The Market for Tradable Securities
Warren Buffett's Approach to Investing – A Fundamental Perspective
Seasoned with a Sprinkling of Technical Insights – How I (Anyone can) Make Money in the Market

Warren Buffett told investors of Berkshire Hathaway, a holding company, in his 1987 annual report, the following story, which he got from his mentor Benjamin Graham (author of the definitive book on value investing The Intelligent Investor):

Mr. Market

To understand the irrationality of the stock prices, imagine that you and Mr. Market are partners in a private business. Each day without fail, Mr. Market quotes a price at which he is willing to either buy your interest or sell you his. The business that you both own is fortunate to have stable economic characteristics, but Mr. Market's quotes are anything but. For you see, Mr. Market is emotionally unstable. Some days, Mr. Market is cheerful and can only see brighter days ahead. On these days, he quotes a very high price for shares in your business. At other times, Mr. Market is discouraged and seeing nothing but trouble ahead, quotes a very low price for your shares in the business.

Mr. Market has another endearing characteristic, said Graham. He does not mind being snubbed. If Mr. Market's quotes are ignored, he will be back again tomorrow with a new quote. Graham warned his students that it is Mr. Market's pocketbook, not his wisdom, that is useful. If Mr. Market shows up in a foolish mood, you are free to ignore him or take advantage of him, but it will be disastrous if you fall under his influence.

A Deeper Look at Mr. Market's Nature

If you are new to trading and investing, market prices may seem to randomly trade up and down without rhyme or reason. When we take a position in the market, the value of that position goes up and down too, tracking market prices. Therein lies the blessing and the curse. We would all love to see the value of our investment go up and up just after we buy, and down just after we sell (we hate to see prices continue up after we sell). But we don't get to live in that world. Being disappointed when the normal ups and downs of reality happen is, well, just unrealistic. When we buy into Mr. Market (take a position) to earn a highly possible and attractive Market Rate of Return, we face the real risk of a periodic reduction in value along the way. We need to develop an ability to deal with this value drawdown. The Market Rate of Return is on average about 5% for an all bonds index and about 10% for an all stocks index over longer timeframes, compared to much lower rates from traditional bank savings accounts and CDs. The rate of return on specific individual investments will vary and will depend on its growth characteristics, longevity, and the timing of the buy and sell operations. That risk, just like the reward, can be either temporary or permanent, and much of that will depend on us. We cannot control market prices. However, we can study market prices to see if there are any natural tendencies that we can exploit. We can also develop and refine a methodology, an iterative process that plays to our natural abilities and that enables us to profitably exploit the market's natural tendencies. Furthermore, we can control the list of securities that we'll focus our time and money on. That is, we can choose What we buy and sell, and When and How we'll do our buying and selling. It is very important that we develop the ability to focus on a few good investments that will pay us to hold and that are likely to see higher prices in the future. Like many professional investors, we can learn how to spot and take advantage of favorable prices when we see them and also learn how to patiently wait for better prices. We must learn how to be okay with normal market volatility, to see it as a blessing, and that will generally take some time and exposure to Mr. Market's nature.

It helps to have a general understanding of what Wall Street Markets are all about. The Market is primarily a mechanism designed to fund economic opportunity, to enable saving for the future, and to diversify risk. It can also be a gambling venue for those with that mindset, which is generally driven by our desire for quick and easy money (i.e., to be the next super star trader). This approach fosters an adversarial perspective — Thinking thoughts like, "I'm going to beat the market." and "I'm going to take his money." Mr. Market is way too big and powerful to beat or even push around. (Okay, there are some big traders that can push him around a little bit; but unlike Mr. Market, no one has unlimited trading power.) The market is going to go where it wants to go. I think this Fast Money Trading mentality is counterproductive and can produce a lot of frustration, savings loss, and maybe even cause some psychological damage given that almost half of all trades will go the wrong way. Market timing is hard, even for the pros.

Focus on the primary mechanism, which tends to yield the desired results. I think it helps a lot to have a positive mindset as indicated by the book The Psychology of Money, a profound exploration of the intricate relationship between psychology and personal finance. You don't have to learn these lessons the hard and costly way. I like to think of Mr. Market as my traveling companion on the road to investment success. He is like a dance partner. I, of course, let him lead and just consider the various opportunities that are offers up in his wake, over-and-over again. Those with favorable odds, in my eye, I jump on and then work them to acceptable profitability; and the rest I leave for everyone else. Learn how to profitably dance to his melody of perpetual (up and down) price swings. After you've learned how to profitably invest (dance) with Mr. Market, then you can try to improve your trading skills (improve your rate of return).

Buy Low and Sell High, we're told, is how to make money in the markets, but that's not the only way.

There are basically two ways for the average investor (saver) to make money on Wall Street (the markets for tradable securities):

• Earn a Capital Gain — A capital gain is realized whenever the proceeds from a sale of an investment (the money coming back to you) is more than the cost to acquire it; and that's the foundation for the old saying, Buy low and Sell high (or at some higher price). But that begs the question, What's low, and what's high?
• Earn Investment Income — Money can be earned from the ownership of income producing investments. Examples include dividend income from equity (stocks), interest income from debt (bonds), and rental income from a real estate investment (e.g., REITs). These are all examples of being paid to hold; and in the long run, a significant portion (almost half) of all market returns are derived from investment income.

What I giveth, I can taketh away. — Mr. Market

In the following Chart of the Total U.S. Stock Market, we see two important things. In the upper part, we see a graph (a squiggly line) that shows the value of a $100 investment in that stock market index in about 1870, which is about as far back as we can go given the historical records. This upward-sloping growth curve is typical of a broad-based stock market index that represent an investment in a growth-bias economy governed by the predictable rule of law that supports property rights and sensible free-enterprise, like what we have in the U.S. In the lower part of this chart, there's another graph that shows a rolling 5-Year window of real (adjusted for inflation) returns. Even though the upper graph generally goes from the lower-left to the up-right, that is from less value to a lot more value, any arbitrary investment within a shorter interval of time can show either a very nice positive rate of return (like up as much as 33.35%) or a very bitter return (like down as much as 13.22%). What if we were able to capture more of that upside and less of that downside while we also own some exposure to this natural wealth building index?

In the short run, the market is a voting machine; but in the long run, it is a weighing machine. — Benjamin Graham

Market prices trade up and down, over-and-over again, in the shorter-run; but over the longer-run, market prices will generally track the real growth in the underlying economic system. Unfortunately, the longer-run can take a lot of time to yield our desired savings growth. Is it possible to learn how to profitably trade these shorter-term market swings? Yes, but it is not easy, and mistakes will be made. The pros are very good at timing the market or at least able to be consistently profitable. They are also very good at minimizing the impact of their mistakes. Everyone else, well, let's just say, "Not so much." The thing is, most of us can learn how to profitably invest in the market, to develop the wherewithal to generate wealth; but it will take at least some amount of time, money, and some appropriate security selection. Some of us can also apply some additional (and appropriate) skill and effort. Clearly, very few of us can become professional traders. So, what are we supposed to do? Turns out, time in the market can be almost as good as effectivity timing the market when you invest in, just own, securities that have a positive compound growth rate. Alternatively, if you have a trading strategy with favorable odds of success and the self-discipline to work it, that can also deliver a positive compound growth rate. Appling the second approach to the first can generate even better savings growth. Furthermore, adding additional periodic savings can yield truly amazing results. But it will all take time, patience, and methodical persistence. Are you ready and able to take advantage of all the up and down price action? To work for that sweet retirement (or for whatever you desire)? I believe anybody can do this if they'll commit to it.

The historical data indicates that you are unlikely to become a professional trader. But you may be able to become a professional investor or at least good enough to retire in reasonable comfort. In the balance of this paper, I'll talk about things that can help you become an effective investor and maybe a consistently profitable trader. By-the-way, an investor is someone with a longer-term time horizon that can rely on economic growth to generate wealth. Whereas a trader is someone who expects to Win the Loser's Game (i.e., Beat Mr. Market at his own game, which can be done, but it is not easy — you'll have to find the self-discipline to play to your advantages after you learn what they are, and all this will take time, money, appropriate training, and lots of focused effort). It is best to first become a profitable investor, and then learn how to use appropriate trading tactics to make money quicker.

Most come to The Market with a Lottery Ticket Mentality. They expect to get rich quickly and are surprised when they get lottery ticket results, losing all or most of their money. And yet, Mr. Market is reliably making ordinary people rich enough to retire over just a few decades of methodical saving and investing using Buffett's value-based approach or some other time-tested method with favorable odds. And you can do this too! Just stop chasing the latest hot tip or story. Taking your buy and sell ideas from someone else is generally a recipe for savings disaster. Please accept that almost no one ever gets rich quick on Wall Street, and the few who do (or think they can) end up giving it back to Mr. Market (or in prison). It is hard to keep an ill-gotten gain, a simple fact of life for most good people. Focus your time and money on an understandable approach with a track record of success. Earn your own success. Folks that can do this tend to be better equipped to keep it and acquire more, another simple fact of life. It takes time, money, a strategy with favorable odds (like the two presented below), some effort, and lots of patience and persistence. Treat this like a part-time job (or a small business) that can get you retired. Be about the Business of Growing your Wealth.

Mr. Buffett counsels investors to never forget that stocks are simply a fractional ownership claim on a business and bonds are simply a loan to a business or government entity; and the rate of return on both investments depends on: 1) how much you pay for that investment (the cost to get in), and 2) on future economic prospects and prudence of the issuer of that security (the tangible form of the investment). Buffett says, "To be a successful investor, one needs good business judgment and the ability to protect oneself from the emotional whirlwind that Mr. Market unleashes."

Warren Buffett likes to say, "On Wall Street, you pay a pretty penny for a cheery consensus of value." When an investment is popular, it commands a premium. But when it becomes very popular (or unpopular), prices can become a momentum play and can significantly deviate away from any rational intrinsic (economic) value. Buying at excessive premium prices greatly reduces the odds of success. Doing so requires finding someone else (Buffett says, "A Greater Fool") to pay an even higher premium to realize a profit (a capital gain), and this must be done before the popularity fades. Popular momentum stocks are infamous for running up to ridiculously high prices; and then tanking to astonishing lows, in the eyes of those who paid some of the prior high prices. Worst yet, most of these busted momentum stocks will never, ever again see their prior highs. Wall Street is one of those marketplaces where most otherwise rational people will gladly pay a premium to buy a popular investment (just to be in it) and will then accept a big discount (just to be rid of it) after that previously desirable investment has turned sour (goes out of favor). Initially, their friends, the media, and the price trend all say, "Prices are Going Higher!" Not wanting to be left behind, these uninformed investors jump in at any available price. Having no real plan (besides, "I plan to make money!") or strategy to manage that investment, these newbies often find their new investment losing value as the pool of new buyers runs out of steam and the only eager traders left are sellers. Human nature being what it is, like deer in the headlights, they hold-on hoping to break-even (get their money back) or (worse yet) to get back to the prior high profits they once had. Unfortunately, the primary trend has now turned down and the popular media personalities say, "Prices are Going Lower!" In time, these novice investors become scared, not wanting to lose even more money, they sell at any available price just to stop the pain. Thus, earn a capital loss by buying high and selling low. Most uninformed investors lose money trading with the popular crowd. Savvy investors, like Buffett, see premium (above average) prices associated with a popular investment as an opportunity to raise cash by harvesting a profitable investment they bought at discount (below average) prices, when that investment was out of favor. These savvy market operators buy at below average prices, sell at higher prices, and earn income while they wait for their capital gains. They work to generate above average total return profits, which is the sum of the capital gain or loss and all the income earned while holding that investment.

Price is what you pay, but value is what you get. — Warren Buffett

Buffett is a value investor — Mr. Value. Market prices change all the time, but the intrinsic value does change all that often or as much. "Whether we're talking about socks or stocks," Buffett says, "I like buying quality merchandise when it is marked down." He only buys Good Investments at discount prices. A Good Investment is one that is supported by a business (or government) that is highly likely to survive an economic downturn and is likely to generate wealth over time (i.e., see higher prices in the future and/or will pay a market rate of return to hold). Because it takes time to analyze and follow the factors supporting the value of a good investment, it's best to focus on just a few good investments (a manageable watch list of dissimilar investments). Buffett says he and his business partner Charlie Munger apply their Four Filters to find Good Investments: 1) The company must have a simple (understandable) business model that is both profitable and able to grow earnings, 2) have a durable competitive advantage (whenever a business is able to generate high profit margins, others naturally enter that market to get a share of those high profits, which tends to arbitrage away excess profits when there are little to no barriers to entry), 3) a seasoned management team with a high degree of integrity, and of course 4) a sensible price tag. Buffett says, "Paying a below average price for an above average business creates a significant margin for error." An investment only sells at a discount when it is out of favor. Because an investment can stay out of favor for a long time, Buffett requires his investments to pay him to hold. Assuming the investment passes the Four Filter test, he is happy to buy a little at a little discount, buy more at bigger discounts, and buy a whole lot more at ridiculously large discounts, when his good investment is very unpopular. Buffett is able to properly execute this strategy because he knows what he is buying. He can see the real (economic) value and knows that Mr. Market will see that value sooner or later. When Mr. Market cheers back up, he books above average profits as they become available. Only make a trade when Mr. Market offers prices that are favorable to Mr. Value.

Warren Buffett holds a Bachelor's Degree in Business and a Master's Degree in Economics; and understands that in the long run, market prices ultimately follow the growth rate trend of the underlying business. These growth trends are extremely likely to follow the boom-and-bust business cycles of the broader growth-biased economy. We don't need a Master's Degree in Economics (or in Business) to understand this historic reality: Riskier investments like stocks and corporate bonds do better when the economy is growing and safer investments like government bonds do better when the economy is in trouble. Here's another business fact that does not require a degree to understand, investments that are backed by the biggest and best businesses (the Blue Chips) in every market sector are likely to survive cyclical downturns and often come out stronger because they're able to take market share from weaker businesses that failed to survive. Furthermore, the survivors are often able to buy up the valuable assets of the failed competitors in bankruptcy for just pennies on the dollar. Savvy investors see market volatility as an opportunity to buy low (build a discounted cost basis) and to sell high (harvest a profitable investment) when their investment objectives (targeted rates of return) are reached or when the economic data signals, "It is time to get out." He (Buffett) knows that when we are being paid to hold a good (survivable) investment, with a low-cost basis, making money is just a matter of time and tracking prices against that cost basis. Furthermore, Buffett likes to hold cash to take advantage of irrational market opportunities, especially those that always show up at or near the bottom of every cyclical downturn. On Wall Street, it is best to invest in securities that will benefit from the current economic trend, that will pay us to hold, and that are likely to survive economic surprises. It is the best way to avoid realizing a permanent loss of principal.

The real secret to generating wealth in the markets is avoiding losses and a positive compound growth rate. Buffett has two rules. Rule No. 1: Never lose money; and Rule No. 2: Never forget rule No. 1. Charlie Munger says, "The first rule of compounding: Never interrupt it unnecessarily." When the younger version of me first got this advice, I was quick to dismiss it as being trite. The much older version of me now knows, this is some of the best advice ever given to me. Simply put, money spent on unnecessary investment products and services or lost on risky trades can never realize a compound growth rate. But mistakes will be made! We must learn how to avoid the big mistakes, investments (trades) that contain anything but the smallest likelihood of realizing a (large) permanent loss. We also need to avoid all unnecessary trading and investing expenses. These capital losses force us to take a double and maybe even a triple hit. Not only do we lose some (or all) of our hard-earned savings, but we also lose the time it took to save, and possibly any compound growth realized on that savings. So, Buffett and Munger are correct about the priority to avoid unnecessary savings losses. Unfortunately, market timing mistakes are unavoidable. We need to learn how to minimize these drawdowns. We also must learn how to convert these small timing mistakes into acceptable profits. Learn to hit low-risk, reproducible singles and doubles by focusing on survivable investments that can yield a doable 5 to 10% yield over-and-over again. It is very rarely achieved by swinging for the fences (chasing the current fast-money trade) or buying lottery tickets (penny stocks and options). Our primary objective must be to become a Consistently Profitable Trader/Investor (CPT). A CPT can grow their savings at a positive compound growth rate (i.e., new growth on top of old growth from initial savings and investments, over-and-over again). There are two ways to realize a compound growth rate. The first is to invest in businesses that have it. The other is to reinvest profits that we realize in our savings (brokerage) account. Any company that can consistently grow its earnings per share (EPS) can yielding a compound growth rate. These are called Growth Stocks. Holding a Growth Stock is one way to be paid to wait. But not all businesses are growth companies. Some are just a money machine that have already lived through their growth phase. These are called Value Stocks. They can consistently earn money without much growth. These are profits, free cash flow (FCF), that can be paid out in the form of dividends. When a growth company loses their ability to grow, Mr. Market tends to cause a significant and permanent price adjustment down. They lose their growth premiums. That's the risk of holding a growth company for too long. Big mature value companies pay dependable dividends and can do stock buybacks to attract investors. So, we don't need a growth company to realize a compound growth rate. The FCF from any business can be either retained by that business to fund future growth opportunities or they can pay out some or all of that cash to their shareholders so that they can reinvestment those proceeds into opportunities available to them via Mr. Market. Historically speaking, a major component of total stock market returns come from dividends. Iterative re-investment of capital gains and dividends also yields a compound growth rate. This, plus a focus on survivable investments that will pay me to hold, is my primary CPT approach. If you are not yet a CPT, please understand and accept that it is far easier to become a CPT in longer timeframes, like over an economic boom-bust cycle, a yearly business cycle, and then a quarterly business cycle. First achieve CPT status, and then learn how to acquire CPT status in slightly quicker timeframes, our secondary objective. CPT status is of primary importance because compounding will naturally occur over time and will magnify whatever trading and investing results we realize. A string of profits, no matter how small or slowly they come, will cause an equity growth curve to turn up over time, and after many years can allow us to retire in comfort. But a string of losses and unnecessary expenses can simply hollow out a retirement account and force you to start over and may force you to work in a more traditional job for the rest of your life.

Bull markets are born in despair, grow amid skepticism, mature in optimism, and die amid euphoria. — Sir John Templeton

Some have said, and I believe there is some truth to the saying, Prices are driven by Market Sentiment. Prices are driven by our beliefs (feelings), and that propels the trend forward (until it has gone too far). But there is a deeper truth. The market is not just driven by feelings, like fear and greed. I believe that the Smart Money uses Market Sentiment via their market commentary to motivate the Dumb Money (those less informed market participants) to buy high (near the top of a broader trading range, like a 52-week high) and to sell low (the other end of that trading range). That is, to buy from the Smart Money when prices are supporting a rich premium (and it feels like prices are going higher but fail to advance on more good news and commentary), and to sell when prices are discounted (and it feels like prices are going lower but fail to stay down on more bad news and commentary). I've seen this pattern of behavior all my investing life, over-and-over again. There's a reason why Sir John's admission has stood the test of time. It is not that hard to learn to see and profitably work this cyclical market reality. We can learn to invest more like the Smart Money.

Watch Ray Dalio's "How the Economic Machine Works" on YouTube at http://www.youtube.com/watch?v=PHe0bXAIuk0 to better understand the big picture and the economic boom-bust cycle, which is the most fundamental factor driving the value of all investments. We need to be able to get this right, but it's not that hard.

The future tends to look a lot like the past, not always and never perfectly identical, there will always be some degree of variant randomness; but similar enough to seriously favor those that can learn from the past, understand basic business and economics, and can think in statistical terms. On average and as noted above, professional money managers (big traders and investors, by virtue of the amount of capital they manage) are responsible for the largest amount of trading volume on any given day and are considered to be the Smart Money. They know how to play this game. Money naturally flows towards the better operators on Wall Street. They can afford to buy the best real-time information, and tend to have some of the best fundamental and/or technical analysts on their team. So, the guy on the other side of your trade is likely to be a professional or a computer programmed by a team of professionals. I'm not saying that they never make mistakes. They do. I'm saying those guys are good, and probably way better than the average retail investors (you). This does not mean that you can't make money too. You can, if you trade (invest) with (like) the biggest investors; and wait for Mr. Market to offer up favorable prices, better implied values. Let Mr. Market come to you. A savvy investor can wait for favorable prices. We can use real-time charts to see what the Smart Money is doing now and has done in the past. (Yes, this paragraph is a little redundant; but that's only because this information is so important and is worth a fortune.) It pays to understand the big picture and to be able to see the well-informed professional forces driving market prices forward, to receive The Message of the Market and to know when that message is likely to be true and when it is more likely to be wrong, given what we can know about the economy and the market's nature. In broader timeframes, when the general economic news is good and prices are likely to slowly grinding higher (like while the economy is growing amid skepticism and then optimism) or the news is bad and slowly grind lower (hope and fear), we want to believe that message and trade with that trend. But, at some point, prices will stop going down on more bad news (while in despair) or stop going up on more good news (euphoria); and this is a market message that should not be believed. The pros are saying one thing but doing the opposite or the guy or gal doing the talking is simply out-of-sync with the broader market. Beware of Pump and Dump, a classic Wall Street tactic that is illegal but still done. One respected guy or gal will advocate the purchase while everyone else in-the-know is selling. It is important to understand that the retail participant is generally the last to get the news or commentary. But everyone can get about the same real-time access to the market data and we can learn how to receive and process the message of the market. We can learn how to make our own buy and sell decision based on all that.

Focus on survivable investments. Buffett runs Berkshire Hathaway like a virtual mutual fund. However, unlike traditional mutual funds, which are only allowed to own a very small percentage of any publicly traded securities, a holding company like Berkshire is legally allowed to engage in any, non-criminal, business opportunity that is consistent with that company's controlling documents as interpreted by that company's senior managers, the board of directors, and (when necessary) the courts. So, Berkshire, like most large blue-chip companies, is actually a diverse portfolio of quality (mostly small) business opportunities that Berkshire owns outright (private holdings that are not available to other investors) and various securities issued by other large blue-chip businesses (most of which are publicly traded on Wall Street). Like most mutual funds and blue chips, thanks to diversification, Berkshire Hathaway is an investment that is extremely likely to survive the vagaries of the market. Unfortunately, Berkshire Hathaway is a very high-priced stock. Don't confuse a high price with a large premium. Berkshire can have a high price tag and still be a cheap stock from a value perspective and that is often the case. The high price tag simply means that it takes a lot of money to buy just one share; but there are others, more affordable stock investments from a capital commitment perspective, and some may even be a better value than Berkshire from time to time. Exchange Traded Funds (ETFs), like SPLG are lower-cost, naturally self-correcting, investments that passively track a market index, like the S&P 500. Buffett says that these low-cost index funds are actually best for non-professional investors because they have a natural growth factor, are self-correcting (troubled businesses are periodically replaced by the new up and comer), and most pay a dividend too. These broad index funds are great examples of survivable investments and are an excellent choice for new savers, just Dollar-Cost Average in until you have enough capital and skill to properly manage alternatives. Speaking of alternatives, there are affordable Closed End Funds (CEFs), like GAB that invests in Value Stocks including Berkshire Hathaway, EOI that invests in Growth Stocks and PTY that invests in bonds. These CEFs are businesses (publicly traded investments, like other stocks) that are actively managed by professional investors like Buffett; and many of these pay attractive yields, which can go a long way to realizing a targeted rate of return. CEFs, unlike ETFs and traditional mutual funds, can trade at prices that are above (at a premium) or below (at a discount to) the Net Asset Value (NAV); so as good value investors, we only want to buy CEFs when the market is selling them at a discount to their average price (see Morningstar's Z-Statistic). It is best for new investors to focus the majority of their time and savings on investments, like ETFs and CEFs, that can survive volatile market swings and that will pay a market rate of return to hold.

Why is Dollar-Cost Averaging (DCA) a tried-and-true savings strategy? DCA is an investment strategy that invests equal amounts on a regular basis over a longer period time (such as $100 monthly for ten years) in a particularly safe investment that will track market prices over normal of boom-bust economic cycles and quicker quarterly earnings and dividend cycles. This strategy forces savers to buy more shares when prices are below average and fewer shares when prices are above average. Thus, yielding a cost basis (the average price per share, which is also the break-even price of the whole investment) that is lower than the average price seen in the trading range over that investment timeframe. Building a lower cost basis makes it much easier to realize a gain on any future upturn in prices. So, DCA works in a growth biased economy, which is the world we live in.

DCA is a calendar-based strategy. What if we regularly looked at Mr. Market's pricing data? What if we used a volatility-based strategy? What if we only bought low, when prices are below average; and maybe sell some of those buys that have a lower cost-basis at above average prices or at least at some higher price? If so, we could earn a capital gain profit and free up some buying power to re-invest in the next cyclical downturn, thus yield a better compounding rate of return. We would have a strategy that can far exceed the rate of return of the alternative DCA approach. But this alternative requires more effort. It requires that we periodically monitor market prices and track our trading details to see if it is better to buy, sell, or just wait for better prices. Is this extra effort and rate of return worth a little more of your time? Do you have the self-discipline to do this? If not, just stick with DCA and skip to the Summary below. There is a reason why DCA is the default recommendation for most retail savers.

What are Market Prices? Get a quote from Mr. Market for any stock, bond or whatever security has caught your eye, and you're likely to get the following standard pieces of information: The Last Price is the price of the latest trade, which is recorded on the Ticker Tape (Time and Sales) for all to see. The Asking Price (a.k.a., Ask or Offer Price) is the price a willing seller (Mr. Market) is asking for their shares. This is the price you would pay per share to quickly get into that investment. The Bid Price is the price a willing buyer (Mr. Market) will pay for your shares. This is the price you would receive to quickly get out of that investment. Plus, the following two trading ranges. The first is the Day's Trading Range (High and Low Prices) and the other is the 52-Week High and Low Prices (the range of prices seen on The Tape over that prior year). This 52-week trading range is generally very wide and should prompt you to ask, "How can a security trade for such a wide range of prices when the underling business that issued that security almost never changes all that much over that same period of time?" And therein lays the proof that Mr. Market's prices really can be irrational at times and may not always be a good measure of value for that security. So, what would be a better measure of value?

Fundamental Analysis is a great way to understand the economic value of an investment. It uses accounting and financial statements to generate a standard set of figures like, Top-Line Sales (Revenue) and Bottom-Line Net Earnings (Profits) and ratios like growth rate, P/E or Yield. Fundamental analysis considers all relevant business specific information, like cash-flows, debt, business model (how they make money), competition, the management team, etc. (i.e., stuff like Buffett's Four Filters) to determine if the stock or bond issued by that business is a Buy, Sell or Hold given current market prices and the price of alternatives. Some prefer to use a Price-to-Earnings Ratio (P/E). P/E is the current market price for a share of stock divided by the prior year's (or next year's expected) Earnings-Per-Share (EPS) for that stock. P/E can also be thought of as the number of years required to earn break-even or pay-back. Many savvy professionals prefer to use the Earnings Yield for stocks, which is just an inverted P/E (EPS divided by Price) because that makes it easier to compare the yield on a stock to the yield on a bond from that same business or other companies in similar businesses. Yield is a superior measure of value because it is based on the relationship between Mr. Market's price and the earnings ability of the business that issued that investment opportunity. Warning: beware of exceptionally high yields caused by a sudden drop in prices, which move first and followed later by a drop in yield driven by truly bad news about a business's deteriorating fundamental situation. When this happens, wait and let prices and yield settle down, and then re-analyze the situation. It is best to compare the current yield (like all standard fundamental values and ratios) to a longer-term average for that security (business) or group of similar securities. Generally, it's best to invest in securities issued by businesses that generate stable Higher Yields (i.e., it's best to be a buyer at above average yields and a seller at below average yields relative to that average) assuming all other things are equal, which is rarely the case when considering alternative investment opportunities; but is always the case when the only thing that is changing is market prices. Warren Buffett is known for his expertise at fundamental analysis. Unfortunately, good fundamental analysis is hard to do. That's the bad news. Most brokerages will give us free access to their fundamental analysis (good news?). But you still have to make good actionable sense of it. Plus, you only get to see it after it has been given to those who paid to see it first or paid to have it generated. So, what can new and less fundamentally gifted investors do to improve their odds of investment success?

Let's take a closer look at Mr. Market. Market prices contain information called The Message of the Market. We can learn how to effectively receive the market's message. Market prices have a natural tendency to trend. That trend is likely to continue until it is no longer reflective of likely future value and therefore that trend reverses, over-and-over again. And thus, market prices naturally trade in a range that is more reflective of likely future value. By law, every trade must be recorded on The Tape for all to see. Market prices on The Tape are Mr. Market's Message, which is a momentary reflection of the sum of all that is known or believed about likely future possibilities at that time. Market prices are both forward and backward looking. They attempt to anticipate news and commentary (and the reaction to that news and commentary) about the economic realities of the businesses and governmental entities that can issue stocks, bonds, and other financial securities that we can buy, sell and hold in a brokerage account. Mr. Market's prices are ultimately based on backward-looking fundamental factors. When forward-looking expectations fail to correctly anticipate backward-looking evidence, market prices correct, and that correction can be surprisingly fast. However, thanks to the fast-money day-trading crowd, there are times when forward-looking expectation can become disconnected from backward-looking fundamentals, and that disconnection can last for a surprisingly long time when driven by fresh commentary on the latest news. But sooner or later, backward-looking realities always catch up with forward-looking beliefs. The re-connection tends to happen after the fast-money swarm has turned their attention to some other security in the news. Because market prices are forward looking, they naturally trade in an uncertain (dynamic) range. So, market prices trade up and down, over-and-over again, probing and defining the range of fair market prices, given all the information that is available to trade on and that reflects the market's collective wisdom about likely future value, which can be wrong at times and is always subject to change. This begs the question, "When are market prices likely to be about right and when are they likely to be wrong?" or better yet "When are market prices likely to be useful and when is it best to ignore them?" It is useful to think of current and historic market prices as a probability distribution that can lend themselves to statistical methods of analysis (how are prices trading relative to an average). It is best to focus on securities that are well anchored to objective fundamentals because they tend to be more predictable and easier to trade profitably. We can see all this trading history and the range of prices on a chart. This price range exists between the highest and lowest prices seen on that chart. Warren Buffett is not known for his expertise at Technical Analysis (visual chart analysis), but that doesn't mean that you can't learn how to use charts. Our brains seem to be able to quickly detect familiar patterns in visual images. Most people are also able to perceive statistical properties. These abilities can be greatly improved with appropriate training and practice. Mastering technical analysis is far easier than fundamental analysis. However, mastering both is best as that allows us to better judge when the price action (message of the market) is likely to be correct about the future fundamental picture.

Technical Analysis (TA) is another way to gauge the relative value of an investment. We can use charts to leverage the Market's Collective Wisdom. Charts show the current trading range, the trend, and the health of that trend. They show the sum of all market activity now and in the past. TA is a great way to see the habitual behavior associated with specific markets. Future price patterns tend to look a lot like the past, rarely exactly the same, but often similar enough to favor those who can learn how do the analysis and planning to effectively exploit the findings therein. Keeping it simple for now, we can use charts to see the current trading range, which is called a Support and Resistance (S/R) Channel that shows the market's collective opinion of likely fair value at this time. Charts make it easy to see where current market prices are trading relative to this S/R Channel, thus indicating if Mr. Market is offering discount or premium prices or somewhere in between.

Why does Technical Analysis work? We all want to make money in the market, to earn capital gains, which requires a buy price below the sell price (i.e., buy low and sell high). So, we all want to buy at a relative discount and sell at some higher price, like at a premium. On any average day, 70 to 80% of all trading volume is generated by professionals, people who do this for a living. They are well-trained, properly equipped, and most have a manager to impose discipline. Plus, these pros have a clear track record of success; without this, the business will force you to find some other occupation. They are "The Smart Money". Big professional value investors are responsible for the longer-term market trend and longer-term trading ranges. They work to harvest economic market swings in the normal boom-bust cycle and quicker quarterly cycles. Furthermore, about 80% to 90% of shorter-term market behavior is driven by professional day-traders (and their super computers). They are "The Fast Money"" and responsible for shorter-term trading ranges and trends. Fast Money traders compete for cyclical profits in quicker (smaller) timeframes. They are some of the very best traders in the world. These professional day-traders don't care which direction prices go, so long as they go; and they're happy to be bullish, bearish or whatever is working now. The Fast Money tends to push quicker (shorter-term) trends into the waiting arms of longer-term investors that do their relatively larger buying and selling at discount and premium prices thus causing trend reversals, which are also known as chart pivots. These pivots define the size of the current trading range (S/R Channel) within the timeframes and markets that they both specialize in. There is a natural symbiotic relationship between these two groups of professionals; and charts show their interplay, the perpetual interaction between competing profession forces of supply and demand. Professionals buying low and selling high causes market prices to trade up and down, in a dynamic trading range. Over any given interval of time, there are a finite number of active professional traders and investors participating in their specialized market. Because we are all creatures of habit, training, and (in the case of computers) programming, we naturally do the same kind of things over-and-over again. These pros naturally do more of what generates profit for them, and they are quick to Stop what causes loss. Furthermore, when any group of individuals interact with each other on a consistent basis, additional collective patterns emerge. All these behavior patterns are observable, quantifiable, and they repeat with statistical reliability. We can use charts to see and analyze these reoccurring patterns on any and every interval of time.

All trading ranges have a natural tenancy to trend (to move), up, down, and sideways. When the underlying economics are presumed to be improving, the trend is up, and down when deteriorating. In the following chart of the Wilshire 5000, we see an uptrending S/R Channel. It is best to trade with a healthy broader market trend. Healthy trends are likely to continue, and unhealthy trends are likely to reverse.

What information can we see in a candlestick chart, like the one above? Each candlestick bar shows the range of prices seen in that sample size. That is, on a daily chart each bar shows the highest price (the High), the lowest price (the Low), the price of the first trade (the Open), and the last price (the Close). If the Close is above the Open, my bars are green indicating that the Bulls dominated that sample of market data; and when the Close is below the Open, the bar is red indicating the Bears came out on top. On a weekly chart, each bar summarizes the trading seen each week, but it takes a week to build each bar, and so on. Like the pros, use Log Scale on daily and longer-term charts and Linear Scale on all intraday charts. The bar on the far-right side of the chart is the latest or current bar. Try not to focus on the individual bars. Focus on broader repetitive patterns. Take another look at the chart above. Notice how prices react to prior S/R levels and other technical indicators like the standard Moving Averages (MAs). Most professional charts include the 20-, 50- & 200-period MAs. Some also include the 100-period on all their charts, and some others prefer the 150 instead of 100 and 200. I think it is very important to see what the pros see on their charts, especially when it comes to the 20 and 50. I've tried all the combinations of 100, 150, & 200 over many years. I'm not convinced that it makes a big difference. I prefer the 100 and 200. These MAs act like automatic trend lines, and they help to smooth out erratic price swings. The 20-period MA shows the short-term average rate of change in prices, which is subject to a relatively greater degree of error thanks to short-term herd behavior. The 50-period is the medium-term average. The 100+ period MAs show longer-term averages. Many pros include a momentum indicator like RSI. When prices have moved up too quickly, RSI can get above 70% indicating that prices are near-term overbought and likely near resistance. When prices drop too quickly, RSI can get below 30% indicating that prices are oversold and likely to be near support. Ideally, we want to be a buyer when prices are oversold and a seller when prices are overbought. In an ideal uptrend, RSI should be between 50% and 70%; and between 30% and 50% in an ideal downtrend. Mr. Market's price action is rarely ideal; but it is possible to see this in longer-timeframes. Trade volume, if available, is another good indicator to have on a chart (and I'll address this below). Most new traders and investors are impatient and focus on shorter-term trends and timeframes, which can be noisy, more random, and much harder to profitably trade. Professionals focus on longer-term trends and trading ranges while profitably working price swings in quicker timeframes relative to those longer-term details.

It is best to analyze just a few market charts like the one above. Focus on the chart set (e.g., monthly, weekly, and daily) for just a few dissimilar securities that can survive and that will pay you to hold. Be patient and persistent. In time, your brain will start to naturally see patterns that you can profitably exploit. These extra profits will require extra effort and time. But this attainable skill can turn you into a consistently profitable investor.

A longer-term average is a great way to gauge relative value and risk. On average, Mr. Market is a relatively good forecasting mechanism, but the dispersion (range) of prices around a longer-term average can become very wide and erratic at times. At any arbitrary moment in time, the market's forecasting error can be considerable. This realization can be good for patient investors that can learn how to exploit Mr. Market's natural tendency to overreact to surprises, to push price trends to unsustainable extremes (to go to longer-term trading range or channel boundaries), and then back towards a moving average again, which is called mean reversion, as seen in this chart. It is this self-correction mechanism that makes longer-term averages such a good forecasting mechanism. Predicting future prices is hard, especially at trading range extremes when emotions are high. But waiting for favorable prices is not that hard, especially when being paid to wait while prices cycle (swing) around a longer-term average. Just patiently, persistently, and periodically check market prices, like every day at 10 am and 3 pm eastern time or just once a day or every weekend or whatever works best for you. When Mr. Market presents favorable prices relative to your trading records (your mark-to-market P&L), take advantage of that opportunity. A superior operational (process) enhancement is to do your technical analysis to identify favorable prices relative to your records and prior S/R Levels, then use your broker's tools to raise an alarm when/if Mr. Market wonders to what you consider to be a favorable price or just open a limit order to request a trade at that price. This approach is amazingly effective at securing a string of profits.

All securities go in and out of favor, over-and-over again as money flows in and out of the various market sectors. It is hard to predict which will go in or out of favor next. But it is not that hard to see which are in or out of favor now. The pros specialize and you should too. For each ticker, learn how prices tend to react to news, to the standard set of MAs and to RSI extremes. On your charts, notice how prices tend to bounce off the standard MAs and to mean revert when prices get too far away from the 20 or when RSI is above 70% (overbought) or below 30% (oversold). Prices bouncing off an MA and prior pivots (trend reversals) indicate Support and Resistance (S/R) levels, as seen in this chart. The price action relative to S/R Levels is a good way to gauge trend health. The slope of an MA is another way to gauge trend health. That is, lower (flatter, closer to horizontal) MA slopes are healthier and higher (steeper, more vertical) slopes are not. We can learn to see, anticipate, and profit from these naturally reoccurring patterns. For example, if prices are above the 20 MA or 50 MA (and preferably above a longer-term MA too), the bulls are likely the dominate group and the odds favor Bullish (Long) Positions. But when prices get too far above the 20 or when RSI is above 70%, beware of (look for) a bearish trend reversal, a near-term topping pivot, major resistance. This is a good time to close or reduce the size of profitable longs. When prices are near the 20 or 50 and up trending, enter or add to a long position. Take profits when prices move too far away from the entry MA or approach a prior trading range edge or a prior trend reversal pivot. If prices are below the 20 MA (and preferably below longer-term MAs too), the bears are the likely dominate power. Look for favorable Shorts. Avoid new shorts when prices get too far below the 20, are at the lower end of a broader trading range, or whenever RSI is below 30%. All of these chart patterns have favorable odds and are likely to yield profitable results, especially when you specialize on a few dissimilar securities that can survive economic boom-bust cycles.

Trading ranges exist in multiple timeframes. Example timeframes include a month, week, day, and an hour, and can be seen on charts set to each timeframe. On a daily bar chart, each bar summarizes the trading range data for each day (bar) on the chart with the latest data (bar) being (created) on the far right edge of the chart. On a weekly chart each bar summarizes a week of data, but it takes a week to finish generating the next bar. Longer-term charts tend to show bigger trading ranges and are more fundamentally grounded because the biggest and best portfolio managers operate mostly in longer timeframes. It just takes time for them to adjust their asset allocation without negatively impacting their rate of return. This is a profitable insight. You want to see what these pros are doing and invest with them. Focus on trade volume, big money creates bigger than average volume as best seen on longer-term charts. Longer-term charts are also more likely to show the range of likely future prices, just project the S/R Channel seen there into the future. There will be surprising exceptions, but the overwhelming majority of all future prices are likely to be within the highest and lowest prices seen on a monthly chart. If your security cannot fill a monthly chart, it may not be a survivable investment. An investment that has been trading for a decade or more is likely to be around for another decade, when the economic value backing that security is likely to be desirable in the future. Buys in the lower half of a broader trading range of a survivable investment are more likely to see profitable prices sooner or later, and this is a very profitable insight. But it is hard to be patent and that is why new traders and investors gravitate to quicker timeframes. There are even quicker intraday timeframes (e.g., 1-, 5- and 15-minute charts), but these are too noisy and erratic for most to profitably trade. Plus, few have the time and ability to just sit and watch intraday charts while they wait for a favorable setup. And if you don't wait for those favorable setups, you are just competing with the Fast Money. However, it is not that hard to periodically check a longer-term chart to see if Mr. Market is offering up favorable prices. Let me repeat, It is far easier to become and retain CPT status in longer timeframes.

These S/R Channels exist simultaneously in multiple timeframes with bigger (longer) timeframes having bigger channels that contain smaller (quicker) channels (i.e., smaller trading ranges within bigger trading ranges within even bigger trading ranges). These S/R Channels have a noisy, erratic, quasi-fractal (self-similar) relationship. All channels have a tenancy to expand and contract based on investor confidence that is subject to change, and to shift up and down in quicker timeframes within their next broader timeframe in response to surprising news and commentary. This is the biggest problem facing traders and investors. We're going to need a strategy to deal with all this quicker channel shifting within broader channels.

Many market professionals employ a strategy (or variation on this theme) that allows them to harvest profitable price swings in quicker, smaller, channels, while also being able to take advantage of channel shifts up and down in broader trading ranges. The pros specialize and break up their trading power to simultaneously trade multiple timeframes. Many have computer systems that automatically track their trading details and that can show them their P&L in real-time for their whole position and for profitable parts therein. So, that they can know if it is better to buy, sell, or hold, and how much they should buy or sell now. Their systems can also indicate (suggest on the fly) how much they should hold back for likely near-term price improvement, which may or may not happen. It is all about iteratively working the real-time odds as indicated by their decision support system that are now often backed by machine learning sub-systems that can analyze dynamic real-time market data projected against historic patterns of behavior.

When I worked on Wall Street as a senior software developer and project manager, I had the good fortune to help prepare for and sit in on a couple of meetings and presentations to some professional traders, fund managers, and their bosses that were seeking this type of automation to better compete. I was also able to attend seminars and participate in development efforts that focused on professional trading tools and techniques. All this gave me the amazing opportunity to really understand some of the inner working on Wall Street. But we don't need all this to make money. We can develop and deploy our own simple version of what works on Wall Street. First we need to become consistently profitable. Once that primary goal is achieved, we can then work on tools and techniques to improve our rate of return. But this secondary goal must never come at the expense of our primary objective, to be a CPT. I say this because our desire to make more can easily backfire on Wall Street.

Let's take a closer look at some professional strategies and techniques just to understand how the pros make money. The pros specialize, have proprietary models and processes, and are simply very good at what they do. We need to recognize that the pros often work in teams, with an experienced team lead or manager. They have a team member that can do a proper fundamental analysis or has very good access to it. All this skill and information can yield an advantageous portfolio allocation with favorable (long/short) trading biases. Plus, they have the capital base that allows them to lean in and let their winners run when their strategy is working, and they're able to execute an appropriate Stop-Loss trade to cut their losses short when market forces turn against their approach.

Warning, Danger: Most retail traders will never master the skills required to Cut their losers short and let their winners run. And the few who can tend to pay a very heavy tuition in the form of lost savings and growth. Trust me, I know from firsthand experience. I've paid this tuition to Mr. Market U and learned, "I just don't have what it takes to make this approach work for me.", and I know way too many others who also paid to learn the same lesson. Furthermore, when I say "lean in" I mean they add capital to their winning trades, which can sometimes include going on margin too, a two-edged sword that will magnify whatever results are realized. Take it from me, if you do not command clear CPT status or are unable to properly cut your loser short, stay off margin. In fact, retail savers should just avoid margin, the great destroyer of wealth. Please, don't pay to learn this lesson too. We need to be very selective about which professional tactics we choose to try and which we need to leave to the pros.

Most pros know how to avoid big mistakes or cut them short. They are also very good at quickly converting smaller timing mistakes into acceptable profits relatively quickly by iteratively scaling in and out (we'll take a closer look at this strategy in the next paragraph). Most retail investors are simply unable to compete at this level because they do not have the skill or capital base. So, what are retail savers to do? We need to develop and deploy a more appropriate competitive edge. We need to focus on investment and trading strategies the plays to the strengths that we can bring to the market. For example, security selection and patience are true competitive forces any retail investor can bring to this game. Focus on securities and trading tactics that will not require a Stop-Loss trade. We need to learn how to avoid trades that can become a big mistake. We should only buy (enter or add to) investments that we are willing to patiently hold until Mr. Market will show us an opportunity to book an acceptable profit. We should focus on just a few dissimilar investments that can survive volatile markets and that will pay us to hold, like a U.S. Large-Cap Index fund (ETF, CEF or traditional fund), a U.S. Small-Cap Index fund, a Bond Index fund, and a Large-Cap International Index fund. Once CPT status is achieved with funds like this, we can then consider a blue-chip issue with strong Relative Strength (RS) performance in each index, which are more volatile (have bigger S/R Channels) and offer bigger dividends but are a little riskier. It is very important that we approach the market as investors first and as traders second. Every investment begins and ends with a trade, so we want to learn how to optimize these investment entries and exits to improve our rate of return. But we don't want to rely on these techniques to maintain CPT status. We want to only own securities that we are willing to hold for the long-run because Mr. Market will force us to hold for longer periods from time-to-time and because no one has unlimited trading power that can be used to manage and optimize a portfolio. Let me reiterate, market timing mistakes will happen, and we do not want to have to take a Stop-Loss trade when we get it wrong. Holding forces us to experience an equity drawdown, a temporary loss, but a loss that we can turn into an acceptable profit sooner or later. This happens all the time, and we'll need to become okay with this. The best way to avoid a longer drawdown, is to always invest with a healthy broader market (economic) trend and only trade against quicker (shorter-term) trends as they approach likely longer-term S/R Levels that are showing in even quicker timeframes signs of going with the primary trend (i.e., buying an early bounce off support or selling an early bounce off resistance). We want to avoid unnecessary Stops-Loss trades. Let's save these for truly appropriate times, like when that broader (primary) market trend is turning against us near the edge of our broadest S/R Channel (i.e., at Major S/R Levels, like those seen on monthly and some weekly charts) or when we find ourselves holding dead money and we see a clearly better place to invest that capital — note that we don't have to recover a loss in the same security that turned out to be that big mistake. But all this is moot when appropriate survivable securities are selected because they give us a big hold option. When being paid to wait for better prices in a survivable investment, being a CPT is just a matter of time and economic growth in the normal boom-bust cycle. Let's be honest about it — most of us will never be pros. But we don't have to be pros to realize CPT status, and that can allow us to earn a comfortable retirement in the market, if we can just save and learn to live within our means.

Professionals work to iteratively take profitable chunks out of every price swing within all available trading ranges. They break up their trading power, converting the single buy-low and sell-high prices into two averages that can be managed and optimized, which also allows them to convert small timing mistakes into an acceptable profit. They scale in and out as prices trend up and down in normally dynamic S/R channels that can expand and contract, and that can also shift up and down in quicker timeframes, over-and-over again. When their near-term swing trade goes as planned or when a channel shift goes their way, they book some profit. But, when the current Channel shifts against them, they still have trading power to help manage the position. However, they want each commitment of additional trading power to truly work to import their average price per share (their cost basis). For example, when scaling in, each additional buy must be at an increasing interval of price and/or share size to improve their cost basis more effectively (the average price per share of the whole position or some part there in). They can also work to improve their rate of return. For example, when a position or a smaller part has made a nice move up, is showing a profit, but is also heading to likely near-term resistance, sell half or whatever is appropriate and hold the balance for possible price improvement, which may or may not come. If near-term resistance holds and prices pivot back down, they have locked-in some profit and also have some cash to buy back in at lower prices, at the next likely lower support level. The pros specialize in a few securities and trading techniques. They profitably trade around the same core holding that they know well. We can learn to do this too.

Warning, Danger: Many new investors make the mistake of assuming this approach of scaling in and out can be applied to any tradable security. We are naturally attracted to the bright and shiny new things, especially those that have been in the news for a while and have made a big move up. Most are not survivable investments and can become worthless (or just worth a whole lot less and may never recover, becoming dead money). It's human nature to believe a big move up can be followed by yet another big move up because the news and commentary is still so bullish — This is The Smart Money selling to the less informed money — don't be the dumb money. This happens a lot, especially near the end of a big bull market run. If prices fail to go higher on more bullish news, then prices are going down and probably all the way down to the other end of the broadest trading range as seen on a monthly chart. Once again, if your ticker cannot fill a monthly chart, your ticker may not be a truly survivable investment. Leave these fast money tickers to the pros or just play these through the appropriate S&P Sector ETF. Focus on boring survivable tickers that will pay you to hold and that are very likely to see higher prices sooner or later because of normal economic growth or because we only start buying at below average prices relative to the broader market trading range or because we're able generate a below-average cost basis (our break-even price).

We can become our own version of a Market Professional. That is, be a buyer and seller at prices that are favorable to the growth of our savings. We can focus our time and capital on a few dissimilar investments that are very likely to survive, pay us to hold, and that will see higher prices in time. We can develop a simple iterative process that allows us to take and re-invest acceptable profits over-and-over again. By simply tracking our trading details and iteratively monitoring market prices, we can see if it is better to buy or sell now or wait for better prices. We can choose to only make a trade when that trade allows us to book an acceptable profit or that can improve our odds of booking an acceptable profit sooner-or-later. In time, we can learn to effectively analyze available market and economic information, and to plan for likely future alternative possibilities. We can iteratively review new information and revise our planning accordingly. Like the pros, we are free to combine and break up individual buys and sells to improve our odds of success, to improve our cost basis and rate of return for the whole position and for any parts therein. We can use Limit Orders to advertise a willingness to buy or sell at prices and quantities that would be good for us. We can perform this repetitive task at whatever rate our life permits. Quicker is generally better, but there will always be some quicker timeframe that is just too quick for us to retain CPT status, unless we become very good at waiting for very attractive trade setups. Based on our iterative process, we can and must do what it takes to generate acceptable profits, to harvest whatever rate of return Mr. Market will show us and that we can book, to be a CPT and thus allowing positive compounding to work its wealth creation magic. Most of the time, we should just ignore the noise while we wait for Mr. Market to show us better prices. Take comfort in the knowledge that we're being paid to wait. All this is a skill that can be developed and refined. Like the pros, we might even be able to automate some or all of this. Methodically embrace normal volatility and ignore the emotional whirlwind that Mr. Market unleashes.

If the broader healthy trend is down, go to government bonds or cash and wait it out or learn how to short. The strategy above works in both primary trend directions, just understand that dividend income becomes a dividend expense when shorting. Plus, some brokers charge a borrow fee too. So, profits from shorting must overcome these extra costs. Note that bull markets tend to last far longer than bear markets. It's okay to just wait for prices to stop making new lows on new bad news, which is a clear sign that the smartest money on The Street is buying and that market prices are at likely Major Support — a good time to invest into Mr. Market. Also note that market prices failing to make new highs on new good news is a classic indication that prices are at likely Major Resistance — a good time to harvest longer-term cyclical profits.

Becoming consistently profitable (a CPT) is of primary importance. Don't go all in and out, trying to pick tops and bottoms. Start with smaller share sizes in longer timeframes until you realize CPT status. Then try to reproduce these results in a slightly quicker timeframe using a very small percentage of your trading capital while keeping the bulk of your working capital in the prior profitable timeframe. Learn how to profitably scale in and out of whatever market conditions you see. But understand that markets are dynamic, and so is your ability to learn and manage change. And when you run out of buying power, just wait for better prices (or if need be, exercise an appropriate stop-loss trade to free up some buying power, which should be very rare, assuming proper security selection, as this forces you lock in a loss and start over). Pivot reversals are very hard to time and happen very quickly in quicker timeframes. Don't try to pick the perfect top or bottom. This is just too hard to do and is even harder to do consistently. Understand that doing this is directly competing with the pros that specialize in that security and timeframe. You may one day become one of those pros; but until then, the odds favor them. Never forget that our reason for investing in The Market is to make our savings grow, and the best way to do that is to achieve and retain CPT status.

Trade your book! When you watch (or listen to) professional portfolio managers and traders on TV or wherever, it is always best to assume that they are Talking Their Book — Their book of business is an expression that means they understand their business and that they are probably trying to talk you into doing something that benefits them, which is not always a bad thing. (It is okay to make a profit, earn a living, by offering a valuable product or service to others.) Professionals tend to understand their business model. They know what makes them money and what costs them money. Every good businessman or woman knows their numbers, their profit margins and cost structure, and all this knowledge comes from having a good accounting (bookkeeping) system. You simply cannot manage what you do not know. You need a system that allows you to track your trading details, your Profit and Loss (P&L) figures, which are subject to change while Mr. Market is open for trading. I have a system that automatically marks my positions to current market prices as they change, which makes it easier to see if it is best to buy, sell, or wait for better prices. A system like this is critical for iterative market analysis, monitoring your P&L, planning out future alternatives, and for measuring results. It is how a good business is able to do process improvement. You will need a good set of books, a general understanding of what processes make money, and which do not. This is key to success in business. Develop a savings, investing, and trading methodology that puts money into your account. Do more of that (i.e., specialize). If you find something that is costing you money without yielding a real economic benefit. Do less of that. Keep it simple and sustainable! Make this an iterative process that starts with analysis of available information. Ask what is possible based on historic information and the current economic environment. Use a spreadsheet (or whatever) to track and plan out your trades. Trade your plans and learn from the results. I use Microsoft Excel and Word that can host some custom VBA to automate some of the process. I also use a lot of python code to automate even more of my process. But there are lots of other tools out there that can be used. Find or build something that's good for you. Don't just rely on your broker's system, which may or most likely not do a good job of tracking your real-time P&L for your whole investment and the various parts therein. Most do not, especially if you scale in and out. And I've yet to find a broker that will factor in your total return P&L.

Be about the business of making money in the markets. Consider my Simple Two-by-Four Approach to trading and investing (below). It introduces two goals and four rules to achieving those goals. First let me say that we need to always think like an investor but understand that every investment begins and ends with a trade. We want to master the mechanics of trading to improve our long-term investment results. To that end, I have two goals: A primary and a secondary; and a set of four simple rules that once mastered make it simple to achieve those two goals. The primary goal is to be a CPT so that positive compounding can work its wealth creation magic. Because rate of return is a function of time, the secondary goal is to earn money as quickly as possible without sacrificing CPT status.

My Simple Two-by-Four Approach

My Simple 2-by-4 Trading and Investing Methodology introduces two goals and four rules. First let me say that we need to always think like an investor but understand that every investment begins and ends with a trade. We want to master the mechanics of trading to better achieve our investment objectives. To that end, I have two goals: A primary and a secondary; and a set of four rules that once mastered make it much easier to be successful in the market for tradable securities.

1. Our Primary Goal is to be a Consistently Profitable Trader (CPT).
2. Our Secondary Goal is to Maintain CPT Status in our Optimally Effective Timeframe (OET).

Our Primary and Secondary Goals require us to earn money at the best rate of return the market and our skills permit. Learn, and in time master, the following rules and you too will be able to achieve these two goals.

1. Focus on a few Dissimilar Survivable Investments that Pay you to Hold.
2. Trade like a Professional Value Investor.
3. Keep your Operations In-Sync with the Health of the Broader-Market Trend.
4. Be about the Business of Growing Your Wealth.

This Simply 2X4 Approach is based on the information presented above. It has empowered me to attain CPT status in a consistent monthly average, my OET. It is rare that I have an unprofitable month; but when I do, it is because I'm taking a planned stop-loss that fortifies returns in subsequent months, thus making my Twelve-Trailing-Month (TTM) average consistently profitable. This approach has enabled me to reach our Financial Freedom Number (the amount of money we needed to earn every month on average to quit our jobs and just live off our savings). Click here to take a closer look at this approach.

By three methods we may learn wisdom: First, by reflection, which is noblest; second is by imitation, which is easiest; and third by experience, which is the bitterest — Confucius.

Invest in yourself, an activity that is sure to pay attractive dividends in the future. There's a ton of free videos on Macroeconomics, Business, Trading and Investing out on the web. Just invest a little time, effort, and some common sense (not everything out there is right or right for you). Start with Joel Greenblatt's The Little Book That Still Beats the Market. It is a quick and simple introduction to value investing. There is also an audio version, if you prefer that medium. To learn fundamental analysis and to better understand what you own, I recommend two video courses from Chris Haroun: Introduction to Finance, Accounting, Modeling and Valuation and An Entire MBA in 1 Course, both offered on Udemy.com. To better understand technical analysis and the professional trader's perspective, consider taking Corey Halliday's Start Trading Socks Using Technical Analysis, Parts 1 & 2, and Advanced Technical Analysis, Parts 1 & 2. A few times a year, these classes are offered at a real discount, generally around the holidays, a value investor's approach to market wisdom. Please understand that I make the second recommendation to help you better understand how professional traders use charts; however, it would be a big mistake to think this information can be used to turn you into the next professional day-trader. I've seriously looked into this, and I now know from insider statistics that less than 5% can get there when given the best training, equipment and managerial support. Use this training to make you a better investor, to understand how professional traders see their markets, and to better understand the message of the market. Every investment begins and ends with a trade. Use this technical wisdom to improve the rate of return on your investments by optimizing the entries and exits. It helps (a lot) to be able to think in statistical terms. To that end, consider taking a course like Introduction to Statistics or Introduction to Probability and Statistics. If possible, finding a profitable mentor or like-minded peers.

Summary

I've come to realize that just about anything worth having and keeping in life costs some real combination of time, money, and effort. Sorry, there is no free lunch. However, If this all seems like too much work, read Charley Ellis' classic book Winning the Loser's Game or watch this YouTube video and just Dollar-Cost Average 10% of your earnings into a Total Stock Market Index Fund until you have enough to retire. In retirement, just reverse the process, dollar-cost average back out to harvest the savings needed to cover expenses. In retirement, an alternative approach is to use some or all of these savings to buy an annuity that will make monthly payments for the rest of your life. This approach will take longer and be a little more painful in retirement. It is extremely easy and very likely to work in the future, just like it always has in the past thanks to the self-correcting nature of the index funds and our growth-biased economic system. Warren Buffett says this is the best approach for most individual investors.

If you are willing to do a little more work for a better rate of return, then understand that Mr. Market's prices perpetually trade up and down, in a trading range. Savvy traders and investors work to harvest as many profitable chunks as possible out of these up and down prices swings. They also earn investment income while they wait for their next capital gain. Like the pros, our primary goal is to become a Consistently Profitable Trader (CPT), so that compounding can work its wealth creating magic over longer periods of time. Becoming a CPT requires money, time, effort, and lots of patience and persistence. The primary goal is simple (take as many profitable chunks out of each price swing as possible), but the process to achieve this simple goal is not. Why? Because markets are dynamic, because the process generates too much noise, contradictory opinions, and emotional confusion, plus most people have trouble focusing on this simple tried-and-true task as it requires lots of methodical patience and persistence and an ability to ignore useless information while our saving seems to be at risk of a permanent loss. It is best to focus on a few dissimilar investments that are very likely to survive volatile markets, that will pay us to hold, and that are likely to see higher prices sooner or later. Buffett says, "Buy low, at below average (discount) prices, and sell high, at premium prices." But what is low and what is high? Professionals use fundamental and/or technical analysis to define a useful answer to this perpetually evolving question. If you cannot do the fundamental analysis, like Buffett, try technical analysis and leverage the wisdom of crowds, the professionals that can do the fundamental analysis. Because Mr. Market is forward-looking, he will (sometimes irrationally, a little randomly, but mostly methodically) trade up and down in a range that reflects the market's collective view of likely fair value. A view that is subject to change, to error, and to correction (thanks to backwards-looking fundamental information); thus, causing quicker smaller trading ranges to shift up and down in longer, broader trading ranges. We can't control market prices. But we can control what we'll buy and sell, and when we'll do our buying and selling. It is hard to pick tops and bottoms. But it is not too hard to follow market prices, to analyze specific market behavior, to see profitable patterns in the data, to track our trading and P&L details, and to learn from the results. These are simple things we can do that greatly improve our odds of success. Do this over-and-over again, so that we can know if it is now better to buy, sell, or wait for better prices. Don't be surprised if we're waiting most of the time, a primary reason we need to be paid to wait. We can use this iterative process to follow market prices and to plan out future possible alternative trades. Perform this tried-and-true repetitive task as often as life permits. When Mr. Market presents favorable prices, take advantage of them, and ignore him when his prices are unable to help us maintain CPT status. Start with the broader market trend. Healthy trends are likely to continue, and unhealthy trends are likely to reverse. Use a chart set to see the health of the broader market trend relative to the broader trading range (e.g., on a monthly or weekly chart). Do the same for quicker timeframes. Always keep your operations in-sync with the health of that broader market (economic) trend. Break-up trading power to allow flexibility. As prices swing up and down in the current (quicker) trading range, work to take profitable chucks out of each price swing. But don't go all in. Quicker trading ranges can shift up and down. Sometimes to your benefit, but other times, not so much. When the latter happens, use some of that reserve cash to scale in over the next longer timeframes and bigger trading range. Work to convert those minor timing mistakes into acceptable profits. Earn capital gains by harvesting cyclical price swings in quicker timeframes when you can and in longer (slower) timeframes when you must to maintain CPT status. Don't be quick to just give your money to Mr. Market when prices don't quickly go your way. That's a recipe for savings disaster. Be patient and focus on appropriate securities and timeframes. Mr. Market will reward traders that can quickly buy low and sell at higher prices. He will do the same for patient investors that can wait for better prices and will work to earn acceptable profits. When you run out of cash to invest, take comfort in the knowledge that our growth biased economic system will reward patient investors in securities that can survive volatile market (economic) forces. Profitably trade around a few core positions that you can specialize in, that will pay you to hold while you wait for acceptable total return profits that you can reinvest to earn a compound growth rate. Understand that it is easier to be a CPT in longer timeframes; and once mastered, work to reproduce those results in the next quicker timeframe to earn a better rate of return.

Here are some of my other web pages to consider. The first is a Summary List of My Market Insights, the second is a set of rules that govern my Retirement Planning, the third takes a deeper look at the Economy and Markets, and the last takes you to a summary look at my trading business. Some of this may be redundant, and I apologize for that. Writing and revising these papers helps me to better understand and remember what I've learned, need to bear in mind during the trading day to protect myself from the emotional whirlwind that Mr. Market unleashes, and that may hopefully help you along your way to becoming a CPT and maybe a true market professional. This I have done, and there's nothing special about me; so, I say with confidence, you can do it too, if you are willing to work for it.

Stan Benson