market & Sector Review
Predicting the Markets of Tomorrow - Part II
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Member Update: - Member response to the Communiqué posted in the member area on February 28 has helped me set some priorities for our future expansion. To those that participated - Thank You. We are now in the process of building a fundamental database on stocks in our universe. Soon you will be able to get fundamental data on the stocks of interest to you and we will use this database to perform fundamental screens for members. Hopefully in the not to distant future you will be able to search through this database for the criteria that is important to you. Members and non-members alike may view some of the definitions of the data we are compiling. You can view them Here! Programming always seems to take a lot longer than I anticipate (perhaps wish for) but who knows, this time we may just get a little lucky.
Changing Your Mind Set
If you don't know where you are going, you'll probably end up somewhere else.
- David Campbell
To be a successful trader over time, you must obtain the mindset; following the rules of your plan is pleasurable and breaking the rules is painful. When you follow the rules, you will still lose money sometimes, and losing money is always a little bit painful. You must convince yourself and understand that the pain is normal and natural; just like the occasional cut you receive. You must become able to accept, on an emotional level, that the pain is unimportant, that it will pass. Success is a process of change, and pain is part of that process.
The essential element of being successful is mastering the art of managing both our mental and physical states. Given adequate knowledge; the problem of changing, of taking effective action, depends on having the right motivation, to act upon our knowledge. Since we know the lack of motivation; is the result of limiting associations, values, and beliefs, then it follows that in order to begin the process of change, we should examine the content of our minds and isolate those limits?
The objective is to achieve a mental state in which the pursuit of our goals is pleasurable and not pursuing them is painful. The way to change is to unlock your subconscious and discover your limiting associations and beliefs; then to replace those limiting associations, beliefs, and values with new ones that will put us on the path of our choosing. All of the Technical and Fundamental knowledge of the Stock Market will not make you money; if you have deep down inside you - limiting beliefs and values. Those limiting beliefs and values will eventually come to the surface and force you to deviate from your successful plans.
To achieve the changes you desire, there are three basic tools: the physical body, the conscious mind and the automatic workings of the subconscious mind. These three are already working all the time and they behave interactively, either supporting or destroying one another. This is not any easy task by any means. I will be touching on some of these subjects over the coming weeks, but if you are serious about changing, I suggest you seek out other sources, much has been written and spoken about this subject and is available to you if you have the desire to change.
Market & Sector Review
Predicting the Markets of Tomorrow - Part II
Last week I spoke of the basic approaches in James O'Shaughnessy's book "Predicting the Markets of Tomorrow". To reiterate just a bit, through his research he has uncovered a twenty year cycle involving investment style. This approach does not take into account major or minor market moves up or down, but assumes an overall bullish bias over time, bear markets not withstanding. In this 20-year cycle he recommends the following asset allocation in stocks:
For the Conservative Investor:
- 25% in small and mid-cap stocks;
- 75% in large cap stocks.
For the more Aggressive investor:
- 35% in small and mid-cap stocks;
- 50% in large-cap value stocks;
- 15% in large-cap growth stocks.
This week I will go over some of the requirements he uses to make investment decisions in the above areas. We will break down the differing approaches into: Growth Market Leaders; Small Cap Growth and Value; All Cap Value with a Growth Twist; and finally the Tiny Titans. I'll quickly discuss the requirements for a stock to pass and then I will give you a list of stocks that have passed the criteria for each of the aforementioned categories as of January 31, 2007. The list is courtesy of American Association of Individual Investors or AAII for short.
All Cap Value with a Growth Twist
This screen requires: a market capitalization more than $200 million (inflation adjusted). Then sort by lowest price to sales ratio; plus lowest price to cash flow ratio; and highest dividend yield. Then choose the top 25 stocks with the greatest 12 month relative strength. Those passing this test as of 1/31/07:
Growth Market Leaders
This screen excludes utilities and foreign stocks. All of the following must be greater than the average stock: Market Capitalization; Shares outstanding; Cash flow for the previous twelve months; Sales for the previous twelve month period; Price-to-sales ratio less than the average stock; Earnings for the last twelve month period must be greater than the previous twelve month period. And finally choose the top ten stocks with the greatest twelve month relative strength.
Small Cap Growth and Value
This screen looks for cheaply priced small-cap stocks with upward price momentum. Market Capitalization between $200 million and $2 billion (inflation adjusted), price-to-sales ration of less than 1.5, and price appreciation above average. Then choose the top 25 stocks with the greatest twelve month relative strength.
And finally Tiny Titans
This screen looks for cheaply priced micro-cap stocks.
Market capitalization between $25 million and $200 million (inflation adjusted). Lowest price-to-sales ratio and lowest price-to-cash flow ratio; and the highest dividend yield. Then choose the top 25 with the greatest twelve month relative strength. Very often these stocks are thinly traded and can have relatively wide bid/ask spreads; they also can experience some of the greatest price appreciation and greater than normal volatility, a word to the wise.
Two items that should bother you about this approach: first and foremost is the shear amount of diversification that is required, and secondly your portfolio is only rebalanced once a year. During your rebalancing period you drop (sell) the stocks that no longer make the list, replacing them with new names that make the list.
The diversification above represents 85 stocks in total which would be required to follow this methodology. That would require you as an individual to virtually be your own mutual fund. It is for that reason and that reason alone, that last week, I suggested looking through the ETF categories (i.e. growth & value ETF's) on site, for those that may fit the requirements or contain at least some of the stocks listed above.
Largest Changes In Raw Numbers (21 Days)
[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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