Lesson 2 – Basics
A little about me
I started my trading/investing career over 30 years ago. I have a degree in Industrial Engineering and I love solving problems. I served my country during the Gulf War for four years and had a successful automotive business for 22 years. In a nutshell, I’m not a quitter and I love challenges.
Everyone is always looking for the Holy Grail of trading or investing. If there is such a thing, I can honestly say I have found it. It took many years to come up with the algorithms I use for my scans, but in the end, it came down to math and patience. I don’t want to scare anyone with the math part, it’s not calculus. But you do have to possess patience. The key I have found is the harnessing of your risk, based on the size of your portfolio. A portfolio is simply the makeup of stocks within your account. I will say this many times throughout this book, DO NOT LOSE MONEY. You will understand this better as you come along on this journey.
We are not looking to hit home runs. We want in-the-park singles. Ask yourself this, how many people do you know that have become wealthy investing in a savings account? In the end, it’s not how much money you make it’s how much you keep. If you are living beyond your means, meaning you are in debt, you will always be working for money rather than your money working for you. The one thing we all have working against us is time, which can make us do things without thinking. It’s great to think big, but taking those small steps first and getting to know the system is key. The old adage still holds true today, the fastest point from A to B, is a straight line.
Markets have changed, technology has changed, and many other things have changed. One thing that has not changed is the power of dividends and compounding interest. One positive thing that has changed is the ability to trade commission-free on most brokerage platforms, at least for the time being when it comes to equities. You will see most of our educational videos on either Interactive Brokers or on a charting platform called Motivewave used in conjunction with TD Ameritrade. We also use Etrade, Merill Lynch, and Charles Schwab. Even though we still pay a commission with IB, we feel our fills are quicker and less slippage occurs. This makes more sense on the high-value portfolios, but we like the options that IB brings to the table. There are others out there such as Tastyworks, Robinhood, and a host of others and because I have not traded or had open accounts with them, I could not give an endorsement one way or the other. This would be your first thing to decide on since some are optimized better whether you will be on a PC, MAC, or a phone. We have many people on phones that I have trained that never look at a chart, they just enter the trades, decide on their strategy, and set their targets when filled, simple as that. The way we structured the system, it does not need to be a full-time job. Thirty minutes to an hour every week is on average your time commitment.
We are going to assume the reader is new to investing and or trading. If this is the case you will have a distinct advantage of not having your grey matter tainted by all the crazy ideas in the market. You will have an advantage over your peers that will have to deprogram themselves and keep an open mind. Those of you with experience will have the advantage of knowing your platforms and will be more at ease with the aspects of trading. Both will need to pursue patience and understanding to be successful. Everyone is different in how they process information and how well they do at math and comprehension. The learning curve can be steep at times but make no doubt, you can get this. One student that we had is a bank examiner who had a tough time with this concept, now he wouldn’t do things any other way. Be patient and ask questions.
Things you will need to be successful
- A brokerage account, preferably one that has no trade fees for equities. (You will still have small regulatory fees, pennies)
- Obviously, you will need money and many of the platforms require very little to open an account.
- You must have a positive attitude and a willingness to learn.
- Being debt-free. If you have 50k in credit card debt, this is not for you at this time. Knock out that debt first then revisit this idea.
- Turn off all distractions until you can complete a trade without listening to the latest news breadcrumb.
- Must be willing to take profits based on rules you set forth for yourself.
- You can not fall victim to YOLO/FOMO trades.
- This is a lifetime endeavor, be ready to invest that way.
- Karma is a powerful tool, be ready to help others that might be struggling.
Things that you won’t need
- A fancy charting package or black-box trading system.
- You won’t need a special finance degree.
- You won’t need a large sum of money.
- You won’t need any experience.
This is a very short list, easy right? If you stick to the rules you will put yourself in a better position to be consistently profitable and grow your own wealth. No gimmicks, no tricks, no hype. Going forward know that you can always add to the rules, but you can never subtract. First and foremost, we do not believe in taking losses. Therefore your temperament is going to define your success in the stock market as an investor and as a trader. Teamwork makes the dream work.
What we bring to the table
Like we had mentioned earlier that many that don’t really understand the market or have lost their behinds making terrible decisions, classify the stock market as a casino. The difference is a casino has an edge, the trick is how do you get your edge. Answer: Don’t lose money. You have to be willing to buy when others are fearful, and be willing to sell when others want to hold. You must be fearful when others are greedy, and be greedy when others are fearful.
- We believe that “any” company that is in the business of making money that wants to pay a dividend to its shareholders is a company we are interested in being a part of.
- As long as a company is paying dividends, I care not what the company makes or the services it renders.
- We don’t promote any one stock and we don’t give financial advice; we just show you what we do and how not to lose money.
- We trade live so we explain what we do as we do it so you can learn faster.
- We trade smaller account portfolios specifically to show you how you can manage a portfolio more effectively. If you can not manage a small one, a large one becomes overwhelming.
- If you have your own system or strategy and can’t figure out how to make it work, I’m willing to help you out, sometimes it just takes a different angle of approach.
Famous quote: I would rather own 1% of 100 companies versus 100% of one company. JD Rockefeller.
My system takes the emotion out of your investing decisions. It’s straightforward and allows you to focus on growing your money and reducing your exposure. There is always a bull market somewhere, remember that. We will look at a couple of examples of the power of compounding dividends and the number of occurrences. They are not mutually exclusive.
Typical investor strategy (hypothetical) $10,000 invested, No DRIP
Quarterly Dividends | Stock | Price | Dividend Amount | Dividend Yield | Shares | Balance |
January | ABC | $50.00 | .50 | 4% | 200 | $10100.00 |
April | ABC | $55.00 | .50 | 3.64% | 200 | $10200.00 |
July | ABC | $50.00 | .50 | 4% | 200 | $10300.00 |
October | ABC | $45.00 | .50 | 4.44% | 200 | $10400.00 |
January | ABC | $50.00 | .50 | 4% | 200 | $10500.00 |
This is the old way of doing things. When trading fees were extremely high. I can remember when brokerage-assisted trades were over $50.00 in some cases. Then the discount brokerages came in at $7 per trade, so round trip $14. Now we are at $0.00 per trade. Like I said before things change, and so should your strategy. In the above example using the Rule of 72, it would take us approximately 18 years to double our money. You could decrease this time horizon if you added money on a regular schedule or switched on the DRIP plan, but only slightly. You would be hoping (hope is not a strategy) that the stock price appreciates and it goes to $100, and that would be one way of doubling your money. But a lot of things have to fall into place for that to happen, which brings us into the realm of probabilities. Oh, it’s possible. Just like winning a lottery ticket, just not very probable. It’s something like 175,000,000 to one to win the big one. Just think you have a 50/50 chance in the world of investing. We will get into this more in-depth as we move along into the nuts and bolts.
When we add trading into the equation based on rules and set targets, we can start to set a value that is predictable. We have routinely through the years been able to garner 1% per month in slow times, and as high as 2% and higher in good times. When markets crash the dividend yields increase yet your dividends remain the same unless you dollar-cost average. And this will become more clear as we move forward.
DCT RULES
- The market’s money is only yours until the market can not take it back.
- Do not mix your strategies until you can consistently prove you understand the method.
- We will never sell anything at a loss, only when we can make a profit. Otherwise, we will continue collecting dividends until the end of time.
- If a company stops paying dividends, it will not come up on the scan so therefore it will not be traded. (BA, Boeing is an example) it may resume someday, who knows.
- We will never make trades based on news reports, social media, or hype.
- We will only DCA (dollar cost average) if we are below water with a specific strategy in place.
- We will not chase the price if not filled at our selected entry price. (FOMO)
- No YOLO plays.
- We will follow the portfolio risk model that allows us to protect our capital in drawdowns.
- When we receive a weekly scan or choose our securities the CEF’s are bought on Friday’s closing price with a Limit order.
- The rest of the scan will be dependent on the strategy opted for by the investor.
- Set realistic expectations for returns in the market.
- Protecting your capital is paramount.
Everyone is expected to follow the rules, and those who deviate from the rules change their risk profile. Don’t do it. When in doubt please ask, answers are always free.
Now if you have made it this far, this is what’s next…