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IMPORTANT NOTE: This special report is for information and educational purposes only The 10 Rules You Must Follow to Beat the Market Copyright © 2016, by Mike Turner. All rights reserved. No quotes or copying permitted without written consent. Published by: Eagle Products, LLC 300 New Jersey Ave. NW #500 Washington, DC 20001 844/818-9444 Email: [email protected] Website: http://www.turnertrends.com/ The Top 10 Rules You Must Follow to Beat the Market Introduction The following 10 rules for investing are my gift to you. A single investing misstep can cost you thousands of dollars in losses and I want to help you avoid such setbacks. The rules are intended to guide you in making profitable investments, while minimizing risk. Stay disciplined in following these rules for investing. I want you to avoid needless mistakes and let you keep and grow your money to help you meet your personal financial goals. These tips are as relevant for fledgling investors as seasoned ones, as well as those in between. Rule 1: Think Like a Fundamentalist My list of fundamentals is relatively short. Your list may be more comprehensive, which is perfectly reasonable. There are two extremely important aspects of reviewing a stock's fundamentals, however, which should be included in any fundamental analysis of a stock: 1. Give more weight to Rate of Growth over various time-frames. The more recent the increase in growth, the better. 2. When attempting to select a stock from a group of equities under consideration, ONLY compare the fundamentals of one company to another within a single industry. It does little good to compare the fundamentals of a Technology stock to the fundamentals of an Energy stock. Here is the list of fundamentals that I consider most important in the review of a company's relative strength: Fundamental Objective Qtr/Qtr Revenue Growth Qtr/Qtr Earnings Growth Year/Year Revenue Growth Year/Year Earnings Growth Multi-Year Revenue Growth Multi-Year Earnings Growth Relative PE Ranking Return on Equity Quarter Performance Top-Line Year over Year Quarter Performance Bottom-Line Year over Year Yearly Top-Line Performance Yearly Bottom-Line Performance 5-Year Top-Line Performance 5-Year Bottom-Line Performance PE Comparison within Stock’s Peer Group Measure of Quality of Operational Management Max Score 15 15 10 10 8 8 6 5 Yield Institutional Holding Stock Price Relative Fundamental Ranking Dividend A Measure of How Large Institutions Like Company Too Expensive or Too Cheap to Entice Investors All of the Above Compared to Stock’s Peer Group 5 6 4 8 Total Points 100 To just look at a company's current fundamentals (i.e., Current Profit Margin) and draw a conclusion about the health of the company, without looking at how much the company's Profit Margin has increased over time, is completely missing the reason for looking at fundamentals. As an investor, I want to buy GROWTH. I am not looking to buy status quo. I can get status quo in a CD. Rule 2: Avoid Expensive Stocks Unfortunately, many investors look at the price of a stock and draw a conclusion about whether or not it is an expensive stock. Common sense seems to dictate that the more a stock costs per share, the more expensive it is. Nothing could (potentially) be further from the truth. It is entirely possible that the $5 stock is many times more expensive than the $400 stock. Here's why... One of the very best ways to determine whether one stock is more expensive than another stock is to compare the two stocks' price-to-earnings (P/E) ratio. The P/E ratio is the ratio of a company's current share price compared to its per-share earnings. For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05= ($43/$1.95). The P/E is sometimes referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, an investor would be paying $20 for $1 of earnings. But... the key here is HOW you use one stock's multiple, or P/E ratio, in comparison to another. P/E ratios are not absolute. They are, rather, only slightly relative to the average P/E ratio of the entire S&P-500. They are very relative when comparing the multiple of one stock to another in the same industry. It does little good to compare the P/E ratio of an ISP (Internet Service Provider) company to the P/E ratio of a healthcare provider company. When I am trying to select a stock based on its fundamentals, I first DO NOT consider the stock's P/E ratio. I only begin to look at the P/E ratio when I am narrowing down my selection between two stocks of the same industry. Then, and only then, do I consider the stock's P/E. My rule is: When all other fundamentals are equal between two stocks of the same industry, the one with the lower P/E can be considered less expensive than the one with the higher P/E. My goal is to not buy stocks with P/E's in the upper 20% of their peer group of maximum range of P/E. This is NOT a hard and fast rule, but more of a rule to follow when two stocks are equal in every other way, and you need to select only one. In that case, I'd select the stock with the lower P/E ratio. I do have a corollary to this rule. Also avoid "cheap stocks". Cheap does NOT equal inexpensive. I consider penny stocks and most stocks under $5 as too cheap to consider in my portfolios. Rule 3: Trade Like a Technician Once I have selected WHAT stocks I may want to own, the next step is to determine if the timing is right to buy one or more of those stocks. In other words, I select what stocks I may want to own based on each one's best-of-breed fundamentals, but I don't execute a buy on any of those stocks until my TECHNICAL ANALYSIS confirms a Buy Signal. There are many ways technically to review a stock to buy/sell/short/cover signals. There's the Elliot Wave theory; the Candlestick theory; the Dow Theory; and on-and-on-and-on... Basically, performing a technical analysis on a stock involves evaluating it based on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. The assumption is that by using a technical analysis on a stock, one can accurately predict the future price of a stock. This is done by looking at its historical prices and other trading variables. TurnerTrends has its own, proprietary, technical analysis theory that I follow in my assessment of stocks. I also use a technical analysis for determining the appropriate stop loss to set for each stock. The TurnerTrends technical analysis provides the following “triggers:” Buy Signal - This is when the closing price of a stock during a given week rises sufficiently above our moving average trend-line by a predetermined percentage. Stop-Loss Calculations - These calculations set a sell price below a long position that incorporates a stock's historical volatility and a statistically accurate time-base formula to estimate the maximum expected movement in a stock's price over the upcoming week. Sell Signal - This is triggered when the price of the stock meets or falls below the stock's then current stop-loss setting. Short Sell Signal - This is when the week-ending closing price of a stock finishes sufficiently below our moving average trend-line by a predetermined percentage. Cover Signal - This is triggered when the price of the stock meets or moves above its then-current stop-loss setting. But I go a step or two further in my technical analysis that I believe is crucial to timing when it is the best time to get into or out of a stock. In addition to performing a technical analysis on individual stocks, I also do a technical analysis on each stock's Industry and Sector. This analysis must support the decision to buy a stock. If I buy a stock, my technical analysis of the stock's Industry must conclude that the Industry is in a technical "BullMode". I also want to see the stock's Sector showing a bullish tendency; again, by analyzing the Sector using the TurnerTrends technical analysis system. But, as important as it is to know when to buy a stock; it is even more important to know when to sell that stock. I use a negative change in a stock's Industry chart to provide me with a leading indicator of a potential future sell-off in the stock. When I see a stock's Industry begin to taper off or turn negative, I will move that stock's stop loss into what I call my "Aggressive Stop Loss Strategy." This is a strategy designed to capture the maximum amount of accumulated paper profit while letting the stock continue on its upward path, until such time as it does reverse and trigger my stop loss. Aggressive stop-loss settings are nothing more than a stop loss set very close or tightly to the current price of the stock. So., I select what stocks to buy on fundamentals and when to buy them based on technicals. And I only exit a position in a stock based on my technical analysis. Rule 4: The Money Rule There is one statement that I hear over-and-over-and-over when I talk to investors: "It is far easier for me to know when to get into a stock than to know when to get out!" It might surprise you to know that I ALWAYS know when to get out of a stock. I never have to guess. And I don't believe you should have to guess either. The reason that I never have to guess when to get out of stock is because I have a clear set of rules that govern my exit strategy for every stock. This exit strategy is unique to each stock because it is tied to the stock's historical volatility and the current money-flow either into or out of the stock's Industry. I have developed a formula for measuring one standard deviation of normal volatility, which mathematically tells me how much a trade can move against me and still be in an uptrend. We call this value an “Expected Move” (EM). It basically means that we know, with mathematical certainty, how much a stock’s price can move and stay within one standard deviation of normal volatility, based on the prior 12 months of total volatility of the stock (or exchange-traded fund). In addition, we know that stocks tend to move from negative trends to positive trends and back, over time. We also know how to measure a stock’s “Trading Zone,” which can be a “Buy Zone”, a “Hold Zone” and an “Overbought Zone”. When a stock or ETF is in a bearish trend, the Trading Zones can be “Short Zone,” “Bearish Hold Zone” and “Oversold Zone.” Based on the above knowledge about our database of more than 6,000 stocks and exchange-traded funds, we know how and when to set downside exit strategies (stop-loss settings) for each trade, based on its Expected Move and Trading Zone. In a Buy Zone, my stop is 1.5 EM below the Friday closing price. In a Hold Zone, my stop is 1 EM below the Friday closing price. In an Overbought Zone, my stop is 0.75 EM below the Friday closing price. I do the same (in the opposite direction) for short trades. The key take-away is this… We buy fundamentally strong stocks when they first enter a Buy Zone and we set our stop immediately at a price that is low enough to avoid normal volatility, but high enough to get us out of the trade if it has moved from a bull-trend to a bear-trend. Each stock and ETF in the TurnerTrends Tools database provides subscribers with a weekly updated stop-loss setting. An important side-note is this: I never lower a stop loss for a long buy position unless there has been a dividend or distribution that requires a recalculation of historical pricing trends. Stops for long positions only move up. Stops for short positions only move down. Stops are set on a weekly basis and are good for the upcoming trading week. Rule 5: Never Marry a Stock I like to say that you should never marry a stock because you won’t like the divorce! This is meant to be both funny and deadly accurate. Too many investors get into a stock because they love the company or the stock has made them a lot of money. They just can't bear to sell it. They got into the stock for all the right reasons, and perhaps, nothing has fundamentally changed with the company. But, when the stock's price begins to cycle lower, instead of capturing their unrealized gains; they hang onto the stock. Sometimes they hang onto a stock until they have lost all they had ever made and much, much more. They were “married” to the stock; and, they did not want to get a divorce (sell it). So, they waited and waited as the stock's price sank lower and lower. Finally, at the bottom (usually), they sell the stock because they could not stand the pain any longer; at which time, the stock immediately began to move back up in price. This story repeats itself over-and-over-and-over. It should never be your story. I have a few sub-rules that, if you follow, you can be sure to not even get engaged, much less married to a stock. Here are those sub-rules: 1. Don't override your stop-loss strategies. If your stop-loss strategy says sell, then sell. If it says cover, then cover. Don't look back. For most investors, the cost of a trade is only $5-$10... why not get out of that stock when your stop loss tells you to; and then put that money to work in a much more attractive position? 2. Never lower a stop loss unless there is a reason for it (e.g., dividend or distribution). Don't let your emotions tell you, "It's different this time." It is almost NEVER different. Follow your rules; not your emotions. 3. Never, never average down. I have heard advisors and investors say, “Great... my stock is now cheaper. I'll just buy some more and average down my cost." The only time I will ever buy a stock at a lower price than my originating purchase is when I have decided to build my position out of 2 or 3 trades, over several weeks. Then, at the start of the buy-in, I decide what my lowest price will be before I say I made an error in the stock. However, it is rare that I will add to a position when the price has moved against me... very rare. Remember... “Hope is not an investment strategy!” Rule 6: Watch the Insider Buying Here's an important axiom: "There are many reasons for Insider SELLING; but there is only ONE reason for Insider BUYING. Insiders buy their company’s stock for one reason and one reason only: they expect it to be a great, long-term investment. Too many investors think that tracking insider selling will give them some insight into an expected weakness in the company’s future. Actually, selling ahead of bad news on the company becoming public is against the law. In reality, I don't care about insider selling. There are just too many legitimate reasons why an “insider” would need to sell stock, other than “knowing something bad is about to happen to the company.” But, the only real reason for insider buying is because the insider knows or thinks something good is in the company’s future. In the chart below is a green shaded area with small circles that say, “IB.” These IB (Insider Buying) markers give you a quick view of how frequent and how large the insider buying transactions are, over time. I would NOT buy a stock just because of a strong history of insider buying, but when I am trying to decide between two stocks that are equal in all other aspects, this one piece of information could sway my choice to go with the company with the greatest insider buying. Remember… It is the insider buying that matters; not the insider selling. Rule 7: Institutional Ownership My approach is to buy stocks that have the propensity to move higher in share price. I look for all of the indicators that I can find that will make that propensity greater and greater. One such indicator is institutional ownership. Financial institutions such as banks, insurance companies, hedge funds and pension trusts own the vast majority of shares of stocks around the world. As an example, the largest public mutual fund that only owns shares of companies in the Standard & Poor’s 500 Index -- the Vanguard Index Trust 500 Portfolio -- has less than $50 billion in assets. In contrast, the world’s financial institutions are estimated to hold more than $600 billion worth of S&P 500 stocks. These financial institutions have the best investment research in the world. They regularly visit the management team of companies in which they buy shares. Consequently, they are considered to be the "smart money" that everyone talks about. When these institutions decide to invest in a company, the move is generally considered very positive regarding the firm’s future prospects. But... there is a downside to institutional ownership... When too many of the shares outstanding (the number of shares that have been issued by the company and held by the insiders and the investing public) are owned by institutions, there is very little market pressure that can be put on the shares to boost their price. I am looking for the propensity for increasing share price. If 98% of all the outstanding shares are owned by a few large institutions, there are very few shares left to trade on the open market. Thus, there is no trading and no change in price. So, too much ownership by institutions tends to limit the growth of a stock's share price. But... I also do NOT like to own shares of a company where few, if any, institutional ownership is present. As mentioned above, major institutions are on the look-out for good companies to have in their portfolios. That means if a stock has very little or no institutional ownership, it probably indicates the institutions already have reviewed the strength and merit of the company and decided to pass. In other words, they have not given the company a good seal of approval. Not having a good seal of approval is almost like having a bad seal of approval... not quite... but almost. Therefore, I have three sub-rules regarding institutional ownership of a company: 1. Avoid stocks with less than 5% institutional ownership. 2. Avoid stocks with more than 95% institutional ownership. 3. Look for stocks with 30% to 60% institutional ownership... I call this my “Sweet Spo”' of institutional ownership. Rule 8: Diversification Diversification will save you from major losses and potential ruin when all else fails. You can do your research and select only those stocks with great fundamentals... You can be the best reader of technical charts and time your entry points exquisitely... You bought only those stocks that are in the sweet spot of institutional ownership... And, your stop-loss calculations are meticulously derived and rigorously followed... But you ignored diversification and had 50% of your portfolio in real estate investment trusts (REITs) and 50% in oil. The market suddenly reverses on you and all of your wonderful paper profits go away in a flurry of downgrades and market consolidations. This scenario happens to investors all the time. Diversification could keep this from hurting your investment success. You NEVER know when the market is going to reverse and turn against you. But, rarely does a reversal occur in every industry and every sector at the same exact time. Way more often than not, market sell-offs occur in pockets of stocks... certain sectors and/or industries. Likewise, even in a bear market there will be some stocks in some industries that are moving upward in price. Money is always flowing from one industry or sector into another. The key is never to have all (or even a large percentage) of your holdings in any one sector or industry. Here are my sub-rules that I follow to keep my portfolios appropriately diversified: 1. Never hold more than 30% of a portfolio in any one Sector, and 2. Never hold more than 20% of a portfolio in any one Industry. This is not a complicated or difficult rule... but it will save you when all else fails! Rule 9: Asset Allocation Closely associated with my Diversification Rule number 8, is my Asset Allocation rule. And, in an indirect way, this rule is a byproduct of my Rule number 5 (the "Never Marry a Stock" rule). Within most portfolios there will be more than one position... more than one stock. So, assuming you have a fixed amount of cash to invest into a portfolio, what is the maximum amount to invest in any one position? My answer to this is easy... If I only have five positions, then I would invest 20% into each of the five positions (5 x 20% = 100%). If I have 10 positions, my investment amount would be 10% in each position (10 x 10% = 100%). And so on... The reason I said this rule is a byproduct of Rule 5 is that if you have the same amount invested in each position, you will tend not to have more of an emotional attachment to one stock over the other. My corollary to this rule is my "Maximum Investment Rule." I believe it is too risky to own fewer than five positions in any portfolio. To do so invites a significant loss if one position suddenly plummets in price. Stop-loss settings do not guarantee a floor. It is possible for a stock price to fall straight through a stop loss when a catastrophe occurs. And catastrophes do occur from time to time in the stock market. So, for me, a five-stock portfolio is the minimum... 10 is better. Rule 10: Timing the Market The real question is, “Can you time the market?” This is another way of asking, “Can you pick a stock's market bottom and/or market top?” The answer is, “Not consistently!” But you CAN increase your odds of getting in near the bottom by using my Rule number 3. AND, you can exit a stock much nearer the top by following my Rule number 10. A LOT more profit can be captured if you know just when to start getting very aggressive with a stop-loss setting. For that, I use the technical charts of the stock, the sector and the industry. The lower left chart is the technical chart of the Sector (Consumer Discretionary) of the stock, ULTA Salon, Cosmetics and Fragrance, Inc. The lower right chart is the technical chart of the stock's Industry (Specialty Retail, Other). When I am making a decision about what to buy and when, I rely heavily on the Sector and Industry charts. I believe strongly in “a rising tide lifts all boats.” In the case of a stock, I want the Industry AND the Sector both to be in a bull-mode (green colored line), if I am considering the stock as a buy candidate. The opposite is true if I am looking to short a stock. In fact, I have a 100-point scoring system I use for technically assessing a stock or exchange-traded fund (ETF). I use 45 points for the Trading Zone; 10 points for the Trading Volume and Trend; 20 points for the Industry Status (green or red condition); 10 points for the Sector Status; and 15 points for how long the equity has been in the Buy Zone. I see these kind of data every day. We post these charts for our subscribers to view in our Stock Ratings for every one of the 6,000+ stocks that we track. The logic behind this approach is this: If you are selecting best-of-breed stocks according to the first 9 Rules, then it is likely your stock will be the last to succumb to a downturn in its industry. This cushion lets you time the market for that stock and exit very near the top to maximize your gain. Conclusion The 10 rules offered in this special report are designed to help you profit from your investing and to minimize any losses. The concepts are not complex and they can help you to grow your portfolio wisely. To review, the 10 rules are: Rule 1: Think Like a Fundamentalist Rule 2: Avoid Expensive Stocks Rule 3: Trade Like a Technician Rule 4: The Money Rule Rule 5: Never Marry a Stock Rule 6: Watch the Insider Buying Rule 7: Institutional Ownership Rule 8: Diversification Rule 9: Asset Allocation Rule 10: Timing the Market You may want to print out these tips and keep them near your computer to review before you make changes in your investment portfolio. Consider them helpful tips as if I could be with you when you are making investment decisions. You have worked too hard for your money to take unnecessary risks with it. Eagle Products, LLC • 300 New Jersey Ave. NW #500 • Washington, DC 20001 844/818-9444 • www.TurnerTrends.com 10RULEBEAT-1016