The story behind a world-beating stock market system

Never before seen tools

It is early May 2012 and common themes of TV stock market commentators, especially CNBC and their money managing guests, are:

• People are not investing in shares because they are afraid to lose their nest eggs (or even more than they lost the last time);

• In the last three months, because of the current momentum in share prices, the number of retail or private investors entering the market again has grown from around 40% to 60% (often a sign that the market is ‘toppy’); and

• A number of money managers (and of course, they must say this) have said the equivalent of “you get what you pay for” and “you must use a good adviser”.

Our message is different. We will soon launch a new market timing system that produces returns from long term stock investing that are startlingly better than all other plain-vanilla long term investment programs. The system allows the market itself to point the way to profits and has been proven over more than 40 years of backtesting.

The Wealthy Investor system begins with one never-failing observation about stocks that every adult knows: they go up and they go down. This is so elementary it seems idiotic to mention it, yet it is crucial to understanding our system.

No one can know when or by how much, or what will trigger the move or a change in market direction or for an individual stock. We know only that stocks rise and then they fall.

Fibonacci 3, 5, 8, 13 it is not

There are hundreds of systems with rigid rules for predicting what will happen to stocks next. Many follow strategies based on the Fibonacci’s number series, introduced to the West by the 12th Century Italian mathematician in his Book of Calculation. Each new number in the series is arrived at by adding the previous two. Higher numbers in the series when divided by each other will approach what is known as the golden ratio: 1:1.618 or 0.618:1. The ratio appears in many natural plants and creatures (the whorls of a snail’s shell, for instance) and architects and artists use the ratio believing it to be the most pleasing to the eye.

In technical analysis, reference might be made to a 38.2% Fibonacci retracement, a 100%, 23.6% or 61.8% Fibonacci extension or a 50% Fibonacci retracement.

Any imposition on market is nonsense

Frankly, imposing any limits or numbers on the market is nonsense! The market will do what investors collectively force it to do. The fact that Fibonacci’s numbers often work is simply that so many people follow them like sheep. Market prices are the most responsive and immediate reaction to potentially thousands of different influences simultaneously, from war, to interest rates, to greed and fear, to the mood a particular person is in when he wakes up. There are more influences than any one person can possibly absorb quickly enough to be of use let alone have time to calculate for themselves.

In the view of many, a stock for whatever reason is worth what someone will pay for it right now, no more, no less. In an ideal world, stock prices reflect all there is to be known at any given time.

Entirely new approach

Forgive the lengthy explanation to get this far. The Wealthy Investor system does not use Fibonacci or anything else that exists elsewhere. It asks the market to tell us where it will go next. It does that, in part, by drawing trendlines and setting targets approximately based on those trendlines that, if hit during the following week, will result in a buy or a sell.

But the trendlines are unique in that they are flexible. Most trendlines when they are used in other systems are akin to walls: they are fixed. They tell the market what the limits are; the drawer of the trendline will take action on a fixed price or point in time in relation to that trendline.

Years of research before the Wealthy Investor system was devised pointed to number of things:

• There is typically considerable volatility early in a bull market caused in part by uncertainty among investors that a bear market truly has ended. This is a time when economic news is invariably bad; the stock market does not deal with the present, it looks roughly nine months into the future. What happens today was mostly discounted months ago. Extensive testing in all kinds of markets showed protective stop losses in these early months reduces overall rate of return by exiting before a stock gets its legs under it. Even a 25% stop, an enormous figure when many people use 10% to 15%, does not escape the volatility. We even tested waiting until a stock had risen 25% before applying a stop of this magnitude (meaning that potentially we could do no worse than break even). A stop loss of any size puts artificial restraints on the market and the Wealthy Investor system is built to allow the market to proceed in a completely natural manner without restraints.

No limitation

This means operating with no stop in the early days of an investment. In fact, in recognition of the fact there are typically two corrections in a bull market (and we believe in long term investing and do not gamble on taking profits and then getting back in at a good price after a correction) means in many world markets we will hold a stock with no stop for more than three years.

• During the period in which there is no stop our system draws a “ghost” trendline merely to measure the overall rate of a stock’s climb over the period. This trendline can advance or be pushed downward by extremes in low prices. It imposes no limits and there are no preconceived ideas behind it other than that the market must be allowed total freedom. (To assume we can impose our will on the market is ridiculous – as the Hunt brothers discovered when they tried to corner the market for silver.)

• Eventually, the system puts curbs on market prices or we would simply follow them down to the bottom of the next bear market. But the curbs (stop losses) we impose are loose enough to allow a little flexibility. They are set a short distance below a trendline, not on it. If the price breaks through the trendline but does not reach the level of the stop, the trendline itself is adjusted downward. The false breakout is assumed to indicate we have not mirrored the trend precisely and need a slight adjustment to the line’s rate of climb.

When to sell completes picture

• But these rules are only a part of the story. They only look after entry into a stock and the middle period of ownership. They do not look after the period near the top of the market. This tends to be another volatile period, excessive exuberance forcing prices unrealistically high as investors see no end in sight for the bull market. To try to account for this price action and maximize our selling price, a much shorter type of trendline comes into play late in the bull portion of the stock’s price cycle. This one carries an accelerated protective stop loss and is able to react to price movements far more quickly.

• Not all buys or sells the system signals are off a stop that has set a price limit a certain percentage outside a trendline. The system recognizes minor resistance points (not used in any other system). If the price of a stock exceeds one of these minor resistance points after crossing a trendline but before reaching the stop that has been set a certain percentage outside the line, then a point above or below the resistance point will be used either to buy or to sell.

Allows market to set direction

The whole objective of the system is to allow the market to set its own direction (and to quickly tell us what that is) without imposing rigidity on it. This is likely why our results are so much better than any other long-term investment strategy we know. The system looks one week ahead and says: “If this happens next week, do this; if not, do nothing.” Stops, when set, move every week and are reported by the system on a separate secure website every Saturday. All a client will need to do is make a note of the price of the stop for the following week and enter it into their discount brokerage account.

Other than in choosing which stocks to buy in the first place, no research is required because, as we said earlier, all types and every level of Wall Street research is already reflected in a stock’s price. We believe that an investor believing their research is better than that of the professionals (which it may well be) and spending hours researching will likely miss the best price. This is because what the best research professionals provide goes first to large investment institutions and brokerage firms. They control massive volumes of business and make the largest trades and by the time research filters down to you, the best prices are usually history.

But activities are instantly reflected in stock prices if you have a system by which to recognize them.

Takes care of most difficult aspect: selling

The most important aspect of the Wealthy Investor system is that it imposes a level of discipline that is completely foreign to most private investors – investors who may spend hours or days researching what stock to buy but who then give up much of any gains because nothing exists to tell them when to sell. Well … now something does.

Having helped you to maximize profits from a given bull market, we get you out of the market altogether to protect your gains. The system will show when to re-enter the market, having used similar flexible trendlines to successfully mark the end of the bear market.

Download your free eBook so you can be updated about the system’s launch.

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