How to make money in the stock market

After retiring early this year, I took the maximum loan from my pension and rolled it into an IRA with a discount broker. I have been investing and reading about investing for about fifteen years, so I as all gung ho to finally have a nice nest egg to work with and grow.

I did my research, stuck mostly to companies I know and do business with, Starbucks, Netflix, Verizon, CVS, Panera Bread, Disney, Panasonic, Honda, plus a couple of oil companies with heavy insider purchases. I read the S & P reports, looked at balance sheets, debt, income statements, analysts expectations, earnings growth, etc etc. This was late Februaruy 2008. Shortly after I bought, the market turned down. I limited myself to approximately a 5% loss in each position. A few went up, but basically I was down a couple of thousand dollars in a month.

I then decided that I needed a better system. I looked to see what book(s) on investing/trading were the best reviewed books by purchasers on Amazon.com. I found Al Thomas's "If It Doesn't Go Up, Don't Buy It". The number of five star reviews that this book got were incredible! It seemed everybody who bought it loved it. I Googled Al Thomas too and found some older interviews with him. I also found out that he has a website called "mutualfundmagic.com". One of the other websites that had an article about him had a link to sign up for his free newsletter. I ordered the book from Amazon and subscribed to Al's newsletter. It is supposed to be a 90 day free trial subscription, but it seems no one at Al's company was paying much attention to the time frame. I continued to recieve the newsletter for free for about six months until they cut me off.

Al's book is basically a very simple introduction to trend following or momentum investing. You basically buy what has been going up. You look at moving averages, especially the 200 day moving average. The 200 day moving average shows the long term trend. When a fund rises above it's 200 day M.A., you buy it. You can phase in slowly, 25% at a time or so, and keep following with purchases as long as it continues to rise. You NEVER buy anything that is below it's 200 day M.A.

I tried this for the next few months with very mixed results. Basically I was trading exchange traded funds, usually gold or oil funds, and sometimes inverse funds that rise as the market sinks. I say very mixed results bcause the results were about 50-50. I would "make" money about half the time. It was easy to get whipsawed out of positions, that is, buy something hold it for a few days, and then sell it because it has headed down too much. Another key part of Al's system is the stop loss. You set an automatic stop loss with your broker to sell the fund if it drops a certain amount below where you purchased it, usually about 8-10%. I kept my stop losses even tighter than this, usually around 5%, because I didn't want to lose 10% on any one position.

Bottom line, after six months of this I was down 10% from my original starting point. That's really not too bad, as the overall market fell about 10% too, though it has rallied here and there in between. The major thing I did was generate commissions for my broker. Thirteen hundred dollars in commissions in six months! I traded somewhere near 130 times in six months. If I had my commissions back I would actually have done pretty well, down-but less than the overall market.

So what did I learn from all this? What can you learn from all this? These exchange traded funds are really too volatile for me. Just because a fund has gone up for a day or two or three doesn't mean it isn't going to come down tmorrow and the day after. I need a smoother ride than this, less volatility.

Al has another article on his website that shows what happens to someone who buys (sells) just the S&P 500 as it moves above (below) it's 200 day M.A. I urge you to see this, either on his website or anywhere you can bring up a chart of the S&P 500 with a moving average (MSN Money, Yahoo Finance, your brokes website, etc). This chart is really eye opening. You don't have to buy just the S&P 500, you can buy whatever fund is doing very well, but you want to buy when the overall market, as represented by the S&P 500, is moving up. YOU NEVER BUY OR HOLD ANYTHING THAT IS GOING DOWN. YOU NEVER BUY OR HOLD ANYTHING WHEN THE OVERALL MARKET IS HEADED DOWN (except an inverse fund). I can't stress this enough, especially for mddle aged people who may need their money for retirement some day.

Another of Al's rules, which makes sense too, is to never buy individual stocks. Anything can happen to a company. It could be a great company today, and everyone thinks it is shit tomorrow because they missed earnings, misstated ernings, lost a big contract, the CEO got indicted, the comptroller quit, whatever. Also, there is too much inside information that moves stocks. It you don't have the inside information you could be the patsy and lose money. Just look at the prices of stocks, and especially options on those stocks, in the days before a merger or takeover is announced. There is too much risk in indivdual stocks. A mutual fund or ETF index fund protects you by diversifying.

Thus, the way to make money in the stockmarket, is NOT TO LOSE MONEY DURING THE DOWNTRENDS. These bear markets last a year or two. The person who sells just as the fund or index drops below it's 200 day M.A. protects his or her profits. The person who doesn't sell could be holding on for a 30-50% drop! Sell and park your profits in a money market fund until the overall market starts to move up again.