TIMED VALUE Table Of Contents
I. INTRODUCTION "Let me clearly and categorically state the following. When the true market structure is fully understood, it is possible to time the market with amazing precision. Not only to the day, but in many cases to the hour. It is the purpose of this book to explore this notion in greater detail."
II. VALUE INVESTING Chapter 1: My Story Chapter 2: What Everybody Is Ought To Know About Value Investing Chapter 3: The Secret Of Margin Of Safety Chapter 4: How To Determine The Intrinsic Value Of Any Company I n 5-10 Minutes.....No Harvard MBA Is Required Chapter 5: Warning: Not All Value Stocks Are Created Equal Chapter 6: The Secret Behind Macroeconomics and Value Investing Chapter 7: The Biggest Problems With Value Investing
III. TIMING THE MARKET Chapter 8: The Secret Behind How The Stock Market Works Chapter 9: Overconfidence Kills....A Word Of Caution Chapter 10: The Dow 1994-2014: 3-Dimensional Analysis & How To Time The Market Chapter 11: Timing The Market With Cycles Chapter 12: Putting It All Together
Introduction As time went on in 2004 and 2005 I was increasingly frustrated. I was working incredibly hard, but my investment returns were not reflecting the fact. If anything, I was starting to underperform while the market was surging higher. I had a big problem on my hands. After a lot of fundamental research I have determined that the real estate sector as well as the mortgage finance sector are set for a significant decline. Not just any kind of a decline, a once in a lifetime blow up. After reading and analyzing at least 100 annual reports I was sure of it. The "subprime" mortgage companies I was looking at were essentially bankrupt. I was sure the market will soon see the same and reward me with outsized returns. I was wrong. Instead promptly collapsing the companies in question kept surging higher. Day after day, month after month and year after year. I could not wrap my head around it. There I was, looking at clear evidence that the "sub primers" in question were nothing more than a giant Ponzi Scheme , yet Mr. Market was rewarding them with ever increasing stock prices. That was my first clue that while the indepth fundamental analysis can show me WHAT will happen with great accuracy, it fairly useless in identifying WHEN it will happen. It was not until 3 years later that the said companies did collapse in a spectacular fashion. Some losing $70-50 per share price within a 2 week period of time and then promptly filing for bankruptcy (summer of 2008). I was right on the money, yet my timing was way off. That lead me to spend a considerable amount of time searching for market timing solutions that work. If I could somehow identify the "WHEN" portion of the equitation, my investment returns would surge. It wasn't long after I started that I came across the article below. It was a life changing revelation that showed that I can use modern science to predict the timing of individual stocks as well as the overall stock market with great accuracy. It was a unique approach and I had to explore it further. (***I highly encourage you to read the article in its entirety to form your own opinion. The Ticker and Investment Digest was later renamed "The Wall Street Journal").
The Ticker and Investment Digest (Ticker and Investment Digest, Volume 5, Number 2, December, 1909, page 54.)
William D. Gann An Operator Whose Science and Ability Place Him in the Front Rank His Remarkable Predictions and Trading Records By Richard D. Wyckoff: Sometime ago the attention of this magazine was attracted by certain long pull Stock Market predictions which were being made by William D. Gann. In a large number of cases Mr. Gann gave us, in advance, the exact points at which certain stocks and commodities would sell, together with prices close to the then prevailing figures which would not be touched. For instance, when the New York Central was 131 he predicted that it would sell at 145 before 129. So repeatedly did his figures prove to be accurate, and so different did his work appear from that of any
expert whose methods we had examined, that we set about to investigate Mr. Gann and his way of figuring out these predictions, as well as the particular use which he was making of them in the market. The results of this investigation are remarkable in many ways. It appears to be a fact Mr. W, D. Gann has developed an entirely new idea as to the principles governing stock market movements. He bases his operations upon certain natural laws which, though existing since the world began, have only in recent years been subjected to the will of man and added to the list of socalled modern discoveries. We have asked Mr. Gann for an outline of his work, and have secured some remarkable evidence as to the results obtained there from. We submit this in full recognition of the fact that in Wall Street a man with a new idea, an idea which violates the traditions and encourages a scientific view of the Proposition, is not usually welcomed by the majority, for the reason that he stimulates thought and research. These activities the said majority abhors. W. D. Gann's description of his experience and methods is given herewith. It should be read with recognition of the established fact that Mr. Gann's predictions have proved correct in a large majority of instances. "For the past ten years I have devoted my entire time and attention to the speculative markets. Like many others, I lost thousands of dollars and experienced the usual ups and downs incidental to the novice who enters the market without preparatory knowledge of the subject." "I soon began to realize that all successful men, whether Lawyers, Doctors or Scientists, devoted years of time to the study and investigation of their particular pursuit or profession before attempting to make any money out of it." "Being in the Brokerage business myself and handling large accounts, I had opportunities seldom afforded the ordinary man for studying the cause of success and failure in the speculations of others. I found that over ninety percent of the traders who go into the market without knowledge or study usually lose in the end." "I soon began to note the periodical recurrence of the rise and fall in stocks and commodities. This led me to conclude that natural law was the basis of market movements. I then decided to devote ten years of my life to the study of natural law as applicable to the speculative markets and to devote my best energies toward making speculation a profitable profession. After exhaustive researches and investigations of the known sciences, I discovered that the law of vibration enabled me to accurately determine the exact points at which stocks or commodities should rise and fall within a given time." The working out of this law determines the cause and predicts the effect long before the street is aware of either. Most speculators can testify to the fact that it is looking at the effect and ignoring the cause that has produced their losses. "It is impossible here to give an adequate idea of the law of vibrations as I apply it to the markets. However, the layman may be able to grasp some of the principles when I state that the law of vibration is the fundamental law upon which wireless telegraphy, wireless telephone and phonographs are based. Without the existence of this law the above inventions would have been impossible." "In order to test the efficiency of my idea I have not only put in years of labor in the regular way, but I spent nine months working night and day in the Astor Library in New York and in the British Museum of London, going over the records of stock transactions as far back as 1820. I have incidentally examined the manipulations of Jay Gould, Daniel Drew, Commodore Vanderbilt & all other important manipulators from that time to the present day. I have examined every quotation of Union Pacific prior to & from the
time of E. H. Harriman, Mr. Harriman's was the most masterly. The figures show that, whether unconsciously or not, Mr. Harriman worked strictly in accordance with natural law." "In going over the history of markets and the great mass of related statistics, it soon becomes apparent that certain laws govern the changes and variations in the value of stocks, and that there exists a periodic or cyclic law which is at the back of all these movements. Observation has shown that there are regular periods of intense activity on the Exchange followed by periods of inactivity." Mr. Henry Hall in his recent book devoted much space to "Cycles of Prosperity and Depression," which he found recurring at regular intervals of time. The law which I have applied will not only give these long cycles or swings, but the daily and even hourly movements of stocks. By knowing the exact vibration of each individual stock I am able to determine at what point each will receive support and at what point the greatest resistance is to be met. "Those in close touch with the market have noticed the phenomena of ebb and flow, or rise and fall, in the value of stocks. At certain times a stock will become intensely active, large transactions being made in it; at other times this same stock will become practically stationary or inactive with a very small volume of sales. I have found that the law of vibration governs and controls these conditions. I have also found that certain phases of this law govern the rise in a stock and an entirely different rule operates on the decline." "While Union Pacific and other railroad stocks which made their high prices in August were declining, United States Steel Common was steadily advancing. The law of vibration was at work, sending a particular stock on the upward trend whilst others were trending downward." "I have found that in the stock itself exists its harmonic or inharmonious relationship to the driving power or force behind it. The secret of all its activity is therefore apparent. By my method I can determine the vibration of each stock and also, by taking certain time values into consideration, I can, in the majority of cases, tell exactly what the stock will do under given conditions." "The power to determine the trend of the market is due to my knowledge of the characteristics of each individual stock and a certain grouping of different stocks under their proper rates of vibration. Stocks are like electrons, atoms and molecules, which hold persistently to their own individuality in response to the fundamental law of vibration. Science teaches that 'an original impulse of any kind finally resolves itself into a periodic or rhythmical motion; also, just as the pendulum returns again in its swing, just as the moon returns in its orbit, just as the advancing year over brings the rose of spring, so do the properties of the elements periodically recur as the weight of the atoms rises." "From my extensive investigations, studies and applied tests, I find that not only do the various stocks vibrate, but that the driving forces controlling the stocks are also in a state of vibration. These vibratory forces can only be known by the movements they generate on the stocks and their values in the market. Since all great swings or movements of the market are cyclic, they act in accordance with periodic law." "Science has laid down the principle that the properties of an element are a periodic function of its atomic weight. A famous scientist has stated that 'we are brought to the conviction that diversity in phenomenal nature in its different kingdoms is most intimately associated with numerical relationship. The numbers are not intermixed accidentally but are subject to regular periodicity. The changes and developments are seen to be in many cases as somewhat odd." Thus, I affirm every class of phenomena, whether in nature or on the stock market, must be subject to the universal law of causation and harmony. Every effect must have an adequate cause. "If we wish to avert failure in speculation we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles
of the highest order lie at the foundation of all things. Faraday said, "There is nothing in the universe but mathematical points of force." "Vibration is fundamental: nothing is exempt from this law. It is universal, therefore applicable to every class of phenomena on the globe." Through the law of vibration every stock in the market moves in its own distinctive sphere of activities, as to intensity, volume and direction; all the essential qualities of its evolution are characterized in its own rate of vibration. Stocks, like atoms, are really centers of energy; therefore, they are controlled mathematically. Stocks create their own field of action and power: power to attract and repel, which principle explains why certain stocks at times lead the market and 'turn dead' at other times. Thus, to speculate scientifically it is absolutely necessary to follow natural law. "After years of patient study I have proven to my entire satisfaction, as well as demonstrated to others, that vibration explains every possible phase and condition of the market." In order to substantiate Mr. W. D. Gann's claims as to what he has been able to do under his method, we called upon Mr. William E. Gilley, an Inspector of Imports, 16 Beaver Street, New York. Mr. Gilley is well known in the downtown district. He himself has studied stock market movements for twenty-five years, during which time he has examined every piece of market literature that has been issued & procurable in Wall Street. It was he who encouraged Mr. Gann to study the scientific and mathematical possibilities of the subject. When asked what had been the most impressive of Mr. Gann's work and predictions, he replied as follows : "It is very difficult for me to remember all the predictions and operations of W. D. Gann which may be classed as phenomenal, but the following are a few. "In 1908 when the Union Pacific was 168-1/8, he told me it would not touch 169 before it had a good break. We sold it short all the way down to 152-5/8, covering on the weak spots and putting it out again on the rallies, securing twenty-three points profit out of an eighteen-point market wave." "He came to me when United States Steel was selling around 50, and said, "This steel will run up to 58 but it will not sell at 59. From there it should break 16 points." We sold it short around 58 with a stop at 59. The highest it went was 58. From there it declined to 41-17 points." "At another time, wheat was selling at about 89¢. Gann predicted that the May option would sell at $1.35. We bought it and made large profits on the way up. It actually touched $1.35." "When Union Pacific was 172, he said it would go to 184-7/8 but not an eighth higher until it had a good break. It went to 184-7/8 and came back from there eight or nine times. We sold it short repeatedly, with a stop at 185, and were never caught. It eventually came back to 17." "Mr. Gann's calculations are based on natural law. I have followed Gann and his work closely for years. I know that he has a firm grasp of the basic principles which govern stock market movements, and I do not believe any other man can duplicate the idea or his method at the present time." "Early this year, he figured that the top of the advance would fall on a certain day in August and calculated the prices at which the Dow Jones Averages would then stand. The market culminated on the exact day and within four-tenths of one percent of the figures predicted." "You and W D Gann must have cleaned up considerable money on all these operations," was suggested.
"Yes, we have made a great deal of money. Gann has taken half-million dollars out of the market in the past few years. I once saw him take $130, and in less than one month run it up to over $12,000. Gann can compound money faster than any man I have ever met." "One of the most astonishing calculations made by Mr. Gann was during last summer [1909] when he predicted that September Wheat would sell at $1.20. This meant that it must touch that figure before the end of the month of September. At twelve o'clock, Chicago time, on September 30th (the last day) the option was selling below $1.08, and it looked as though his prediction would not be fulfilled. Mr. Gann said, 'If it does not touch $1.20 by the close of the market it will prove that there is something wrong with my whole method of calculation. I do not care what the price is now, it must go there.' It is common history that September Wheat surprised the whole country by selling at $1.20 and no higher in the very last hour of trading, closing at that figure." So much for what W D Gann has said and done as evidenced by himself & others. Now as to what demonstrations have taken place before our representative : During the month of October, 1909, in twenty-five market days, W D Gann made, in the presence of our representative, two hundred and eighty-six transactions in various stocks, on both the long and short side of the market. Two hundred and sixty-four of these transactions resulted in profits ; twenty-two in losses. The capital with which he operated was doubled ten times, so that at the end of the month he had one thousand percent of his original margin. In our presence Mr. William D. Gann sold Steel common short at 94-7/8, saying that it would not go to 95. It did not. On a drive which occurred during the week ending October 29, Mr. Gann bought U.S. Steel common stock at 86-1/4, saying that it would not go to 86. The lowest it sold was 86-1/3. We have seen gann give in one day sixteen successive orders in the same stock, eight of which turned out to be at either the top or the bottom eighth of that particular swing. The above we can positively verify. Such performances as these, coupled with the foregoing, are probably unparalleled in the history of the Street. James R. Koene has said, "The man who is right six times out of ten will make a fortune." Gann is a trader who, without any attempt to make a showing, for he did not know the results were to be published, established a record of over ninety-two percent profitable trades. Mr. W. D. Gann has refused to disclose his method at any price, but to those scientifically inclined he has unquestionably added to the stock of Wall Street knowledge and pointed out infinite possibilities. We have requested Mr. Gann to figure out for the readers of the Ticker a few of the most striking indications which appear in his calculations. In presenting these we wish it understood that no man, in or out of Wall Street, is infallible. William D Gann's figures at present indicate that the trend of the stock market should, barring the usual rallies, be toward the lower prices until March or April 1910. He calculates that May Wheat, which is now selling at $1.02, should not sell below 99¢, and should sell at $1.45 next spring.
On Cotton, which is now at about 15¢ level, he estimates that after a good reaction from these prices the commodity should reach 18¢ in the spring of 1910. He looks for a corner in the March or May option. Whether these figures prove correct or not will in no way detract from the record which W. D. Gann has already established. William Delbert Gann was born in Lufkin, Texas, and is thirty-one years of age. He is a gifted mathematician, has an extraordinary memory for figures, and is an expert Tape Reader. Take away his science and he would beat the market on his intuitive tape reading alone. Endowed as he is with such qualities, we have no hesitation in predicting that, within a comparatively few years, William D. Gann will receive recognition as one of Wall Street's leading operators."
END OF ARTICLE........................................
So began my exploration of various sciences and mathematics in my attempt to time the markets. If Mr.Gann was able to figure it out, given enough time, I should be able to as well. Over the last few years I have followed every path that have made any scientific sense at all. Some were dead ends, while others started to produce tiny results. Little by little and crumb after crumb, I started to gauge a better understanding of what Mr. Gann was talking about in the article above. For the first time I started to get indications that it is, indeed, possible to time the stock market and individual stocks though the use of modern sciences and mathematics. Shortly thereafter, small bits of progress turned into significant breakthroughs. Significant breakthroughs then turned into real understanding. While I am aware of controversy surrounding Mr. Gann's life and his approach to the stock market, let me firmly state that everything that was said in the article above is 100% true. Once the stock market structure is understood in its entirety, the market or individual stocks can be timed with great precision. Not by some arbitrary technique that cannot be replicated, but through the use of modern science and mathematics. Math doesn't lie and when the market turns/reverses at exact mathematical points of force, only one explanation remains. The market is not a randomly volatile instrument, but a mathematically precise tool that baffles the mind. Let me clearly and categorically state the following. When the true market structure is fully understood, it is possible to time the market with amazing precision. Not only to the day, but in many cases to the hour. It is the purpose of this book to explore this notion in greater detail.
VALUE INVESTING My Story I became interested in financial markets when I first learned about them at the age of 16. Growing up in Russia we had no financial markets. We had a controlled economy where there was no such thing as stocks, bonds, private enterprise or investors. Everything was controlled by the government. Everyone lived in the same type of housing, wore the same type of shoes, the same coat and the same type of jeans (if you could get a pair). It was a bizarre world. Shortly after coming to American at the age of 15 I became fascinated with the stock market for one simple reason. I wanted to be rich. I wanted to be a filthy rich billionaire by the age of 30. No matter how naive that goal looks now, that was my only dream at the time. Even at that age I understood that if I want to be really rich, one way or another, I have to participate in financial markets. I can either be an investor or build a company and take it public or build/sell a large private enterprise. These were, and still are, the only ways to get into the Billionaire club. I started studying the market and how it works. I concentrated on the people who have seen huge successes in the stock market. Of course Warren Buffett stood out as the most successful one, but I did study others as well. People like Peter Lynch, Jim Rogers, George Soros, Philip Fisher, Benjamin Graham and many others. For some reason I really clicked with Value Investing and what Warren Buffett was doing. It made a lot more sense to me than investing in growth or speculating based on other factors such as technical analysis, trends, timing, etc.... It was really simple. Find an undervalued asset, buy it at a significant discount to its intrinsic value (company value), sit around and wait for that stock to appreciate over time to reflect its true value. Sounds easy enough. Anyone can do that and get rich. Two years into my college education I have decided to drop out of my Pre Med Major (I wanted to be a brain surgeon but wasn't smart enough) and switched to finance. By that point I knew that one way or another I wanted to participate in financial markets. When it came to financial markets, the degree itself wasn't very useful. We rarely talked about how to make money in the stock market and most of the courses were filled with useless formulas and academic equations that have no place in the real world. Soon after graduation I felt that I was ready. Yet, finding a job working in financial markets in San Diego in 2001 was nearly impossible. The tech bubble had burst a year before and there were very few jobs available. I was offered a few financial product sales jobs, but I instinctively decided to strike out on my own. So, on January 1, 2002 at the tender age of 22, I naturally started my own hedge fund. Without a penny to my name, I was able to scrape enough money together to register the business, do some legal stuff, pass needed exams, open a bank account and a brokerage account. After naming the fund Dvorkin Investments, LP (what else) I was ready to go. All I needed now was some capital to invest. After some negotiations with my parents I was able to secure them as my first clients. With $10,000
now sitting in my brokerage account I was ready to rock and roll. Out of the way everyone, I am on my way to becoming a billionaire. Or, so I thought. As a side point, you do not really need that much money to start a hedge fund. While most people believe you need millions to start one, it is possible to get away with spending as little as $200 to $500 on all of the points mentioned above. You do need to have capital to invest, but the overall structure of the hedge fund is fairly easy and inexpensive to setup. If you do have questions about setting one up, please don't hesitate to contact me so I can point you in the right direction. Now, with money sitting in my brokerage account and my fingers getting itchy I decided to concentrate on the following Value Investment strategy. 1. Find substantially undervalued stocks (companies) selling at a significant discount to their intrinsic value. 2. The companies must either be growing rapidly, about to grow rapidly or have some sort of a catalyst in the works to release value in point #1. 3. Concentrate. Such investments are hard to find. As such, concentrate on having only 3-5 stocks in your portfolio. This is what Warren Buffett does as well. Diversification is a myth. 4. Do an enormous amount of fundamental research to confirm points 1 through 3. 5. Watch the investments like a hawk in case of any change. The first three years were amazing. While the DOW remained net flat during this time (2002-2004), my fund returned an astounding +149.75% net of fees. I was on fire, I could do no wrong. Most of the things I touched turned to gold. I was starting to get more clients, more money and making contacts in the industry. I was now making fairly good money, but I was also getting restless. I was growing sick and tired of the strategy above. It was not exciting enough. There were only a few stocks/companies that matched my criteria and after a while I knew everything there was to know about them. In other words, there was only so many times I could look at the balance sheet of any given company before getting bored out of my mind. I couldn't sit still. I knew there had to be a better way to invest. A more advanced way. One of the major problems with value investing is timing. While you can identify a substantially undervalued asset, it might take years before its value is realized. You don't know when it is going to happen. It might be tomorrow or it might be 2.7 years from today. In the meantime you have your investors calling you and questioning everything that you do. If you don't know, the competition for capital in the investment industry is fierce. While I am telling my clients about the balance sheet, fundamentals, valuations and why this company should appreciate significantly given enough time, their Lehman Brothers broker is screaming how NOW is the "Generational Buying Opportunity." To be honest, I think they teach that phrase in the stock broker school. At the same time, I shouldn't complain. I had great and understanding clients. Yet, I wasn't naive, all they wanted from me was performance. If I couldn't outperform this quarter or the next, they would be gone.
During this time period it was already easy for me to figure out WHAT would happen, but next to impossible to try and figure out WHEN it would happen. As such, I shifted my research work to TIMING. I wanted to see if it was possible. I have studied everything I could put my hands on. Technical analysis, cycle analysis, planetary movements, physics, mathematics, various other sciences and even witchcraft. At the end of the day and after a tremendous amount of work I found what I was looking for. Let me state this in no uncertain terms as the whole premise of the book relies on this one statement. Yes, it is absolutely possible to time the markets and/or individual stocks with great precision. I have proven that fact to my entire satisfaction. Math doesn't lie. Now, I understand that you might be skeptical of the statement above. Yet, I ask you to keep an open mind and withhold judgment until the end. Just remember, if I was to suggest 500 years ago that the earth was round, or that the sun and not the earth was the center of our solar system, I would probably be burned at the stake. As Albert Einstein so famously said "God Does Not Play Dice", meaning the universe presents us with the perfect order in all things. It is only the stuff that we do not yet understand that is viewed as random or volatile. By March of 2006 I have made a huge break though in my mathematical work. So much so that I have led myself to believe that I finally broke the "stock market code". By this point my work was so well researched and accurate that I truly thought that I have figured it out. I was on could nine. Finally, it was my chance to shine. That was the final piece to the puzzle I was searching for. Now, I would be an unstoppable force and it was only a matter of time before I would be a billionaire. By May of 2006 and after some additional confirmation work I was ready to go. In hindsight, what I did next was beyond idiotic. I threw out my value investing book, I threw out all of my rules and I threw out any type of rational thinking along with it. I was ready to be a trader now. I was going to make a ridiculous amount of money. The next 20-30 trading days were beyond remarkable. My work had allowed me to pick 90-95% of significant tops and bottoms within hourly resolution. Meaning, I was able to pick almost exact tops and bottoms. Sometimes in advance and sometimes minutes after they have had occurred. It was a fascinating time and by the time this period ended I have accrued close to $500,000 in profit. Yet, for some reason that wasn't enough. I was blinded by greed. I wanted to make more money as I was only 3 years away from being 30 years old. Beaming with confidence and an overwhelming desire to make an obscene amount of money I then became even more aggressive and careless. Not only with my own money, but with the money of my clients and other funds I was managing at the time. In June of 2006, on the day of the FED interest rates decision my work showed a powerful move to the downside. It didn't matter to me what the decision was, my work clearly indicated a significant move down. Blinded by the accuracy of my work in the past, by the greed running through my blood and by my oversized ego I bet the house on the stupidest trade of my life. I took all of my money and a large portion of my clients money to buy as many Short Term PUT Options as I could. If my work was to be right I would make a huge amount of money. If it was wrong, well, that was impossible according to my mind. (If you are not familiar, put options allow you to leverage your
trade and make or lose a lot more money faster than you would be able to do investing in an underlying security). I was right about one thing. There was a powerful high energy move on that day, but to the upside. Long story short, I started the day as a self made multi millionaire hedge fund manager and ended it as broke bum. Thus far that day remains the lowest point of my life. It was so bad that I was literally 10 seconds away from blowing my brains out. If you would like to learn more about this experience I suggest you visit my other website, LastSpartan.com and search for the first article on that site titled, I Want To Die Today, I Think I Will Blow My Brains Out. When the day ended I was broke. Not only financially, but spiritually, mentally and in every other way you can think of. At least for the time being I was finished as an investor. I lost all interest in financial markets. I shut down my fund and returned all capital to my investors. They lost very little, if anything. I used my own capital to prevent their losses. At that time I couldn't stand to even look at financial markets or to do my research. I was too devastated and mentally destroyed. I put everything away and moved on to the next chapter of my life. As time went by my thirst for financial markets came back. My pain went away and by mid 2013 I was ready once again.
What Everybody Is Ought To Know About Value Investing If you have spent any time in financial markets, you probably already know what Value Investing is. If you are new to investing, Value Investing is probably the easiest investment style to understand and apply towards your own investment purposes. Also, while debatable, some very successful investors have proven that Value Investing is one of the best ways to approach financial markets over the long term. Allow me to first illustrate what Value Investing is with a real world example. Imagine that you are strolling through your local mall in the middle of July. The sun is scorching hot and you are just trying to stay cool. After your 3rd Caramel Frappuccino you decide to check out a nearby sports superstore. Shortly after you walk in you see something and you can't believe your eyes. The snowboarding jacket you have always wanted, but were never able to afford, is on sale. And not just any kind of a sale. It is a seasonal liquidation sale. Typically selling at close to $250 during the winter season, it is now just $19.99. You can't believe how lucky you are. You check the jacket to make sure there is no big gaping hole in the back of it. Nope, everything looks fine. The size is just right. All zippers work and it's the color you want. You are beyond excited. You found exactly what you wanted at over 90% discount to what it is really worth. The timing is not perfect and you can't use it over the next 6 months, but you know with 100% confidence that you have found a deal of a life time. In 6 months this jacket will be selling at $200-250 again. Without a second of hesitation you take out your wallet and head towards the register. Value Investing is just like that. Except, instead of a jacket you are buying shares (or other financial instruments) in publicly traded companies. Simply put, you do a lot of fundamental research to find companies that are selling well below their intrinsic or real value and then proceed to buy them at a significant discount. Typically a 5099% discount. The bigger the discount you can obtain the bigger your margin of safety is. In fact, margin of safety is one of the most important concepts when it comes to Value Investing. Margin of safety is an insurance policy of sorts that acts to protect your capital. The theory suggests that if you buy stocks at deep enough discounts to their intrinsic value you have an automatic safety net built in. After all, no fundamental research can be 100% accurate and you need something to limit your downside risk. In such a case you are unlikely to lose a lot of money on your stock trade/investment because your investment is unlikely do decline that much further. Remember, it is already very cheap. In essences you are buying $1 bills for $0.50 cents or less. Over time these assets "should" appreciate back to $1 to reflect their true value. Providing you with a large return on your investment while minimizing risk. Yet, as with anything, there are numerous issues associated with value investing. Issues that we will cover in greater detail over the next few chapters. For now, value investing can be summarized in a five easy steps. 1. Do a lot of fundamental research to find deeply discounted stocks or other assets.
2. Buy such bargains or stocks at a significant discount to their intrinsic value. Typically a 50% or more discount is required. By buying at a significant discount you automatically create a margin of safety. 3. The margin of safety is your best friend. Maximize it. It protects your capital by limiting the downside. 4. Patiently wait for asset appreciation to reflect its true value. Such periods can range from days to years. 5. Watch your investment like a hawk by constantly updating your fundamental research. Should any developments alter your original investment thesis, you should re-evaluate your investment decision. That about covers it.
Why Do Stocks Sell At A Discount? Most people would classify the stock market as irrational and volatile. Yet, it is the best pricing and discounting mechanism that we presently have. It is not perfect, but what it lacks in predictability it makes up in opportunity. The stock market tends to flow and oscillate up and down. Sometimes drastically so. It is during those oscillations that we are given opportunities to either buy low/sell high, buy high/sell low or any other combination of the two. We will discuss exactly how the stock market works and what causes such oscillation in the later chapters, but for now we have to figure out why and how certain stocks can sell at significant discounts. To answer the question, why and how are value opportunities created? To be honest with you there could literally be millions of reasons of why any particular stock sells at a significant discount. It could be caused by an economic collapse, internal company infighting, product failure, management failure, fraud, management change, financial mismanagement, industry decline, new technologies, competition and so forth. Whatever the fundamental situation is, the market always gives investors plenty of opportunities to purchase good businesses at 50-90% discounts to their value. When such opportunities present themselves, an outsized return could be generated while taking on very little risk. An ultimate setup for any investor. With that said, let's take an in depth look at three primary reasons of why various companies sell at significant discounts. Market Factors Most stock market indexes such as the DOW Jones have their own rate of vibration and flow. They tend to rise and fall in conjunction with the overall economic cycle. Basically, the market represents the overall state of financial health and growth prospects for all of corporate America. As such, when the overall stock market rises (Bull Market), all stocks tend to do very well. When the overall market falls(Bear Market), most stocks tend to do poorly. While most of the declines are not substantial enough to present investors with 50-90% discounts, at certain times, they are. For instance, 1929, 1949, 1972, 1982, 1987, 2002 and 2009 bottoms are just a few of the examples when investors could have made a killing if they would have purchased stocks at the bottom. It is during such times that the market presents investors with a galore of stocks selling well below their intrinsic value.
Such occurrences are caused my major failures and/or panics that tend to dominate the markets at the time. The most recent decline of 2007 - 2009 is a perfect illustration of that. Caused by a number of fundamental and cyclical factors I discuss on my blog, it ended with major panic in early 2009. With the Dow Jones selling well below 7,000, it presented investors with an opportunity to buy hundreds of great companies/stocks selling at well below their intrinsic values. In summary, the overall market flow and the human psychology involved tend to push stocks well below their intrinsic values at various points throughout history. At such times enterprising investors can easily pick up wonderful businesses at 50-90% discounts. Investors should not be afraid of such severe bear markets. Rather, they should be excited. After all, the market is giving them a rare opportunity to pick up great stocks selling at significant discounts, insuring a large margin of safety (low risk) and a significant return on investment in the near future. As Warren Buffett says, "Be greedy when others are fearful and fearful when others are greedy". Company Factors The next primary factor of why certain companies or stocks sell at a significant discount to their intrinsic value has to do with the internal company causes. Companies might be struggling with a number of different issues to warrant a lower valuation, but some of the primary ones include.
Management Change or Internal Infighting Financial Failure, Financial Mismanagement or Fraud Competition Is Eating Their Lunch Product Failure or Market Failure Falling Growth Rates, Deteriorating Financials and No Clear Future/Catalyst New Technologies Are Entering The Market
Once again, there are many others, but these are the primary issues. Any given corporation can have one or multiple factors working against it at the same time. Whatever the situation is, it can greatly impact the value of any given stock. If investors are aware of any such negative developments there is a good chance the stock will be sold off. So much so that you are likely to find it selling at a significant discount to its intrinsic value. Let me give you an example. I believe it was in 2003 when I was invested in a fast food concept out of San Diego called Pat & Oscars. It was a very well run company at the time, selling at a very reasonable valuation (that was well below its intrinsic value) and the company was planning to grow its chain nationwide. Value and growth in one package. Yet, at some point in 2003 the company had an E. Coli outbreak in its San Diego restaurants. The stock sold off the next day to the tune of 50%, giving investors a chance to buy a good company at a huge discount. Assuming this E.Coli outbreak didn't kill the company. This is what you would call a company factor. It is company specific and depending on a situation it can provide investors with amazing buying opportunities. The trick here is to figure out if the issue in question is a permanent one or a temporary one as in the example above. If it is a temporary one and if
your research is proven to be correct a significant amount of money could be made while taking on very little risk. Industry Factors Finally, various industry factors can push any stock into being sold at a significant discount. It could be because of cyclicality, it could be due to industry wide technological change, it could be due to pricing pressures and so forth. The trick here is to find the best performing company in the sector and make sure you buy it at a significant discount. When the industry eventually recovers, the best performing companies should outperform the rest of the sector by a large margin. For example, let's assume that your research indicates that the price of gold should go through the roof over the next 5 years. Yet, for some reason gold mining stocks are selling at an all time lows due to the price of gold collapsing in the open market. In fact, most of the miners are selling well below their liquation value. What you should do if you really believe in your investment thesis is identify 1 or 2 best companies in the sector and invest in them. If your research is proven to be right, your stand to gain a substantial amount of money while keeping your risk at a minimum. In summary, while the are many other, market, company and industry factors are the three primary forces responsible for driving stocks well below their intrinsic value. When doing fundamental research you should have a clear understanding of which one of the forces above is responsible for pushing the stock price in question into the 50-90% discount category. Clearly understanding this factor can mean the difference between making a great investment and making a disastrous one.
The Secret Of Margin Of Safety Margin of safety is one of the most important concepts in value investing and as such deserves a more in depth look and analysis. As I have mentioned earlier in this book, your margin of safety is the difference between the price you pay for an asset and how much that asset is truly worth. Let's take a quick look at another example for better understanding. Imagine a suburban street with 3 identical houses on it. The house on the right sold a few months ago for $500,000 and the house on the left is on the market right now for $520,000. Yet, you are interested in the house in the middle. The previous owner has defaulted on the loan and the house is soon to be auctioned off. Your house is not in as good of a shape as the other two houses. In fact, it has been run down by the previous owner and you estimate that it will cost you about $75,000 to bring it back to the condition of the two adjacent houses. On the day of the auction you are able to purchase the house for $150,000. With an additional $75,000 in repair costs, your true cost is $225,000. At the same time you know the true value of the house is about $500,000. So, $500,000-$225,000=$275,000 Is Your Margin Of Safety By definition, the $275,000 or 55% discount from the true value of the said house becomes your Margin Of Safety. It becomes your safety net to prevent any losses, it becomes your security blanket against adverse developments and it becomes your possible profit margin. What if it takes $150,000 to fix everything up instead of $75,000. That's fine you are still in the black. What if you find out that there is an additional $50,000 lean against the house? That's fine, you are still in the black. Your margin of safety on this house will protect you against various unpleasant developments to the tune of $275,000. Yet, an important question still lingers. Is the Margin Of Safety your insurance policy or is it your profit margin? Well, it is both and that is why it is so important when it comes to value investing. First and foremost, margin of safety is your insurance policy. As Warren Buffett so famously said "Investing rule number one...never lose money. Investing rule number two.....never forget rule number one". Basically, the margin of safety is there to protect you against any losses and unforeseen events. We live in a complex world where your fundamental analysis will not always be right. You will not always be able to predict unforeseen or as the insurance industry calls them "Act Of God Events". Should such events occur your investment will have a large cushion built into it to protect you against significant losses. It is only after acting as an insurance policy does the Margin Of Safety becomes your profit margin. Technically speaking, your asset should appreciate to its true value. As with the real estate example above, your margin of safety of $275,000 becomes your profit if/when you decide to sell the house. Yet,
that is not always the case in the stock market. When we deal with publicly traded companies the situation becomes a little bit more complex. Why? Because the stock market is a much more complex discounting mechanism. The stock market constantly discounts fundamental data, human psychology and future projections into any given stock price. During this process many errors are possible. It could based on simple misunderstanding of the fundamental data or a negative psychological mood of the overall crowd or a market correction/surge. As such, stocks end up being either.....
Significantly Undervalued $25 Undervalued $50 Properly Valued $100 Overpriced $150 Speculatively Overpriced $250
Obviously, as value investors we are interested in the first two categories because such stock give us the best margin of safety. Yet, that doesn't necessarily mean that the margin of safety you are able to obtain will automatically become your profit margin. For example, if you have bought an "Undervalued" stock at $50 giving you a 50% Margin of safety, it doesn't mean that the stock will simply appreciate to $100 over a certain period of time so you can sell it at 100% profit. It should, but it doesn't mean that it will. Keep in mind, many outcomes are possible here. Yes, if you have done your work right, this particular stock should appreciate to its true value of $100. However, the path it takes is unknown. It could decline even further to $25 before surging back to $100. It can stay at $50 for a couple of years before surging all the way up to $250. The decision making process becomes progressively complex as well. For instance, should you sell at a $100 or keep the stock in your portfolio due to improving company fundamentals? As you can see, there are just way too many possible outcomes to clearly define if your margin of safety is your profit margin. That is why it is best to look at the Margin of Safety as your insurance policy as opposed to your profit center. The profit or loss that will eventually come from your investment can realize itself in many different ways, yet there is only one Margin Of Safety and it is clearly defined. Now, let's take a look at a real life margin of safety example and how to apply it to individual stocks. (*I will keep the analysis below very simple and without going into an in-depth analysis and/or valuation work).
Date: 10/18/2013 Company Name: RadioShack Stock Symbol: RSH Stock Price: $3.35 Market Value: $334 Million Enterprise Value: $613 Million Book Value Per Share: $5 Price/Book Ratio: 0.67 Revenue:$ 4.19 Billion Net Loss: ($206 Million) Total Cash: $432 Million Total Debt: $712 Million
Corp (RSH)
A stock that just 3 years ago was selling at close to $25, is now selling at $3.35. That is a about an 85% decline in value for a famous brand name we all know. This type of a situation (significant decline and strong brand name) should definitely peak an interest of any value investor. As mentioned earlier, there could be a million different reasons of why this stock has declined so much, but for the sake of simplicity and our margin of safety discussion lets simply look at how much (if any) margin of safety does this stock offer. One of the first things we have to look at from the value investing perspective is the price/book value ratio(P/B Ratio). The book value is defined by total assets - total liabilities/divided by total number of shares outstanding or it could also be determined by dividing shareholder equity/total number of shares outstanding. There are other ways to calculate the book value, but that is the most basic form. Now, without making this too complicated, book value per share means the value left over if you decide to liquidate the company, sell all inventory and assets, pay off all liabilities and return all remaining capital to the shareholders. For example, a P/B Ratio=1 means that if the company is liquidated at that time you will get $1 for every $1 invested. The P/B ratio of 5 means that for every $5 dollars you have invested in the stock, if the company is liquidated now you will only get $1 back. The P/B ratio of 0.5 means that for every $0.50 cents you have invested, you will get $1 back if the company is liquidated today. Value investors typically try to identify stocks with P/B ratio of 1 or less because it automatically gives them a margin of safety. As with the Radio Shack example above we can see that their P/B ratio stands at 0.67. Meaning that if you invest in Radio Shack today, you are buying $1 in assets for just $0.67 cents. This gives you an automatic margin of safety to the tune of 33%. This also mean the company is undervalued, providing an investor with a possible gain of 33% or more. Not a bad start. The next thing we try to do is determine the Intrinsic Value of the business. If you recall, the intrinsic value of the business is typically above the book value. It includes its brand name, future growth projections and cash flow, interest rates, etc.... While figuring out Intrinsic Value could be a time consuming process, an easy solution will be shown to you in the next chapter. No degree in finance is required. We will then look at the management team, business prospects, competition, products and a few other metrics to add into the calculation. Once the Intrinsic Value number is estimated (it will never be 100% accurate) we will have a much better understanding of what the business is truly worth. For instance, if the Intrinsic Value of Radio
Shack ends up being $10, we can safely assume that our margin of safety is 66.5%. If true, it is indeed a significant margin of safety that allows us to protect our original capital. In addition, the 66.5% margin of safety could be viewed as a potential profit margin which could be realized when the Radio Shack stock eventually moves towards its true value. Again, even thought it could be as simple as that, in the real world it is rarely so. Depending on the future performance of the company both the book value and the intrinsic value calculated above can go up or down. Sometimes substantially so. That is why obtaining a significant margin of safety when purchasing any given investment is so important. In the majority of the cases that lowers your risk profile and gives you an opportunity to get out without too much damage if the mistake is made. As such, value investors should always strive to minimize their risk by maximizing their margin of safety.
How To Determine The Intrinsic Value Of Any Company In 5-10 Minutes.....No Harvard MBA Is Required In the last chapter we took a closer look at how the margin of safety works and what kind of indicators we should look for in order to make a proper value investment. As previously discussed, one of the most important things to know when figuring out the true margin of safety is the Intrinsic Value (IV) of any given company. Wikipedia defines Intrinsic Value as the actual value of a company or stock determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value. Now, there is something very important you must understand. Determining the Intrinsic Value of any company is arbitrary at best. It could be a highly complex process involving hundreds of excel sheets and data points or it could be a fairly easy process involving a few easy to understand middle school algebra calculations. At the end of the day, neither approach will give you an exact Intrinsic Value of any company. Why? Because we are dealing with the unknown. What we are doing when we are determining an Intrinsic Value of any company is taking various existing data points and projecting them well into the future. In fact, most models call for at least a 5 year discounted cash flow projection to value a company. The problem is, the future is unknown and in the fast paced business world everything can change on the dime. Making your original Intrinsic Value calculation obsolete. New products, new technologies, new competition, economic booms and busts, political developments, regulations, etc..... and the list never ends. How can we make an accurate Intrinsic Value calculation when so many different "unknown" factors can impact your model. Well, we cannot. We can make our best estimates, but we can never achieve a 100% proper Intrinsic Value valuation for any given company. Give 10 different analyst a company to value and they are likely to come up with 10 different answers. Most likely within +/- 20% of each other. The point I am driving at is this. There is no possible way to achieve perfection when it comes to Intrinsic Value calculation. We are dealing with too many unknowns and future developments. All we can do is estimate. Let me give you a quick example. Why did Investment Banks who were involved in the Facebooks IPO (initial public offering) valued the company at $38 a share? Did the Investment Banks have a bunch of complex and secret valuation algorithms valuing Facebook before the IPO? It's probable, but not likely. You see, whatever number any such valuation yields would technically speaking be "garbage" because the future of Facebook is unclear. It is a fast growing tech company, but without a clear path. Everyone is making assumptions. No one knows if Facebook will grow at 20% per annum over the next 10 years or make a series of mistakes that will put it on the path previously walked by MySpace. As such, everyone can make estimates in order to derive the Intrinsic Value, but in reality no one truly knows. Anyone who claims they can properly determine the Intrinsic Value value of Facebook is simply
lying. What ends up happening in a situation like this is as follows. Investment bankers basically figure out what "the market" is willing to pay for shares of Facebook and set their IPO price based on that. That is why I argue that most investors out there do not need a complex "discounted cash flow Intrinsic Value calculation". Yes it will give you a more precise answer, but a much easier valuation technique can give you the same answer within 5 minutes. Here is what you have to do. First, let's take a look at Microsoft Inc and estimate its Intrinsic Value. We need the following inputs (easily available from any financial website Ex: Yahoo Finance). Stock Market Price: $33.75 (Oct 23, 2013) Current EPS (Earnings Per Share): $2.58 Estimated Future Growth Rate: 10.8% Weighted Average Cost Of Capital (WACC): 7 to 8% Average P/E (Price/Earning) Ratio To Use: 15 STEP#1: Figuring out EPS in 10 years. Formula: (Annual EPS x Estimated Future Growth rate^10) Microsoft: $2.58 x 1.108%^10 = $7.19 Explanation: If Microsoft continues to grow its EPS at 10.8% over the next 10 years, in 2023 its earnings per share will be equal to $7.19 STEP #2: Figuring out stock value at year 10 Formula (EPS at year 10 x Average P/E Ratio) Microsoft: $7.19 x 15 = $107.85 Explanation: This means that if EPS and Average P/E ratio hold, the price of Microsoft stock should be $107.85 in the year 2023. STEP #3: Discounting future value to determine today's Intrinsic Value Formula (Future Stock Value/ WACC^10) Microsoft $107.85/(1.07^10)=$107.85/1.9671=$54.82 Explanation: This means the stocks Intrinsic Value today should be $54.82. With the stock price being $33.75 today, it appears that Microsoft is selling at about 38% discount to its Intrinsic Value. The Weighted Average Cost Of Capital (WACC) used in the calculation above was 7%. In simple terms, WACC is the average combined cost of debt and equity. It is not a particularly hard calculation, but it does require some work. I do not believe that you need to do this calculation. Instead, there are two other ways to think of WACC. You can think of it as ROI % required by you for this investment or as the average stock market return over the last 50 years. To simplify things even further I
tend to use 7-8% WACC at this time, unless there are company specific issues that lead me to either increase or decrease the cost of capital. Further Notes & Valuation Explanation Based on the calculation above there are 2 important dynamic areas that require our further attention and explanation. They are an integral part of the calculation and just a small adjustment in either one can have a significant impact on the overall Intrinsic Value outcome. The two variables are... 1. Estimated Future Growth Rate: Determines the future growth rate of the company over the next 10 years. It is an impossibly difficult number to get exactly right, yet we have a few options. We can look at the historic growth of the company and use that number OR we can use the existing (last few quarters) growth rate OR we can use our future projected growth rate based on our understanding of the fundamental factors, the economy, company products and so forth. Whatever your decision might be, understand that you are somewhat guessing here. The future is fuzzy at best. In 10 years the company in question might be collapsing under negative growth rates or it might be growing at an +40% rate due to new product introductions. I often find it helpful to concentrate on the historic/average growth rate and then reduce it by a few percentage points to reduce Intrinsic Value output. This give me a little bit more margin of safety and a little bit more room if I have made a mistake. 2. Average P/E Rate: Very similar situation to the Estimated Future Growth Rate discussed above. While we can look at the average P/E ratio of the company over the last 10 years and perpetuate it over the next 10 years, in reality we have no idea what that ratio will be in 10 years. In Microsoft's example above we have estimated that the P/E ratio will be 15. Yet, no analyst can say that with 100% certainty. Once again, the company might stumble over the next 10 years and find itself with a P/E Ratio of 5 -OR- it might surge its growth and find itself with a P/E Ratio of 35. Of course, that greatly impacts the Intrinsic value calculation and any perceived Margin of Safety that you have. As discussed in the previous point you are better off using historic/average P/E Ratio and then reducing it by a few points to give yourself some extra margin of safety. It is often helpful to play around with different inputs for these variables based on your research. It will give you a range of Intrinsic Values (Best Case, Average, Worst Case) type of scenarios that can give you a better understanding of what the company is really worth. For example, in Microsoft's case you can have a range of ($45.15 I $54.82 I $59.28) based on playing around with a few numbers. These prices can act as markers for future developments. If the company is performing better than your original research has indicated, a higher range Intrinsic Value calculation becomes appropriate. If worse, the lower one. In either case, you are at least aware that the Intrinsic Value you have derived is not an exact number, but a constantly changing one. Once again, the formula above is a highly simplified version of a standard Intrinsic Value calculation. It can be made a lot more complicated for the purposes of being more precise. Plus, there are multiple ways to calculate the Intrinsic Value. Whatever the situation is I want you to understand that an Intrinsic Value number cannot be determined with exact precision. It is a calculated guess at best.
Finally, some of the most important variables in the Intrinsic Value calculation rely on the future performance. While the future can be estimated, any such estimate is rarely accurate. As such, you must have a clear understanding that you are making predictions based on unknown future developments that might or might not be anywhere close to what you have originally estimated. With that said, let's take a look at our previous example, RadioShack, for clarification. Stock Market Price: $3.35 (Oct 18, 2013) Current EPS (Earnings Per Share): $-2.71 (EST $0.50 in 2015) Estimated Future Growth Rate: 11% Weighted Average Cost Of Capital (WACC): 7% Average P/E (Price/Earning) Ratio To Use: 14.8 RadioShack presents us with an interesting real life valuation example that you will run into more often than you can imagine. Particularly, if you are looking for cheap value oriented stocks. First, you will notice that last year's EPS were negative. Well, we cannot perpetuate negative earnings into the future in order to determine Intrinsic Value. Earning have to be positive for the calculation to work. In addition, negative earnings means that you do not have a workable P/E ratio to use in our formula. That is where and why fundamental analysis comes in so handy. It is obvious that RadioShack is going through a rough time and its stock price reflects it. If this continues, in the not so distant future RadioShack is likely to be filling for bankruptcy. Yet, if the company is able to turn itself around and grow again, the stock price will appreciate significantly. Providing investors with outsized returns and very little risk in the process. Let's assume that your in depth fundamental analysis has yielded the following points (this is done for valuation explanation purposes and NOT to be a real life analysis for RSH).
The new and highly experienced management team has taken over operations. The new management team has put forth a plan that you believe they will be able to execute. Based on your fundamental research you estimate that the company will turn around and earn EPS $0.50 in 2015. Thereafter the company will grow at 11% per annum(based on your research). After looking at RSH average P/E Ratio and industry averages you feel comfortable with using a P/E ratio of 14.8 for your valuation work. Most importantly, based on your work you believe the company will turn around and prosper.
Let's take a look at the valuation. STEP#1: Figuring out EPS in 10 years. Formula: (Annual EPS x Estimated Future Growth rate^10) RadioShack: $0.50 x 1.11%^10 = $1.42
Explanation: If RadioShack grows its EPS at 11% over the next 10 years (after EPS of $0.50 is acheived), in 2025 its earnings per share will be equal to $1.42 STEP #2: Figuring out stock value at year 10 Formula (EPS at year 10 x Average P/E Ratio) RadioShack: $1.42 x 14.8 = $21.02 Explanation: This means that if EPS and Average P/E ratio holds, the price of RadioShack stock should be $21.02 in the year 2025. STEP #3: Discounting future value to determine today's Intrinsic Value Formula (Future Stock Value/ WACC^10) RadioShack $21.02/(1.07^10)=$21.02/1.9671=$10.72 Explanation: This means the stocks Intrinsic Value today should be at $10.72. With the stock price being at $3.35 today, it appears that RadioShack is selling at about 70% discount to its Intrinsic Value. As you can see the calculation itself is fairly simple and straight forward. What is not easy when it comes to doing Intrinsic Value calculation is doing the fundamental research and figuring out which inputs to use. A slight deviation in any of the variables above can have a huge impact on your overall Intrinsic Value calculation and your subsequent valuation estimate. For example, are you 100% confident in your management team analysis? Are you sure they will be able to turn the company around? Is your estimate of $0.50 EPS in 2015 and a growth rate of 11% thereafter really valid or is it full of holes? Are you sure the company turns around and what about the competition? These are the real variables and the real questions that determine the Intrinsic Value. Yet, none of them can be known with 100% certainty. They can be very well researched and you can make very accurate estimates, but they are not exact. In many cases these are guesses at best. That is the point I want to drive home. You will NEVER have an exact Intrinsic Value, it will always be an estimate. That is why Margin Of Safety plays such an important role when it comes to Value Investing. Let's say you have worked very hard on determining RadioShacks Intrinsic Value at $10.72. With today's stock price of $3.75, it gives you a 70% Margin of Safety. That is exactly what you are looking for. This type of a "large" margin of safety will protect you on the downside should your analysis fail to deliver. If the management team has failed, if the growth rate or the P/E ratio don't materialize the chances of this stock going much lower is small. Why? Because it is already selling at 70% discount from what a reasonable fundamental research and valuation work have indicated. Should you make a mistake your losses will be limited. Yet, should the company surprise to the upside your return will be significantly higher. A low risk and a high return kind of a setup. Can the RadioShack stock still go to zero? Absolutely. The company can still fail and file for bankruptcy, but if you have done your work right and continue to follow the company on the daily basis you should be well aware of that long before it happens. That is what value investing is all about. Finding these
undervalued gems, doing a lot of fundamental research, valuing companies and trying to identify investment opportunities that sell well below their intrinsic values. That in return provides you with a low risk and a high return type of a setup. Conclusion: If you are to take anything away from this section of the book, take away the fact that no Intrinsic Value calculation can be exact. Even complex models used by the investment banks and the "Quants" yield best guess estimates. Basically, there are just too many unknown variables that depend on future events that comprise the calculation. That is why you will be very well served by doing your own fundamental research and concentrating on stocks that provide you with the biggest margin of safety and plenty of upside. The types of stocks discussed in the next chapter.
Warning: Not All Value Stocks Are Created Equal Now that you are well versed in value investing, the concept of margin of safety and how to do an Intrinsic Value calculation work, you must be made aware of yet another very important point. Not all value stocks that exhibit a substantial margin of safety are created equal. For instance, you will have companies selling well below their intrinsic value, on the way to their eventual bankruptcy. You will have stocks selling very cheaply, but with no chance for a recovery any time soon. You will have stocks that seem to have a large margin of safety, yet it is an illusion. You might have stocks that offer very little margin of safety, yet they are about to take off to the upside like a rocket ship to the moon. You get the idea, there are many different types of value stocks with many possible outcomes. For my own purposes, I like separating Value Stocks into the following easy to remember categories..... Dead Man Walking: Initially, such stocks might look like a great investment opportunity because they are selling as if they are about to go out of business and/or file for bankruptcy. On the surface they might be everything a good value investor is looking for. They might be selling at a huge discount (80-90%) to their Intrinsic Value and you might be salivating over the opportunity, thinking about how much money you are going to make. However, stop for a second and take a closer look. It is very rare that the market will present you with such a wonderful buying opportunity. It will happen, but very seldom. Most likely than not, you are missing a vital piece of information that the market sees. You will need to go back and figure out if this a great investment opportunity or if this is a company that will be filling for bankruptcy 6 months from now. Further, you will need to be very careful here. You will need to double down on your fundamental research and figure out what you are missing. I guarantee, you are missing something. Once you find that missing piece of information you will need to re-evaluate your fundamental research and Intrinsic Value calculation in order to determine if your original conclusion was right. If you still believe in your original conclusion, I recommend that you buy as much as you can. You might have found one of those once in a life time opportunities. At the same time, if the missing piece of information makes a significant negative impact on your previous work you would want to steer clear of this stock. In conclusion, you should try to avoid such stocks like a plague. They are cheap for a reason. They will stay cheap for a long time or they will be filing for a bankruptcy soon. Yet, if your fundamental research indicates that the market is wrong you might want to shift this stock into the Rocket Ship category presented below.
Hungry Dogs: These stocks tend to operate in the "No Man's Land". They are not dead enough to file for a bankruptcy, but they are not healthy enough to do anything but survive. More likely than not, they have significant business problems associated with internal or external factors. They are surviving, but barely so. Think of them as street dogs running around looking for food. They either can't or do not have enough capital to fix whatever problems that they have. They are simply getting by and there is no catalyst on the horizon that would indicate that their luck is about to change. Typically they sell at a significant discount to their Intrinsic Value (or perceived Intrinsic Value). To the tune of 50-80%. As an example, think of an apparel retailer who has been struggling over the last 5 years. Their brand name has been diminished, their sales are down 4-5% quarter after quarter, there is no new store growth, their management is not changing direction, they are sustaining operating losses, there are not an acquisition target, their financial position is very weak and they barely have enough cash flow to keep their operation going. The bottom line is, avoid Hungry Dog stocks if there is no clear catalyst that could increase their value in the near future. What kind of a catalyst? As per example above it could be a buyout or a takeover, management change, improvement in merchandise, gradual/consistent improvement in same store sales, new store openings, etc..... If no clear catalyst is present, such stocks are likely to remain in their trading range or worse, shift into the Dead Man Walking category. As such, you don't want to tie up your capital in these stocks even if the margin of safety is well over 50% and your valuation work suggest otherwise. Simply put, stocks in this category are not going anywhere. Sleeping Beauty: Just like a sleeping beauty such stocks are nice to look at, but most of the time they are worthless. Such stocks might look very good in your overall portfolio, but there is no use if they do not contribute to your capital gains. They are certainly better than Hungry Dogs, but not by much. They are easily identifiable through the following characteristics. The company is growing at a slow rate of about 1-5% per annum. It is financially stable, operating at a profit or a small loss, has enough cash flow to sustain operations for a long time and is in no imminent danger from outside factors. Furthermore, the company is making certain changes that seem to be working, but they are not drastic. The company is selling at a significant discount to its Intrinsic Value (20-70%), but its stock price hasn't gone anywhere over the last 5 years. Plus, there is no clear catalyst to release the value in the near future. As an example, such a company might include an agricultural company with a lot of land holdings or a REIT that has a lot of assets, a strong financial position, but no real catalyst for releasing that value to the shareholders. Their stock prices end up stagnating, sometimes for decades even though investing in them looks good on paper.
In summary, you want to avoid such stocks as well. They might look good, but all they will do is tie up your capital for a long time without any sort of a real return. Meanwhile you might be losing on other great investment opportunities. The opportunity cost is real and you should definitely take that into consideration when looking at Sleeping Beauties. Waking Beast: This is where things start to get exciting for us. For some reason Waking Beast stocks are significantly undervalued (selling well below their Intrinsic Value), yet there is nothing radically wrong with them. For the most part they might be growing at a good pace, have a good management team and a product that is in demand. Yet, the market has sold them off. There might be a number of reasons for such a development. The industry itself might be going through a downshift, there might be a bubble elsewhere in the market, there might be a misconception about the company or they might simply be "not sexy enough". Home builders in early 2000's would be a perfect example of that. At the time they were selling at huge discounts to their Intrinsic Values even though the housing boom was in full swing. Most of the companies in the industry were selling at 30-75% discounts to their Intrinsic Values even though people were literally fighting and standing in lines to get access to their products. Their financial positions and management teams were superb as well. These are the types of opportunities value investors should be excited about. The company is doing great on every front, yet for some reason the market has discounted it well below what it is worth. Now that you have your margin of safety built into your purchasing price it is highly probable that such stock will appreciate significantly over the next few years or months to fully reflect their Intrinsic Values. In conclusion, that is exactly what you are looking for. Highly discounted stocks that are doing very well and are in the position to appreciate significantly over a short period of time. That is how you minimize your risk while maximizing your gains. Unfortunately, you won't find many of these stocks out there. When you do, back up the truck. Rocket Ship: Rocket Ship stocks won't come across your desk very often, but when they do, you will be able to make huge sums of money. As Warren Buffett so famously says, "Wait for the perfect pitch". Well, these are your perfect pitches. Such stocks are dirt cheap, but they shouldn't be. It could happen for two reasons. 1. The market has a misconception about the stock and has mispriced it significantly. Yet, your fundamental research clearly shows that the market is wrong and the stock should bounce back soon. 2. There are adverse market forces (like a severe bear market of 2007-09) that drive great companies well below what they should be worth. Eventually the market recovers and you make huge sums of money. Rocket Ships are the companies that are doing everything right. They have strong financials, a great management teams, a great future, new products, etc... Yet, the stock price was driven down well below Intrinsic Value of the company. If your fundamental analysis confirms that the decline was unjustified
and the stock should rebound soon, buy as much as you can. These types of investment opportunities will be your large money makers. Don't forget to look for the catalyst as well. Something that would set the ascend in motion. (**A word of caution. Just as I talked about in the Dead Man Walking category, make sure you are not missing something. Make sure that your fundamental analysis didn't miss an important point that the market sees and you don't. ) Further, there are three more important points that deserve a quick note. 1. Never try to catch a falling knife Falling knifes are known as stocks that have had a huge drop in value over a short period of time. Sometimes as much as 50-80%. Imagine for a second that you were considering an investment opportunity only to see it drop 50% over the last 2 days. You can't believe your eyes. You thought it was a good value before the collapse, yet now the stock is being given away. Literally. You can't stop thinking and salivating about how much money you are going to make. STOP. NEVER invest in falling knifes. Forget about your fundamental analysis and your Intrinsic Value calculation. NEVER buy into this situation from both technical and timing perspective. I will describe this further in the timing section, but the chances are high that such stocks will continue to decline even further before experiencing stabilization or a recovery. Do not worry, in 99% of the time you will have plenty of time to pick up such stocks long after the collapse. Very rarely will you see stocks that have experienced a large drop in value over a short period of time show a "V" shape type of a recovery. It happens, but very rarely. Typically, stock bottoms take quite a bit of time to develop. Personally, I have made this mistakes a number of times in my early days, but I will never make it again. As such and as a general rule, avoid falling knifes as if your life depended on it. 2. Avoid Penny Stocks. It is very tempting to buy a $0.25 stock in hopes that if it goes to just $5, you will walk away making 20X on your money. We always hear stories how someone, somewhere has made such a killing and turned their $5,000 into $1 Million within a year. Clearly understand, this is hype perpetuated by day traders and people trying to sell you newsletters or the penny stocks themselves. I don't know of a single person who has made any real money investing in penny stocks over an extended period of time. You might get lucky here and there, but the risk associated with investing in penny stocks is just too much for the average person. You don't see Warren Buffett, George Soros, Jim Rogers and other top fund managers investing in penny stocks and neither should you. 3. Concentration or Diversification A whole book can be written about pros and cons of both concentration and diversification. Which one is better? Well, that really depends on your personal specifications and your risk profile. For me, concentration is a much better way to invest especially if you concentrate only on Rocket Ships and Waking Beasts described above.
The problem is, if you concentrate only on two categories, chances are, you will not be able to identify more than 3-10 stocks (under normal market conditions). Personally, I like concentrating on just a few stocks as they provide me with the lowest risk and the highest return profile. Warren Buffett has the same approach. Yet, it also depends on how you define risk. Is it more risky to hold 1 stock purchased at a significant discount, a stock you have fully analyzed and know everything about, a stock that you expect to appreciate significantly -OR- is it more risky to hold 30-100 stocks your don't really know anything about? One again, that is a personal choice that you would have to make. If you are new to investing, I would recommend you to diversify at first and then slowly move towards concentration as you gain more knowledge and experience. Chapter Summary: This chapter discussed various attributes of different value stocks by showing you that not all stocks are created equal. Further, the chapter suggested that you should concentrate on Rocket Ships and Waking Beasts as your primary investments vehicles. Such stocks tend to provide investors with the lowest risk and the highest return profile. Finally, the chapter encouraged you to avoid falling knifes and penny stocks while showing you that diversification or concentration should be based on your personal preferences and/or risk profile.
The Secret Behind Macroeconomics and Value Investing By now we have looked at value investing and what it is, how to determine the intrinsic value of any stock, the proper application of the margin of safety, what types of stocks to look for and what type to avoid. Still, there is one more thing to consider. Macroeconomics. I am a firm believer that as an investor one should understand Macroeconomic factors prior to making any sort of an investment decision. While not an important part of the equation for short term traders, it is an incredibly important factor for most value investors who's investment time frame is oftentimes counted in years. A miscalculation on macroeconomic front could have severe consequences on your overall investment. Let me give you an example. For simplicities sake and without going into too many details, let's assume that you have looked into buying a homebuilding stock in early 2007. After doing a lot of research and valuation work you cannot believe your eyes. For some reason the stock is selling at 60% discount to its Intrinsic Value and the growth rate remains at over 20% on all fronts. Everyone is excited about the real estate market and your work shows that this stock should at least double over the next 12 months. Based on your work you are 100% confident that this particular stock is a Rocket Ship. You cannot believe how lucky you are as you begin drool just thinking about how much money you are going to make. Yet, you have just missed an incredibly important point that only macroeconomic analysis can provide. You have missed the fact that the overall US Economy and the Real Estate/Financial industry in particular are in a giant bubble that is about to blow up. You have missed the point that when that bubble does blow up it will take the entire economy and the real estate/financial sector in particular down with it. Big time. Further, when that happens your significantly undervalued homebuilder stock price is likely to collapse because the company is directly tied into both of those sector. Indeed, that is exactly what happened. Even though homebuilding stocks were already down significantly at the start of 2007 (indicating substantial value), they proceeded to decline even further. Around 50-80% further when the credit bubble of 2007-2009 finally blew up. Point being, looking at the company or the sector alone, is not good enough. You must have an overview of the overall economic environment in order to avoid similar situations. A value investor with a clear macroeconomic point of view would have never even looked at homebuilders in 2007. Well, maybe from the SHORT side, but that's about it. As such, any good investor worth his salt should always be aware of where we are in the economic cycle. That is where macroeconomic analysis comes in. Do not despair. You do not need a fancy degree from a business school to understand macroeconomics. It is probably best that you don't have one. That way you have an open mind to see how easy and straight forward this analysis can be. First, you must understand something very important. Do not pay any attention to the financial media (or media in general) and/or professors of economics and/or the economists themselves. All of that data and all of their fancy economic models are nothing more than garbage. They have no place in the real world. Think about it this way. If their models truly worked, they would be working on Wall Street and making millions of dollars instead of playing with their numbers or teaching others. As a rule of thumb, don't give such people even a split second of your attention.
With that said, how do you perform proper macroeconomic analysis that is useful for picking stocks? It is very easy. Step #1. Read, Listen & Follow Read and listen as much as you can. Yet, be very selective. Here is what I DON'T want you to read and/or listen to.
Most Economists Professors of Economics/Finance Technical Economic Papers (they are worthless when it comes to market application) Talking Heads On TV News, Newspapers or Magazines Politicians Market Pundits
Be aware of such sources, but do not take them at their core value. Simply put, their interests are not aligned with yours. They either want your attention or they are trying to sell you something. Plus, in the majority of the cases, all of the above sources are simply recycling old news and putting their own spin or analysis on it. Yes, their view could be accurate, but it is rarely so. At the same time, here is what I DO want you do to. I want you to find market practitioners (money managers, hedge fund manager and investment advisors) who have a very good track record when it comes to the stock market or the overall economy. I want you to start following such people. I want you to read, listen and study everything that they have to say. Said market participants have a proven track record and for the most part they do not have time for nonsense. Just as your money is on the line, so is theirs. This aligns your interests and ensures that their opinion is at least backed by capital. For example, you can follow my blog at www.investwithalex.com if you believe the opinion I share on it is an accurate one. There are too many other smart and capable money guys that I can recommend, but I will not. Discovering such people is part of the process of learning who you should follow and who you should avoid. Just as you should never buy/sell stocks based on somebody else's advice, you should never blindly follow someone and their opinion. Even though they might sounds very smart, they might also be wrong. Remember, you must always perform your own research in order to form your own conclusion. With that said, here is the best part. Being an independent thinker in the investment world pays off, big time. Step #2. Use Common Sense This is by far the best tool you have in your toolset. As the saying goes, "If it sounds too good to be true, it probably is". Meaning and as you have probably noticed, most market pundits (whether it's the
economists, talking heads or the money managers) are perpetually bullish. No matter what the situation is they are always talking about how great things are and how all stocks will be going up over the next 12 months. That is an excellent point of view to have if you are working in the self-help inspirational type of an industry, but a dangerous one to have if you are working with stocks. If you haven't noticed, stocks do go down at times. Sometimes they collapse as they did in 2007-2009. That is why having your own, well researched common sense opinion is so valuable. Case and point, today's economic environment presents us with a perfect example. (Written Nov 7th, 2013) Majority Opinion: Today's stock market closed at an all time high with the Dow at 15,746. If you listen to the main stream media, the economists, read the newspapers and magazines, listen to market pundits and talking heads you would undoubtedly walk away with an overwhelmingly BULLISH opinion. According to most of them the US stock market and the US Economy are in the early stages of a major bull run and economic recovery. In fact, if you are to believe them you would probably be so excited that you would invest every single penny you have in stocks. Common Sense Opinion: Yet, if you are to form your own opinion you would see an opposite point of view. You would understand that today's economic recovery is nothing more than a mirage driven by a massive infusion of credit into the system through monthly QE of $85 Billion, low interest rates and massive amount of speculation. After digging deeper you would see that all asset classes (stocks, bonds, real estate and even art) are in massive speculative bubbles that are unsustainable. Digging even deeper and looking at the technical picture you would probably think twice about going long here. Instead of looking at the market and saying it's at an all time high with many years of bull left on the table, you would probably look at the market and say, "Hmmm, this market is way overbought and given the current economic environment and the fact that everyone is so bullish I think the market is setup for a large bear move". Instead of going long you would consider either getting out of the market all together or going short. Your research and common sense understanding of the economic situation would clearly support that decision. As you can see, the difference between Majority Opinion and Common Sense Opinion is vast. One would have you buying every stock under the sun while the other would make you want to run for the hills. Which one is right? Well, that is for you to decide, but I would always pick a well researched Common Sense Opinion from a trusted source. More often than not, it pays to do so. In conclusion, following the two easy steps above will put you well ahead of the competition within a short period of time. It will put you on the fast track of fully understanding the macroeconomic picture and what is going on in our financial markets. More importantly, you will become self proficient and 99% more accurate than most of the economist and talking heads out there. You will be able to make much better investment decisions and avoid unnecessary losses most often caused by following the crowd.
The Biggest Problems With Value Investing Thus far value investing has been a perfect investment vehicle. After all, what's not to like? It steers you to buy wonderful businesses at highly discounted prices. That in itself minimizes your risk by creating a margin of safety while maximizing your return potential, creating a highly desirable low risk and high return type of an investment scenario. At the same time Value Investing is not perfect. While there is a number of shortcomings associated with Value Investing, the most important one from our vantage point is the issue of "TIMING". Please allow me to explain. Let's assume that you have been able to find a value stock of your dreams. Let's imagine for a second that it falls into either a Waking Beast or a Rocket Ship category. Let's further assume that the company is clothe retailer who's stock is selling at 70% discount to it's Intrinsic Value. The company suffered over the last couple of years due to various financial and merchandising issues. Same store sales are down 50% over the last 3 years and the company recently closed 25 underperforming stores. As a result the stock price had collapsed over 80% in the last 2 years. At the same time your in-depth fundamental research shows that things are about to get better. The company recently restructured and brought on a new management team with an excellent track record. That is already being evident in the companies same store sales and improved cash flow. The merchandise is hot again and the company is also getting ready to start opening up a lot of new stores over the next 2 years. Based on your research and calculations the stock price should be at least double of where it is today and much higher if the company continues to perform well. Overall, it's a wonderful buying opportunity that you believe will make you a lot of money. Yet, for some reason the stock price hasn't moved to the upside yet. The market hasn't yet recognized the change that you see and hasn't yet re-priced the stock. If anything, the stock price continues to go down, on average losing about 1% per month. The question is....why? The answer has to do with TIMING. Timing has always been an issue with value investing. While we can identify significantly undervalued assets, thus far no one has been able to determine WHEN such assets will begin to appreciate again to reflect their true intrinsic value. As today's value investors very well know such appreciation can happen at any time. As in the example above the stock price can start climbing tomorrow, a few months from now, a year from now or five years from now. Or It can never climb again. The old value investing mantra states that such a scenario is fine and that it shouldn't matter. For as long as you buy a stock at a significant discount to its intrinsic value and hold it until the stock reaches that value or appreciates significantly enough, you should be fine. Yes, it could take a long time but your eventual capital gain and lower risk profile should more than make up for your "unknown holding period". I respectfully disagree. There are two issues to consider.
First, the opportunity cost of capital is real. What happens if your perfect value investment (Rocket Ship or Waking Beast) hasn't moved anywhere over the last 3-5 years even though the market is up 60% over the same period of time? What if another stock that you have considered at the same time has appreciated over 150% while your stock has lagged behind or worse, declined? Well, the impact on your capital is real and the opportunity cost is significant. An ill timed move over a certain period of time can end up costing you millions in opportunity costs alone. While diversification can help you mitigate the impact of opportunity cost, it can also reduce your returns should you diversify too much. Second, while this might not be an issue for individual investors, this is a significant issue for professional money managers who must present their performance and answer to investors on regular basis. As such, most money managers end up under constant pressure to perform. To generate positive returns for their investors while outperforming the competition. Should they fail to do so, investors will not hesitate for a second to pull their money and allocate it to a better performing fund. That is true even if the stock picks the manager has in his portfolio are well researched and shall provide the investment fund with outsized returns if given enough time. Unfortunately, most investors have a very short time frames and if they do not see immediate results they express their dissatisfaction by turning their backs on the money manager in question and by walking away. That is why TIMING must become increasingly important issue not only for individual investors but for money managers as well. Just imagine for a second what would happen if you could identify the exact timing of any anticipated move. In either the overall stock market or an individual stock. What if you could take a look at any given Rocket Ship or Waking Beast value stock and add another level of analysis that would allow you to identify exactly when that stock is going to start going up and at what point it will stop. What if you are able to determine the velocity of any such move and establish an exit point with great precision and long before it occurs. Now you can. That is what the second part of this book is all about. TIMING. We will add a level of timing analysis to our typical and by now well known value approach to investing. This quantum jump forward in financial analysis shall help you supercharge your investment returns while reducing risk even further. We will take an in depth look at my unique method of timing the stock market (and individual stocks) and how you can apply this same type of analysis towards your own research and investing. Further, we will take an in depth look at the overall stock market so I can show you exactly how it works. Through using modern science and mathematics I will show you how and why the overall stock market truly moves. For the first time in your life you will have a complete understanding that the stock market is neither volatile nor random, but acts exactly as it should by tracing out mathematical points of force in 3-dimensional space. By the end of the TIMING section you should be able to use concepts discussed here to time the stock market and/or individual stocks with great accuracy. Leading you to amazing results, market beating performance and a much lower risk profile. Let us start.
TIMING THE MARKET The Secret Behind How The Stock Market Works For most people, the stock market is an enigma. It is a mystical creature that many have tried to tame, but very few have ever come close to succeeding. When you think you finally have a good understanding of how it works, the markets tends to turn around and slap you in the face. When the news is great it goes down and when the news is bad it surges higher. Only to turn around and repeat the sequence in the opposite direction. Leaving most people frustrated and without any sort of guidance. Over the last 200 years, hundreds of different approaches and analytical tools have been developed by people from all walks of life to try and predict the market. Everything from fundamental analysis to studying the planets/astrology, from complex mathematical formulas to technical analysis, from computerized trading to consulting fortune tellers, witchcraft, etc.... While many have claimed to figure it out, only a few have. Thus far I know of only two people who have been able to break the "stock market code". From what I have seen, their work proves it without any doubt. The most prominent and the most accepted stock market theory today is called "Efficient Market Hypothesis". The theory basically states that the overall stock market is efficient as it continuously and immediately discounts all available information. Under such circumstances it is impossible to outperform the market over an extended period of time. While loved by academia, this hypothesis is for the most part dismissed by true market practitioners. Even the king of investing Warren Buffett has not only dismissed the theory by making a number of compelling arguments against it, but he has also proved without a shadow of a doubt that the stock market can be beat over an extended period of time. His investment returns prove that. In simple terms, just as the clock is right twice a day, so is the efficient market theory. The market is indeed efficient, but only at various points and at various times, as the overall stock market continues to oscillate "randomly" up and down. Since there is no real workable theory on how the stock market really works and since so many people have tried to figure it out in the past but have failed, is there any chance for us to understand it? The answer is YES. Not only to understand it, but to predict it with great accuracy. That is what this section of the book is all about. To take a completely unique look at the stock market from a different vantage point in order to understand how the stock market truly works. Further, such a view will allow us to understand why the market has behaved as it did in the past while allowing us to predict what is coming next. It goes without saying that having access to such a knowledge can be incredibly valuable and profitable. So, how does the stock market work? First, you must understand something very important. If you look at any stock market chart you will see price (Y Axis) moving over time (X Axis) in 2 dimensions. In today's analyst society all attention is given
to the Y Axis or the study of the price movement and very little (if any) attention is given to the study of time. Yet, TIME is the most important element. Let me repeat that one more time. TIME or TIMING is the most important element when it comes to stock market investing. So much so, that once you understand this fact and once you have a better understanding of how the stock market truly works you will be perplexed as to why most people and analyst on Wall Street completely ignore the TIME part of the equation. Going even further, I will make two controversial statements that I will prove in this section of the book without a shadow of a doubt. 1. The stock market and/or individual stocks are not random. Not at all. Quite the opposite, they are exact. The stock market moves in 3 dimensional space between mathematical points of force while tracing out an exact structure. In more simple terms, the stock market or individual stocks are moving exactly as they should with mathematical precision. 2. The stock market and/or individual stocks can be predicted well into the future and with great accuracy. Since the stock market moves with mathematical precision while tracing out points of force, once the overall structure is fully understood, exact calculations could be made to predict the stock market or individual stocks. Well into the future and on multiple time frames. From hourly time frames to moves spanning years. God does not play dice with the universe. --Albert Einstein The quote above is right on the money. It means that nothing in nature is random. As Einstein himself said on numerous occasions, the only randomness out there are the things we do not yet understand. I tend to agree. As such, the only reason we believe the stock market is random is because we do not yet understand its exact mathematical composition. To understand why, we must first look at nature, how things work and how all of it applies to the stock market. Let me give you two examples. First, let's take a look at the human being at the moment of inception. Not birth, but fertilization. The point when the genetic material of the sperm and the egg is combined to create a new cell that will start dividing. I want you to think about that single cell for a second. When the genetic material is combined, in that split second an exact forecast could be made about what kind of a human being it will produce. If we had the technology, in that split second we would know all possible information about the unborn person. For instance, we would know if it would be a boy or a girl. We would know the eye color, height, hair type and color, exact length of fingers and toes, blood type, predisposition to certain diseases, psychological predispositions, character traits, etc... We would also be able to know exactly what that human will look like at the age of 5, 25, 50, 80, etc... In addition, we would be able to make a pretty good guess about when that organism will die. All of that at the point of conception and all of that based on the DNA sequence/genetic composition alone. Remember, all of that information is available to us at the point of conception if we had the technology to decipher it. Perhaps, one day.
Certainly, the environmental factors such as accidental death, living conditions, etc... will have an impact on the human being in question, but not as much as you think. You are probably scratching your head by now and wondering "what" if anything this has to do with the stock market. Well, most of us look at human life as random and unpredictable, yet, if an exact forecast could be made about your human composition at the moment of conception, same thing could be applied to the stock market. Second and along the same lines, I want you think of a simple pine tree seed. Before that seed is put into the ground and the tree begins to grow, that seed contains all available information about the tree. The seed is already pre-programmed with what that tree will look like. How tall, how many branches, their direction, their variation, etc... everything. No doubt, the environmental factors will have an impact, but such factors are typically within a certain range of variance. Should we have the technology, we should be able to know exactly what the tree will look like just by looking at the seed. Now the scientists can even take the seeds that are tens of thousands of years old and set them on their preprogrammed growth trajectory. Amazing. Back to the stock market. We have to begin thinking about the stock market not as a simple chart of price moving over time(2-dimensional representation), but as a complex natural growth system. If you look at and study nature, nothing in nature is 2-dimensional. Our perception could be two dimensional, but the nature itself and everything that exists in nature is 3-dimensional. Everything from galaxies to the smallest particles are 3-dimensional. With that in mind, is it possible that the stock market is not a simple 2-dimensional system, but a more complex 3 or even a 4-dimensional system? The answer, based on my mathematical work, is most definitely YES. With proper understanding now in place we can start looking at the stock market in a completely different way. The stock market is not a simple 2-dimensional structure (up and down over time) but a much more complex 3-dimensional system. In addition to moving up/down and sideways, it also moves in volume of space. While it is a little bit more difficult to envision at first, please allow me to illustrate. I want you to take a look at the 3-dimensional tunnel below.
Imagine for a second that you are standing at the entrance and looking into the tunnel. Further, imagine that there is a snake in the tunnel and that this snake is moving away from you in a screw like fashion while hugging the wall of the tunnel. Got a picture of that in your mind? Great. That is a good representation of how the stock market truly works. Now, if you are to walk to the outside of the tunnel and stand at the half way point (preferably at a good distance away from the tunnel) you will only see up and down movements of the snake as it moved along the wall in a screw like fashion throughout the length of the tunnel (from left to right). And indeed, that is exactly what we see on a typical 2dimensional stock market chart. Simply put, when we look at any existing stock chart, we see the shadow of the move and not the move itself. In reality, the market moves up/down, over time and in 3-dimensional volume of space (not to be mistaken with transactional volume). Once we understand that the stock market is a 3-dimensional phenomena we can begin to apply all scientific and mathematical rules that could be found/applied in nature. Just as with the human being and the tree seed examples above, the stock market has its own "Genetic/DNA Code" and sequence and once that code/sequence is understood exact forecasts could be made. Here is the best part. Once we begin seeing the market in such a way we can begin analyzing and measuring it in a completely different way. Instead of using technical analysis, trend lines, etc... we gain the ability to bring in exact scientific and mathematical models into the analysis part of the equation. Where typical stock market forecasts are inaccurate at best , this mathematical modeling allows us to obtain precision that was unavailable before. In other words, it allows us to predict the stock market with astonishing accuracy. So, how do we measure the stock market in 3-dimensional space? By using simple math. However, before I go any further I would like to give credit where the credit is due. The technique below was first developed by a brilliant market analyst by the name of Bradley Cowan. If you are serious about performing stock market analysis I encourage you to seek out his work. In order to measure the stock market in 3-dimensional space, we must unify price and time into a one joined value. How do we do that? By using simple geometry and Pythagorean Theorem. For our purposes here is all you need to know. We call the outcome 3-Dimensional Value (3-DV) AB= SQRT (PRICE^2+TIME^2) *SQRT = Square Root B
TIME
A PRICE
As such and in order to properly calculate the value we need two numbers. Time and price values over a studied period of time. As a reference point, we typically measure price values between bottom-to-top OR- top-to-bottom moves. Let's take a quick look at the real life examples for a quick reference point. There was a strong bull market between November 1994 and January of 2000 (a 5-year cycle). More precisely, the market moved exactly 8,296 points in exactly 8,437 trading hours. The move occurred between BOTTOM on 11/24/1994 and TOP on 1/14/2000. There are 6.5 trading hours in each day the market is open. I highly recommend you verify these numbers and perform sample calculations on your accord to gain a better understanding. Now, to calculate 3-DV according to our formula above. SQRT(8296^2+8437^2)= 11,832.75 The 11,832.75 value is the 3-Dimensional Value we are seeking. It is the first step in our Timing financial analysis. An analyst who is willing to put in the work, will soon start seeing periodicity and recurring patterns of the same size movements on multiple time frames. Once the sequence of such moves is understood, exact forecasts into the future could be made. For example, let's take a look at our 3-DV of 11,832.72. Do you know that the stock market topped out on January 14th, 2000 at the price of 11,866.55 or just 33 points away from our 3-DV. Do you believe that to be a coincidence? Not in the slightest. As indicated before, there is a mathematically exact structure within the stock market and once that structure is understood, the stock market (and individual stocks) can be timed and predicted with great precision. Let's take a quick look at the real stock market example to see the amazing precision this particular technique can offer us.
I cannot overstate how amazing this chart is. Just a few points.
As we have already discussed, the move between 1994 bottom and 2000 top was 11,832 3-DV UNITS. The Dow topped at exactly 11,866 in January of 2000. Amazing!!!
The up move between 1994 bottom and 2000 top was 11,832 3-DV UNITS. The down move between 2000 top and 2002 bottom was 6,483 3-DV UNITS. When you combine both values together you end up with a value of 18,315 3-DV UNITS. The move took 9 years.
The up move between 2002 bottom and 2007 top was 10,156 3-DV UNITS. The down move between 2007 top and 2009 bottom was 8,137 3-DV UNITS. When you combine both values together you end up with a value of 18,293 3-DV UNITS. The move took 7 years.
To summarize, the combined move took 16 years and there was only 22 3-DV UNITS of variance between two sections. This variance over the 16 year period of time can be attributed to as little as 2 trading days and a few hundred points on the Dow. This example alone should put to rest all claims that the stock market is random and unpredictable. Once again, when we identify the exact structure of the stock market through using our 3-Dimensional analysis we can time the market with great precision. For example, if we understand the structure above we know that the move between 2002 bottom and 2009 bottom will be identical in 3-DV UNITS of the move between 1994 bottom and 2002 bottom. Just by having this information alone one should be able to figure out the stock market with great precision. Further, once we have hit the 2007 top on the DOW, any analyst using this technique knows that the upcoming down move will be exactly 8,127 3-DV UNITS. (18283-10156=8,127) The only thing left to figure out at that stage is the angle or the velocity of the upcoming decline. Multiple ways will be shown to figure out that inflection point over the next few chapters, but for now let's assume that this information is already available. That would mean that once the 2007 top is confirmed you would know exactly where the market would bottom. So, while everyone is freaking out in the late 2008 and early 2009 you are either shorting the market and making a lot of money or you are setting yourself up for the upcoming bull market that you know will start in March of 2009. Either way, I hope this clearly illustrates how powerful this 3-Dimensional analysis can be. Also, please keep in mind that the example above is just a tiny sample of the information available to you once 3Dimensional analysis is performed.
Overconfidence Kills....A Word Of Caution It is important that I pause here for a second and caution you that arbitrary use of 3-Dimensional analysis techniques described in this book could be very dangerous. Having learned this the hard way, please allow me to tell you a cautionary tale. Back in 2006 and after years of looking into this type of analysis I have made a number of significant breakthroughs that led me to believe that I have finally and fully cracked the 3-Dimensional analysis and the so called "stock market code". What followed was nothing short of amazing. Over the next 30 trading days I was able to predict the stock market within daily resolution and with 90-95% accuracy. Needless to say I was making a lot of money. Yet, this same work and the success it brought have led me to an overconfidence level that should not be exhibited by any reasonable investor. It led to me to make large bets in situations that do not warrant it, all because my mathematical 3-Dimensional work has indicated a certain move in a particular direction. This strategy worked until one day when my analytical work backfired and led to massive losses in my fund. Instead of a powerful move to the downside (which my work predicted), there was a powerful move to the upside, wiping out all of my gains and causing large losses in the process. For the purposes of this book the lesson is twofold. First and foremost, do not use techniques described in this book in an arbitrary fashion or with 100% confidence. Yes, this work can and does predict the markets with incredible accuracy, but that accuracy can only be attained after a substantial investment of your time into performing any such 3-Dimensional analysis. You should never follow anyone's analysis or use the tools found in this book without first understanding the "WHY" of your actions. Let me repeat that, until you reach the level of analysis where you clearly understand WHY you are doing something, try to minimize the use or techniques described here in an arbitrary fashion. Second, never be 100% confident in your work. Even if your 3-Dimensional work has advanced substantially and you consistently making exact forecasts, be wary of it. Always maintain the psychological mind frame that your analysis might be wrong. Never bet the farm based on your analysis and never back yourself into a corner. Always use stop losses and always leave room for maneuver, even if you are 100% confident. Remember, you will have plenty of opportunities to make money. It is my hope this warning steers you clear of trouble and helps you avoid the mistakes that I have made. Now, back to the stock market analysis.
The Dow 1994-2014: 3-Dimensional Analysis How To Time The Market
Once again the chart above represents 3-Dimensional movements within the stock market. The numbers above unify price and time into one number and are calculated as per Pythagorean Theorem formula provided earlier. While we have already looked at how to calculate 3-Dimensional values, let's take an additional look to cement our knowledge. Please take a look at the DE move as an example. During this bear market decline of 2007-2009, the market moved exactly 7809 points in exactly 2288 trading hours. When we apply our 3-Dimensional calculation we get a 3-DV of 8,137, which is the number you see on the chart. I highly encourage you to calculate every single number on the chart above to confirm the numbers and to gain a better understanding. Now, understand something very important. While the chart above is a long term chart representing the DOW between 1994-2013, it doesn't have to be. The chart above could be the stock market chart over the last century or it could be the daily chart representing 2 hours of trading. The time frame is inconsequential. Same rules of 3-Dimensional analysis apply to all time frames. What are the rules?
Rule #1: By identifying a 3-DV on the chart you know exactly what the next move will be. It will either be identical to the one preceding it or the derivative of it. Meaning that once you know what the DE is, you can predict (with great accuracy) what the EF will be. To the day and to the point. That's how accurate this work is. Much more on that later. Rule #2: Make sure you know the time frame you are analyzing. If you are using long term charts, as above, make sure you do not shift to the short term charts and anticipate the same size movements. For example, do not take DE 8,137 value and then try to find it on the daily chart. It will not work. You will only be able to find this value or the value of its derivative on the long term chart. Rule #3: Always square price and time. When calculating your 3-DV make sure your time variable and your price variable are squared(match in size). In simple terms, at certain times you would have to shift your time variable between minutes, hours, days and months. Let me illustrate what I mean by showing you the right and the wrong way to do this. Let's assume for a second that you are looking at the chart above. Current market is a high energy, fast moving market. As such you have to use the hourly time frame to square the chart. It would be wrong to use any other TIME variable. Let's take a look at the move labeled CD. Between 2003 bottom and 2007 top the market moved in the following fashion. Price Movement: 6,838 POINTS (fixed variable) Time Movement: 7510 TRADING HOURS OR 1,155 TRADING DAYS -OR- 231 WEEKS -OR- 58 MONTH (there are 6.5 trading hours in 1 trading day) If you want to generate a proper 3-DV measurement you have to use 7,510 trading hours as your primary TIME input. That input squares (matches) the price movement. If you were to use trading days or weeks or months, the PRICE portion of the formula would overwhelm the equation and you would end up with a worthless measurement that is not applicable to the stock market analysis. Let me show you what I mean. The Right Way: SQRT (6838^2+7510^2)=10,156 (3-DV) As you can see, in this case price variable energy level matches the time energy level. In simple terms, they match each other, yielding a highly relevant 3-DV in the process. The Wrong Way: (using daily time variable)
SQRT(6,838^2 +1,155^2) = 6,935 (3-DV) In this case the price side of the equation overwhelms the time part of the equation. Rendering the entire calculation useless because it depicts price and time as not squared. The end product is the 3-DV that is almost identical to the price move itself. Once again, yielding a 3-DV that is not applicable for further 3-Dimensional analysis. The bottom line is, to perform viable 3-DV calculations we have to square the chart or be in the same range of variance. It is also important to note that at times the market (or individual stocks) will exhibit violent up or down moves, rendering squaring of the chart impossible. In such a case and as a rule of thumb, use the prior measurement TIME variable. For example, if the price moved up 1,000 points in 20 trading hours, continue to use trading hour variable if you have used this variable in the time frame directly preceding this sharp/powerful move. How To Predict Future Moves By Using Existing 3-DV As mentioned earlier, if we know the 3-DV of any move we can predict the next move with great accuracy. It will either be identical to or a derivative of the move preceding it. For example, looking at the 3-DV chart above, if we know that AC is 14,100 we can very well forecast that CE will be equal to 9,810. Let's take a closer look and perform a complete 3-DV analysis of the 3-DVchart. At first glance, there isn't that much synchronicity of the 3-DV calculated on the chart above. Other than the matching two 23,610 and 23,455 values, the rest of the values do not warrant any sort of uniformity. The question is why? If you remember, I have mentioned earlier that as the stock market moves through 3-Dimensional space it continues to trace out mathematical points of force. Those point of force represent market turning points, but what are they really? Without going into too much detail these points represent a lattice structure moving through 3-Dimensional space. We know from Chemistry that every element (or combination of elements) will have its own lattice structure. Same kind of scientific analysis applies to the stock market and individual stocks. Each individual stock or the overall stock market will have its own lattice structure or the points of force associated with any such lattice structure. As the market moves through time it simply traces out such 3Dimensional points of force on the 2-Dimensional stock market chart. For simplicities sake, here is all you need to know. When we apply the lattice structure thinking to the existing stock market structure, we soon realize that the most common derivatives are the 2x and the square roots (SQRT) of 2, 3 and 5. The next step in our analysis would be to calculate the derivatives for
each one of our 3-DV determined above. We do so for both upside and downside by multiplying and dividing each value. The calculation itself is very simple. For instance, lets figure out all possible derivatives for the original move AC of 14,100 (ORIGINAL 3-DV 14,100)
Multiply
Divide
SQRT 2
19,940
9,970
SQRT 3
24,421
8,140
SQRT 5
31,528
6,305
2X
28,200
7,050
What do these numbers represent? They represent all possibilities of the next move. Basically, we know that the next move (starting at point C) will either be 14,100 or the other 8 numbers representing the derivatives of the original number above. This helps us determine the next turning point with stunning accuracy. For instance, please note that the move CE (the move between 2003 bottom and 2009 bottom) was exactly 9,810 points. The square root of 2 derivative above stands at 9,970. This represents a 1.6% variance from the actual value. Fairly accurate if you ask me. Particularly if you know the exact structure and the direction of the move years before it happens. Further, at the time of this writing (November 26th, 2013) the 3-DV of the move CF (2003 bottom to 2013/2014 top) is sitting at 20,050 and thus far has had an exact hit of 19,935 if you take 2013 September top into consideration. While I will not make exact predictions in this book, this gives you an indication of how powerful this 3-Dimensional analysis can be. For example, in my other writings (my blog located at www.InvestWithAlex.com) I have clearly indicated that the 2014 top will be the completion of the bull move that started at 2009 bottom. After the move completes itself we should experience a 3 year bear market that will take us into the 2017 bottom. As you now can see, by looking at the market through the 3-DV analysis we can predict with great accuracy when the top of 2014 will take place. Just by looking at this one 14,100 3-DV alone (or its derivative of 19,940), we know that the market is toping right now and should reverse itself shortly.
Let's analyze all of our 3-DV so you can see the amazing accuracy available with this technique. As a quick not, please understand that all 3-DV starting at point A have their origin long before point A was reached. In other words, all 3-DV that we see on the chart above are the direct result of the 3-DV values that have preceded it prior to 1994. Let's take a more in-depth look. The value of importance prior to point A was a 3-DV of 9,922. Representing a 3-Dimensional move between 1988 bottom and 1994 top. Let's take a look at that number and its derivatives to see how many other 3-DV values we can explain. (Original 3-DV 9,922)
Multiply
Divide
SQRT 2
14,031
7,015
SQRT 3
17,185
5,728
SQRT 5
22,186
4,437
2X
19,844
4961
1. Immediately we see the move AC equal to 14,100 or the square root of 2 move. With only 0.4% variance between the forecasted value and the real value it is an exact hit. By knowing this number and lattice structure described before you could have identified this turning point 9 years before its actual occurrence. Most certainly you would have been able to identify 2003 bottom by looking at this number at the time. 2. The next two numbers that are associated with the original value of 9,922 are the AE 23,455 and AD 23,610. These values are represented by the square root of 5. Even though the variance is a little bit higher, at 5.6%,*** these numbers are once again responsible for exact hits on both the 2007 top and the 2009 bottom. Once the lattice structure is understood these inflection points could have been predicted all the way back in 1994, with exact accuracy. Certainly an analyst studying the market could have identified these points as they would have approached the turning points above. *** It is important to understand that most of the moves above are exact. The large variance (or perceived variance) of 5.6%, for example, is caused by the growth spiral developing in the stock market. As I have mentioned before, the stock market is a natural and dynamic growth system. Meaning not only does it move in a predictable fashion, but it also grows and changes energy levels as it moves along.
For example, the energy levels of 1860 or 1920 or 1960 are completely different from the energy levels of today. This part of analysis might be discussed in future publications for clarification. For now, growth spiral cause for variance will simply be mentioned. 3. We have already mentioned this earlier in the book, but AB + Bc and CD + DE are equal. Let's take another look. (11,832+6,483 = 18,315) and (10,156 + 8,137 = 18,293). Please note that we are using 2002 actual bottom for point c instead of 2003 secondary bottom. Also note, that the variance is just 22 points over the 15 year period of time. That constitutes a margin of variance equal to just 3 trading days or a few hundred points directional move. Also, note that if you divide 18,300 by the square root of 5 you get a value of 8,184. Which was the value of the move between 2007 top and 2009 bottom. Further, if you multiply BD of 12,815 by square root of 2 you will get a value of 18,123 which is identical to the value above. Once again, if you know the structure of this move and the lattice structure associated with the market you would have had the ability to identify every single turning point in the market over the last 15 years. All you would have had to do at those points is to rotate your portfolio position from long to short and from short to long in order to make a killing and outperform the market by a large margin. It is as simple as that. 4. The move CE of 9,810 and the move CD is the continuation of the move AC represented by 14,100. If you divide 14,100 by the square root of 2 you get a value of 9,970. The actual move between CE ended up being 9,810 giving us the variance of only 1.6%. The actual move between CD ended up being 10,156 giving the variance of only 1.8%. When you combine this knowledge with the previous 3-DV already discussed you get another confirmation that March of 2009 will be a solid bottom for the stock market and that the 2007 top has been reached. As such, when everyone was freaking out about the 2007-2009 decline and predicting the end of the world as we know it, you would know that the market would turn around in March of 2009 and begin a multiyear rally. 5. When you multiple the value AB of 11,832 by the square root of 2 you end up with a 3-DV value of 16,733. The actual move between 2000 top and 2009 bottom or the move BE was exactly 16,613. That is a variance of just 0.7%. Again, the move AB predicted the move BE and 2009 bottom 9 years in advance. Giving you another confirmation point that March of 2009 is an exact bottom and a major turning point. 6. The move BD of 12,815 was the derivative of the move AB + Bc of 18,315. When you divide 18,315 by the square root of 2 you end up with a 3-DV value of 12,950. This gives us a variance of just 1%.
7. The move AB was an exact square and continuation of another 3-DV prior to 1994 bottom. This move was a perfect square. The market moved exactly 8,296 points in exactly 8,437 trading hours. Giving us a 3-DV of 11,832. This 3-DV was identical to the actual top set on January 14th, 2000 of 11,854. Proving, once again, how accurate this analysis can be. 8. Finally, the move BC was the derivative of the move AB. If you divide 11,832 by the square root of 3 you end up with a value of 6,831. With the move BC having a 3-DV of 6,840, it gives us 0% variance. As 2003 secondary bottom was approaching an analyst using 3-DV analysis would be very well aware that a turning point was coming up. Using the techniques above an analyst would be about 10 trading points away from the actual bottom. That is truly incredible. This concludes the analysis and explanation of the 3-DV moves above. The explanation above went over every single value and showed you how they can be used in order to predict the markets with great accuracy. Going further and by understanding the lattice structure within the market you would be able to know precise angles and directional moves of any upcoming market or individual stock moves. For the first time attaining the ability to predict the markets in both time and price. On any time frame. From daily resolution to decades from now. This section is written on November 29th, 2013 with the DOW at 16,097 If you follow my daily blog you are very well aware that my mathematical work is predicting a severe bear market between 2014 and 2017. This bear market will represent the final leg down of the bear market that started in early 2000. This brings us to point F on the chart above and further explanation on how to predict exact turning points by using 3-DV analysis. Please keep in mind that point F represents the actual turning point in 2014 and the ushering in of the bear market leg. It hasn't happened yet. We are predicting the future here. Let's take a closer look. (*** Please note, the analysis performed below is not an actual forecast, but an mere illustration of how to perform such analysis). Step #1: Measure 3-DV from all major turning points (E, D, C, B and A) to today's DOW close. They are..
EF: 12,364
DF: 10,610
CF: 20,190/20,900
BF: 24,100
AF: 34,750
Step #2: Perform analysis of 3-DV and its derivatives from each point.
For example, let's take a look at point E. At point E we can work with 4 different 3-DVs and their derivatives. They include DE, BE, CE and AE. Meaning, it is highly probable that EF will be equal to the four 3-DVs above and/or their derivatives. As mentioned earlier, the 3-DV of EF today is 12,364. If we analyze the four 3-DVs above, we will soon find out that 3 different numbers closely resemble today's value of 12,364. They are
DE 14,094
AE 13,542
CE 13,873
All other 3-DVs and their derivatives either fall short or are outside the scope of our analysis. You will notice that the value AE is the closest one to our present value of 12,364. That basically means the market is not yet done moving up. It also means that once the value AE 13,542 is reached, it is highly probable that it will mark the turning point in the stock market. Further, as of today the value EF consists of 2 input variables. Time Value of 7,742 trading hours and Price Value of 9,641 points. Let's further assume that based on our research we believe that March of 2014 will be the top of the bull market and/or the move EF. This gives us an additional 80 trading days or 520 trading hours. By adding 520 trading hours to 7,742 trading hours we get all necessary information to make an accurate estimate of the bull market top. In addition, we can estimate how much the market will move up between now and March of 2014. We simply adjust our 3-DV equation to look like this SQRT (8,262^2 + X^2 ) = 13,542 When we solve the equation for X, the X = 10,730. This value represents the PRICE portion of the equation at the completion of the move. With today's PRICE value being at 9,641 this means the market is likely to go up another 1,089 points (10,730 - 9,641) between today and March of 2014. Think about this for a second and how powerful this simple calculation is. If you got your lattice structure figured out and/or you know the next 3-DV move, you can predict with 100% certainty exactly when the stock market will top out. Not only when, but exactly where. To the day and to the point. So, while everyone else is playing the guessing game of how long this bull market will continue, you know the answer well ahead of that turning point taking place. You know that you must hold for another 4 month in order to realize the maximum gain and then simply reverse to short position to benefit from the upcoming bear market decline. Amazing, isn't it?
But what if the forecast above is incorrect? As I have mention so many times before in this book, no analyst or investor should look at any forecast in absolutely certain terms. Until the lattice structure of the market is fully understood, there is always a possibility of being wrong. Unfortunately, understanding the lattice structure of the market is outside the scope of this book. It is too complex and dynamic to be explained in this relatively short publication. Volumes of work must be published before clarity could be obtained. Yet, any analyst willing to put in the work, should be able to determine the underlying structure. For those unwilling to do the work there are a number of available shortcuts. They are.... Shortcut One: 3-Dimensional Space Triangulation. Earlier in this book I have mentioned that 3-DV exist on multiple time frames. From hourly to yearly to decades to centuries. At any given time there are hundreds of various length 3-DV tracing out market points of force (turning points). What I have found in my research over the years is that major turning points in the stock market or individual stocks are never represented by only one 3-DV. In most cases, such points are represented by a number of different 3-DV coming together at a singular turning point. Once again, these multiple 3-DV can range from hourly to centuries long. Let me give you an example. As you know, when 3-DV of any length moves in 3-Dimensional space they tend to trace out the circumference of a circle. The radius of a circle represents maximum reach of any given 3-DV. In other words, it represents all possible points on the two dimensional chart where the 3DV in question can terminate its move. Further, let's assume that we are studying five 3-DVs from various points on the stock market chart that have similar termination points. By drawing -OR - calculating their circumferences in either 3Dimensional space or on a 2-Dimensional stock market chart, we would be able to see where those circumferences intersected. As a rule of thumb, if we have multiple intersection at a singular point of time and price, the probability is high that such point will be a major turning point. The probability increases further if the market is heading towards such a point. In simple terms, triangulation allows us to figure out high probability turning points by identifying at what points multiple 3-DVs come together. By combining this type of analysis with the 3-DV lattice structure discussed above we are able to either confirm or increase the probability of a turning point. Let's take a look at the real stock market example for clarification. Let see if we would have been able to identify point E on the chart by using triangulation. As discussed earlier, point E had 4 major 3-DVs associated with it.
1. AE, value of 23,455. Once again and as discussed earlier, this move was the derivative (square root of 5) of 9,922 move prior to 1994. The more than typical variance of the move was caused by the growth spiral in the market. 2. CE, value of 9,810. As shown earlier, this move was the derivative (square root of 2) of AC move of 14,100. 3. BE, value of 16,613. As discussed earlier, this move was the derivative (square root of 2) of AB move of 11,832. 4. DE, value of 8,137. From earlier discussion I have shown you that AB+BC=CD+DE=18,293. Therefore, by knowing CD, we would automatically know the value of DE (18,293-10,156)=8,137 To identify point E, well ahead of point E occurring, we would calculate where all of the 3-DVs above come together at a singular point. Well, a point that makes sense. After performing triangulation calculations and running the circumference of the circle for each 3-DV in question you would realize that they all come together in March of 2009. In other words, they all intercept each other in March of 2009, between 6,750 and 6,250 on the DOW. Further, you would be able to get a visual confirmation that the market is indeed headed towards that same point of force. In fact, this particular method has allowed me to confirm my other analysis and has allowed me to identify March of 2009 bottom (between 6,750 and 6,250) in October of 2008. I did that when the DOW was still trading between 10,000-9,000. In such a case, as everyone was losing their minds and predicting the next Great Depression or the end of the world, an analyst familiar with the 3-Dimensional analysis would know that a significant turning point is coming up in March of 2009. Not only that, but an investor familiar with this type of an analysis would simply reverse from a short position to a long position at point E to attain maximum benefit. Once the confirmation that point E was indeed a major turning point arrives, any investor would be fully aware that the next BULL move should be a prolonged one. By reallocating capital from the short side to the long side at that instant, one would be able to achieve maximum profitability. In summary, triangulation of 3-DVs allows you to find high probability turning points in 3-Dimensional space. It allows you to confirm the lattice structure if your lattice structure analysis has not yet advanced to the point of certainty. Further, by having multiple 3-DVs intersect at the same point in the future, you will have a fairly good idea of where the market is headed.
(Don't forget, triangulation can be applied to all time frames). Shortcut Two: Trading Techniques The other way to avoid problems and/or to reduce risk when the lattice structure of the market is not yet known is to implement a strict trading regiment that would help you avoid large mistakes. By implementing strict trading rules and procedures you are able to eliminate all guess work out of the equation. In other words, while the 3-DV analysis gives you the ability to predict the markets, strict trading rules make sure you pull the trigger at the right time. The rules below are a very simple strategy of getting in and out of stocks. Yet, it produces very powerful results while minimizing risk when you combine it with the fundamental, 3-DV and triangulation analysis described above. First, a few rules. Avoid Low Priced Stocks: While it is possible to make a large amount of money with such stocks, for the most part cheap stocks remain at low levels for a very long time. Sometimes forever. Avoid Slow Trading Markets or Stocks: These are the financial instruments that are stuck in a trading range. Do not invest in them until and unless the trend is definitely broken, either to the upside or to the downside. Concentrate On Fast Moving Markets or Stocks: This is where most money is made over the shortest period of time. Once the primary trend is identified and the 3-DV analysis work is done, buy the best stocks in the fastest moving industry. Never Guess: Take the guesswork (gut feeling) out of your decision making process. Develop strict trading rules that are followed 100% of the time. While the analytical framework described above is followed, you should never guess if you got it right. Let the market and/or your trading rules put you in and take you out. Always Follow The Main Trend: You will always make money if you follow the main trend. Either up or down. Remember, stocks are never too high to buy if the stock market is going up and they are never too low to sell if the trend is pointing down. Always Use Stop Losses: I cannot overstate this enough. Always use stop losses to protect your capital. Even if you reach an advanced level of the 3-DV analysis described above, always use stop losses to make sure your work is correct. Let the actual market prove if you are right or wrong. In the meantime, your capital base will remain safe.
Buy At New Highs: Believe it or not, but buying at new highs is the most profitable way to make money in the stock market. Most people believe that they must buy at the lowest price or in the valley. That couldn't be further from the truth. By buying at the new high you are moving with the main trend. Sell At New Lows: In a similar fashion, selling or selling short at the new low is the best possible position to exist the stock. It confirms that the trend has changed and it gives you the ability to exit your trade at a good price. More importantly, it allows you to trade with the trend and not against it. Never Commit To Anything: Never attach your forecast to any fixed outcome. If you do, you will shift from the position of power to the position of fear and hope. Opening up your trading strategy to risk and losses. Instead, remain flexible and move with the market even if your forecast indicates otherwise. Move Stop Losses: As the market or any given stock continue to move with the main trend you must continue to move your stop losses up or down to avoid unexpected developments and to protect your profits. By doing so you eliminate unnecessary risk of losing money. Don't Be Afraid To Be Out Of The Market: There is absolutely nothing wrong with being out of the market completely. Sometimes for prolonged periods of time. It is better to sit on the sideline than to lose money. Particularly when the trading situation or the direction of the financial instrument you are looking at is unclear. Don't Wait Until The Trend Changes: DO NOT hold your losing position in hope of a trend change. That is how people lose most of their money. For instance, the bears who have been holding short positions throughout 2013 have been decimated (even though they will eventually be right). Once again, always move with the main trend. Get Out As Soon As You Realize You Have Made A Mistake: Even if your in-depth research shows one thing, the market might do something completely different. At such times you might realize that you have made a mistake. Do not hold your position in hope that the market will reverse itself and allow you to exit at a better price. Liquidate your position immediately. Always Wait For A Confirmation: Do not establish a position until and unless your work is confirmed by the market itself. In most cases the market will do so by setting new highs or new lows. Only after receiving such a confirmation should you establish a trading position based on the main trend of the market and/or based on your own research work. Avoid Hope & Fear: This is probably the main reason why people lose money in the stock market. They trade and/or invest on emotion rather than technical, timing or fundamental work. They hope, pray and
fear instead of following the main trend. Do not behave in such a fashion. Never trade based on hope or fear. Always follow your rules. Avoid Loss Averaging: Contrary to a popular believe, it is not a good idea to buy more stock when the price declines after your original purchase. Buying more at a discounted price means you are going against the main trend and not with it. While you lower your overall purchasing price, the main issue remains. The main trend is down. Instead, you should average up when the stock price is going up. That way you are going with the trend. Now that we have looked at the overall rules to the profitable stock market operations, let's take a quick look at a simple set of specific trading rules. Rules For Trading In Stocks RULE 1: Buy at new high prices or old top levels. RULE 2: Buy when prices advance above old low prices. RULE 3: Sell when prices decline below old top levels or high prices. RULE 4: Sell at new low price levels. RULE 5: Wait to buy or sell until prices CLOSE above old highs or below old lows on the daily charts. Closing price is incredibly important. RULE 6: Use stop losses. Your capital and your profits must be protected at all times with STOP LOSSES. Implement stop losses at 1-3 points above or below your original price and at the time of the original trade. RULE 7: Do not lose money. In this section we have looked at 3-DV analysis, triangulation and various trading rules associated with trading the markets. By performing 3-Dimensional analysis for the DOW between 1994-today I have demonstrated without a shadow of the doubt the hidden structure within the stock market. Once that structure is fully understood an exact forecast could be made. In other words, once the analyst understands the lattice structure of the market, he can calculate it 1 year, 10 years or 100 years into the future with astonishing accuracy. Further, we have looked at triangulation and various trading rules to minimize the risk associated with 3Dimensional analysis. By following all of the rules described above, any stock market participant should
be able to profit greatly. After all, any analyst using the work above in an appropriate fashion should know what the market will do and should act accordingly. In the next chapter we will look at yet another powerful market timing tool called "Cycle Analysis".
TIMING THE MARKET WITH CYLCES Thus far we have looked at the 3-Dimensional stock market analysis as the primary tool in predicting the stock market or individual stocks in both price and time. Yet, there is another way to perform the same type of an analysis. It is called cycle work. At the same time it is not the typical cycle work associated with the stock market. Relatively speaking cycle analysis has been around for as long as the stock market has been operating. People have been using various cycle constructs to try and predict the market. Thus far without too much luck. Any analyst working with trying to time the markets through the use of cycle work would soon tell you that at times his cycles work perfectly fine, being able to predict the market with great accuracy and at times, they don't work at all. Believe it or not, there is a reason for it and that reason will be discussed in greater detail shortly. However, before we go any further we need to define what cycle analysis really means. In traditional sense of the word, it means studying various time cycles and then trying to apply them towards the stock market. The simplest form of such exercise is identifying one market cycle and then trying to fit it into your market forecast. As a hypothetical example, an analyst studying NASDAQ market structure is able to determine that all stocks in the index go up for 14 trading days and then decline for 5 trading days. Then they go up for another 8 trading days and then decline for next 3 trading days. Thereafter, the cycle repeats itself indefinitely. Of course, no such cycles exist, but it gives you an idea of how you should think about cycles. On a more complex level an analyst might put together hundreds of various cycles in order to try and predict not only the time but the value of the move. While such cycle analysis is fairly complex, it does produce interesting and sometimes incredibly accurate results. The keyword is....sometimes. Which begs the question, why does cycle analysis only works on limited basis? The simple answer has to do with the 3-Dimensional analysis discussed in the previous section. The cycles do not work very well or they do break down after a certain period of time because they are being applied in the wrong medium. In this case, the 2-Dimensional chart of price moving over time. As mentioned earlier in the book, the 2-Dimensional chart construct is nothing more than a shadow of the real stock market movement. As you can imagine, no proper outcome can come from studying the shadow as opposed to studying the real move. At the same time, when we apply cycle analysis to the 3-Dimensional construct of the market we begin to see a completely different picture. We begin to see periodicity in the cycle analysis that can be used
to predict the markets with great accuracy. Not only that, but we gain a further understanding of how the markets truly works. Let me give you a real world example. Imagine for a second that you are watching the New York Philharmonic Orchestra. As the show starts you see over 50 musicians sitting on stage and playing their musical instruments. The instruments themselves vary across the board. There is a piano, dozens of violins, trombones, cellos, bass, etc... As musicians begin to play, beautiful and harmonious music begins to flood the concert venue. If we stop at this juncture, we would miss an important clue that can help us time the markets with great precision. As the music plays, a number of very important developments occur behind the scenes. To begin with, music itself is nothing more than a vibration or a wave or a cycle or an oscillation. Each musical instrument and each player produce a range of vibrations while playing their instruments. That creates music. So a single musician will produce a rate of vibration/oscillation that at least in technical terms is identical to the structure of the cycle. Now, having 50 musicians in our orchestra simply means that at any given second there are 50 different cycles (vibrations/waves) being created by 50 different musicians and instruments. They vary across the board and are as diverse as possible. Yet, they all come together to create beautiful and harmonious music. I cannot stress this enough. All 50 of the cycles (vibrations/waves) unify into 1 primary cycle by the time music reaches your eardrum. No longer are you listening to 50 different vibrations, you are now listening to only one. You are listening to the summation of these vibration, to the final result. Finally, this end product or the summation of all of these cycles could be represented on the chart as a singular wave moving up and down over time. What does this have to do with the stock market? If you are to chart the final result or the final musical wave generated by the 50 musicians above it would look identical to the 2-Dimensional chart of any given stock or of the overall stock market. It wouldn't be identical, but it would look identical as if the music you have just heard is being tracked by the stock market charting service. This yields an important clue when it comes to the stock market cycle analysis. Basically, there are many different cycles working in the stock market at the same time. Their range, structure, power and amplitude are as diverse as you can imagine. While some cycles last for decades and even centuries, others oscillate every few minutes. However, once we identify all of such cycles and put them all together, we end up with an exact representation of the overall stock market. When I say exact, I mean exact.
Let me repeat this. If the cycle structure is fully understood and constructed properly you can build an exact replica of the stock market. Not only for the past, but also for the future. Once the cycles are known you can predict the exact structure of all upcoming stock market moves to the point and to the day. Confirming both the fundamental and 3-DV analysis work described earlier. Now, before we jump headlong into cycle analysis, we must first look at and address two primary cycle issues. Issue #1: Why do cycles exist in the stock market? To begin with, everything in nature is cyclical. If we wish to get very technical and look at the fundamental particles we will learn that everything in nature is energy. That energy itself is in the constant state of cyclical movement where the primary difference between various elements and matter is the rate of vibration or oscillation (which in itself is a cycle). Since everything in nature is cyclical and the stock market itself represents a natural growth spiral, we can safely assume that the stock market is cyclical as well. Yet, it is a little bit more intricate than that. It is not necessarily the stock market that moves in cyclical fashion, but the human psychology that underlines the stock market. If you study mass human psychology you will soon learn that men go on repeating the same mistakes over and over again. Not only are they incapable of learning from history, but they tend to repeat exactly the same mistakes that their parents and their grandparents had made. When it comes to the stock market and mass human psychology it is very easy to see how people pool their emotions (or mass delusions) together to justify what the stock market is doing. For instance, 2000 and 2007 stock market tops present us with a perfect opportunity to illustrate just that. In both cases it was clearly visible that market participants are suffering from a mass delusion. With the tech stocks selling beyond any reasonable valuation in early 2000 and with the credit/housing market feeding a massive speculative bubble throughout the entire economy in 2007. From bottom to growth, from growth to excess, from excess to a decline/collapse. Rinse and repeat. Each one of these cycles servers their purpose, from start to finish. They always had and they always will, for one simple reason. You cannot change the human nature of greed, hope, fear and panic. It will always be within us. The tricky part is identifying such cycles, how long they will last and more importantly, where do they start and end. This section clearly illustrates how to do just that. Issue #2: Why do some cycles work perfectly fine over a certain period of time only to break down and never work again?
As mentioned earlier, this issue has caused major headaches for most cycle analyst since the day their craft was born. At times analysts are able to de-trend various cycles out of the market that, at first glance, work perfectly fine. In fact, they might work so well that an analyst might get too comfortable with it. The trouble starts when the cycles brake down and stop working. Eventually they all do. Most analyst have been trying to figure out why that happens, thus far without any luck. The problem with traditional cycle analysis is threefold. First, the use of 2-Dimensional price/time stock market charts to track the cycles. This book makes it clear that the stock market is a much more complex phenomena that moves in at least a 3-Dimensional environment. As such, when the stock market cycle analyst begins to use traditional cycle analysis on a two dimensional chart, they are nearly measuring the shadow of the overall cycle and not the cycle itself. Second, the cycles are not static, they are dynamic. They are constantly rotating, adjusting and realigning themselves within the structure of the market. While it might sound complicated, it is not. It simply means that while the overall cycles remain intact, they constantly change their starting position to realign with the 3-Dimensional structure of the market. As various points of force occur in the market place, the cycles tend to realign themselves to confines of the lattice structure developing in the stock market at the time. Finally, there are multiple cycles working in the stock market at any given time, ranging from hourly cycles to cycles lasting decades. An analyst performing cycle analysis must be aware of this fact and know which cycle is the predominant one at the time. Doing so would allow the analyst to setup a proper index composite that should mimic and predict the market with great accuracy. An illustration is a must to cement all 3 points. Let's take a look at the 2000 top, 2003 bottom and 2007 top. Let's assume that during this time there were 10 different and major stock market cycles moving at the same time, and when combined, represent all major ups and downs of the market. The dates above are the major inflection points in the market. They represent the lattice completion points in the 3-Dimensional environment. That is precisely the points where the cycles realigned themselves in order to form the new cycle composite. When the market hit the 2000 top, most cycles that worked prior to that period had stopped working. Instead the cycles realigned themselves at the 2000 top to build a completely new cycle composite going forward. These cycles represented the market between 2000 top and 2003 bottom. Further, these cycles realigned themselves again at the 2003 bottom and the 2007 top. That is the primary reason behind why the cycles work for a period of time and then break down to never work again. Once the
inflection points and the cycles are understood, an analyst simply realigns such cycles in a predictable fashion in order to time and predict the market with great accuracy. Let us study a sample market composite to gauge full understanding.
This chart requires a little bit of explanation in terms of being able to mimic the actual stock market. 1. The chart above represents a sample market composite over a 5 year period of time. 2. Please note 5 separate cycles located under the green line. Each line of different color represents a different cycle working over that period of time. Note that the cycles vary in amplitude, and most importantly, in spacing. While some cycles are moving up, others are moving down. 3. As the cycles move over time they interact with each other by either diluting each other or by amplifying energy in any particular direction. For instance, major bull moves on the green line occur when most cycles are pointing up. 4. As you can see from the chart, all of the cycles started at different points in time. 5. The Green Line is the composite cycle of all cycles coming together. It is the summation of all of the moves, either up and down. By combining cycles in such a fashion we come close to mimicking the actual stock market move over that period of time. 6. The chart above is one step removed from getting the exact composite. That is done by multiplying the composite above (green line) by the main trend at the time. When we do that properly, we end up with an extremely accurate representation of the stock market. For instance, an analyst working with this composite would know not only the structure of the upcoming market, but the exact turning points and the length/velocity of any upcoming move. When done with
precision, the final output of the composite above should mirror the actual market movement with scary accuracy. Of course, the same type of analysis can be applied to individual stocks. PRIMARY CYCLES WORKING IN THE STOCK MARKET (Please note that it took me a considerable amount of time to work out the cycles and their appropriate allocation. After reading this section, I would highly encourage you to perform your own cycle analysis to confirm the cycles below. Doing so will give you a better level of understanding and reassurance.) Market Cycle #1: 5-Year Cycle. This cycle represents the primary trend in the stock market. In fact, this cycle had been mentioned earlier in this book when it was indicated that this particular cycle represents major long-term movements in the stock market. For example, 1982 to 1987, 1994 to 2000 and 2002 to 2007 were ALL represented by this exact five year cycle. Typically, this cycle moves 5-years up and then 5 years down. Internally, this cycle moves in the following fashion. Five years up and five years down. During the bull market the cycle moves 2 years up-1 year down-2 years up and during the bear market 2 years down-1 year up – 2 years down. Because this cycle represents the primary trend in the stock market, an analyst who is working with this cycle would have to multiply the composite created by the cycles below by the five year cycle in order to create an accurate representation of the stock market. Market Cycle#2: 52-Months Cycle. This cycle moves bottom to bottom every 52 months. Meaning the bull phase is represented by the first 26 months and the bear phase is represented by the following 26 months. Market Cycle#3: 27-Months Cycle. This cycle moves bottom to bottom every 27 months. Meaning the bull phase is represented by the first 13.5 months and the bear phase is represented by the following 13.5 months. Market Cycle#4: 18-Month Cycle. This cycle moves bottom to bottom every 18 months. Meaning the bull phase is represented by the first 9 months and the bear phase is represented by the following 9 months. Market Cycle#5: 13-Month Cycle. This cycle moves bottom to bottom every 13 months. Meaning the bull phase is represented by the first 6.5 months and the bear phase is represented by the following 6.5 months. The cycles above represent the longer term moves in the market. However, as mentioned before cycle analysis can be applied to any time frame. An analyst working with shorter time frames (daily/hourly)
would just have to narrow down the window of analysis in order to figure out the short term cycles and their relevant application to the stock market. When done, the shorter term cycles must be added into the composite above. Doing so will produce a very accurate composite on both the long-term and the short-term time frames. In conclusion, cycle analysis adds an extra level of analysis to the fundamental and the 3-Dimensional analysis introduced earlier. Building a proper cycle composite allows for either a confirmation or questioning of the 3-Dimensional structure of the market. If the cycle work confirms the 3-Dimensional analysis, it gives an analyst an extra level of assurance that the work done in earlier chapters is indeed correct. Further, properly executed cycle work will allow the analyst to pin point high energy moves (either up or down) and the time frames associated with them. Allowing the money manager to make the most money within the shortest possible time frame.
Putting It All Together Throughout this book we have talked about a number of important investment concepts. We started out by looking at the traditional value investment approach and how to use it in order to minimize risk while maximizing returns. We followed on by looking at things like margin of safety, how to determine the intrinsic value of any stock like a pro, the different types of stocks out there and how to apply macroeconomic analysis in order to supplement fundamental analysis. Basically, the "Value" section of the book allowed us to concentrate on the fundamental approach to investing and the best practices associated with it. At the same time, we were able to identify a number of significant problems associated with value investing. The most significant of them was the fact that value investing doesn’t give us the ability to properly time entry and exit points into the financial instruments we are interested in. Even if our fundamental research is proven to be correct, we might be months or even years away from a properly timed entry point. Yet, timing is the most important element. Properly timed investments allow us to further reduce risk while maximizing our returns. Not only that, but properly timed investments can either confirm or challenge the validity of our fundamental analysis. This understanding forced us to look at various timing techniques and their associations with the stock market. Primarily, by introducing a completely new way to look at the stock market we were able to concentrate on the 3-Dimensional analysis as our primary tool to time the markets. As this book clearly illustrates, the stock market is not random, but is, indeed, highly structured. Once the structure is understood through the use of 3-Dimensional analysis, one can time the market with great precision. Further, an analyst working with the timing techniques described in this book should be able to identify with great accuracy not only what any given stock or the overall market will do, but exactly when it is going to happen. This was followed by cycle analysis and an explanation of how cycle analysis truly works. Most analyst have had issues with using cycle analysis in the past because cycles tend to work over a certain period of time, only to break down and to never work again. This conundrum was clearly explained and it was shown how the cycle analysis can be used to mimic the stock market with great precision. Once the cycles are arranged in a proper configuration an analyst can determine with great precision not only the price and time, but the velocity of the move as well. Once again, confirming price/time while minimizing risk. So, what is Timed Value? It is exactly what it sounds like. Three powerful investment strategies, all wrapped into one. Fundamental analysis, 3-dimensional analysis and the cycle analysis. Combining all three into one allows us to predict the stock market (or individual stocks) with great precision in both price and time. This further reduces risk while maximizing the returns. For instance, working with fundamental analysis and macroeconomic understanding we would be able to identify “Rocket Ships” stocks that are set for rapid and significant advance. We would then use the 3-Dimensional analysis and the cycle work to confirm our fundamental analysis and timing. At this juncture, if everything aligns and the actual price movement confirms, it would be ideal to start building a trading or an investment position. Through using trading rules described earlier we progress even further in our risk management by minimizing mistakes in our overall investment approach. For example, if all previous metrics agree and
we decide to establish an investment position in any given stock or the overall stock market, we would still have to look for the market to confirm our research. If the market moves against our very well researched position, we would have to follow our strict trading rules and liquidate our position as fast as possible. While such actions will lead to short-term losses, over the long-term such actions will minimize losses while greatly increasing your return opportunities in more profitable stocks. Once again, by combining all of the factors above into what I call a “Timed Value” style of investing, one gains the ability to compound oversized gains over an extended period of time. All while minimizing risk. An allocation that should ensure market beating performance if the timing techniques explained in this book are used in their proper format. It is also important to understand that properly exercised timing techniques can lead not only towards market beating performance, but to capital gains that are typically not available in a more "traditional" market sense. In fact, when the market structure is understood in full, from the 3-Dimensional perspective, the market or individual stocks can be timed with great precision. Leading to astronomical returns and very little (if any) risk. To summarize the Timed Value approach discussed in this book…. 1. 2. 3. 4. 5.
Identify “Waking Beast or Rocket Ships” value stocks through the use of fundamental analysis. Confirm your investment thesis through the proper use of Macro Economic analysis. Use 3-Dimensional analysis to time the stock market or individual stocks with great precision. Use Cycle Analysis to confirm your timing work. Follow strict trading rules to properly enter and exit financial instruments in order to minimize risk.
In conclusion, I have developed this unique investment approach after more than a decade long participation in financial markets and tens of thousands of hours studying various timing techniques. While the above might not work for everyone, it is the most powerful and the most risk averse approach to investing that I know of. While “Value” portion can be replaced with many other investment styles (growth, technical, etc..), the timing principles discussed in this book are indeed timeless and cutting edge. An analyst who dedicates his time to studying the market in 3-Dimensional environment should walk away with a much better understanding of how the markets truly work. An understanding that will eventually morph into an exact science allowing the said analyst to time the stock market with precision most other market participants can only dream of. The End. Do you need more information? If you wish, you can follow my work at InvestWithAlex.com Further, if you have purchased this book please email me your receipt at
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