9 posts tagged “time”

Our determination of buy/sell points is based on a logical understanding of the structure of the market and of the behavioral patterns of fellow market participants. We are not concerned with waves, angles, astrological configurations, or other such data, which by some magical force are presumed to be satisfactory indicators of future prices.

The purpose of our timing technique is to help facilitate our objective to take the monies of others in a repetitive, consistent fashion that minimizes risk in actual market endeavors. We have no interest in theoretica abstractions in that time so spent can only detract from fulfilling our of objective. At this point, we are attempting only to ensure acceptable accuracy in forecasting changes in the major market averages. The final goal is to develop profit consistency for our stock positions at the percent- age level we have chosen (90 percent minimal) within the average holding period we have decided to use (four to six months).

Because of the upward bias in the specific stocks we utilize, we do not need k the probabilities for accurate timing of the popular averages to be as high as those associated with the specific stocks. As discussed in the previous sections, our 95-percent accuracy rate with individual stock issues needs only around a 78-percent or better accuracy probability relative to the popular averages.

In actual market participation, decisions must be made quickly and without emotion. Our timing technique, therefore, must not be influenced by emotional "subjectivity," and it must be easily and quickly calculated to avoid time lags that would take away from maximizing the number of available opportunities.

Market timing is nothing more than reviewing statistically valid data to derive probabilities for future price moves. Consequently, because of the probability variances at any given time, not all buy/sell points are created equally.

The relative strength of any buy/sell point can be compensated for by altering the "investment level," that is, by varying the percentage allocation between stocks and cash.

At this juncture, our objective is to develop buy/sell points that meet our minimum requirements related to the purchase or sale of specific common stocks. Application to options, index futures and more speculative trading strategies require adjusting our timing probabilities upward from those that are the focus of this discussion.

Our discussion of the technique, at this time, is designed for the process of buying specific stocks, then selling. The basic elements are buy indications that increase the percentage of funds allocated to common stock investment (that is, increasing the investment level), a holding period, and then sell indications that would result in selling specific positions to adjustto a lower investment level.

This buy-to-sell aspect is stressed because you cannot assume the processcan be automatically reversed. That is, the same criteria cannot be used in reverse for short selling with the same degree of accuracy in specifi_cpositions—selling short on sell indications and covering (buying back the short positions) on buy indications. The reason it cannot be reversed automatically is because of the upward bias in the stocks we utilize. For accurate short sale techniques, alterations (to be discussed) are necessary to eliminate this upward bias.

In this discussion, we are going to fully describe the criteria that w_e actually use. Some of the criteria might appear rather complex, and the information to implement exact duplication might be difficult for many investors to obtain. However, after such detailed descriptions, greatly simplified methods within reach of almost all investors will be described. In fact, the basic timing method can be compacted so it takes less than one hour each week without any need for complicated equipment. Nothing is necessary beyond the ability to read.

The factors we use to determine buy/sell points are of two types: essential (or primary) and ancillary. There is only one essential factor, and it must be present for any buy/sell indication. There are twelve ancillary factors; any six (or more) must coincide with the essential factor to have a buy/sell indication.

3. Familiarity with the Institution

Beyond knowing the specific investment techniques being employed and the specific analyst(s) involved; it is important to be properly treated by the institution itself. The better analysts who have achieved some notoriety will generally have many accounts and many millions of dollars to supervise. As such, it may be impractical (or physically impossible) for the analyst to be in continuous, personal contact with all clientele. Support personnel are necessary and investor's communication with the analyst's aides should be in a familiar, congenial atmosphere.

Support personnel can provide warning signs. If there is rapid turnover, terse responses, or any other form of discontent, it could indicate that there are problems with upper management's abilities to conduct themselves properly with employee's or clientele's needs.

Other warning signs can be the behavior of the specific analyst(s). It is Virtually impossible to properly manage money while repeatedly crisscrossing the country for interviews, constantly appearing in "dog and pony" shows (speech/seminar circuits), or being available for any media event that provides a chance for the analyst (or the organization represented) to get a picture or quote in the news. Proper money management takes time—lots of time involving continuous access to changing data that affect clients' goals and needs. Inordinate amounts of time spent on publicity tours can only detract from personal account supervision. It also raises a question: If the analyst is so well-known and so good, why spend so much personal time advertising?

As mentioned, it may be physically impossible for the manager to personally convey the logic for each investment decision to each client. However, the client should be aware of the manger's current basic reasoning. After all, maybe the manager went to that proprietary brain surgeon.

Most analysts whose client base is too large to allow individual verbal 1 communication will provide regular written correspondence regarding the reasoning behind portfolio positioning. If a manager does not provide such regular written or verbal communication, it could be a sign of laziness or pomposity, neither of which are characteristic of prudent account management.

The rewards, or the lack of them, associated with the selection of discretionary management are not limited to those who have personal control of their own funds and therefore have personal control of their own financial fate. Billions of dollars are taken from the earnings of people (employees, estates, trusts, and others) and turned over to discretionary management, over which the individual contributors exert little or no control. The abuses that can result from involuntary "contributions" (fat fees, funding the personal projects of managers, ludicrous costs paid to families and friends, kickbacks, and the like) are well-known. These abuses would stop if those making the involuntary contributions stood up and demanded their right to the three "familiarity" points just discussed. Such action would make a lot of nasty people angry, but would certainly provide a lot of nice people the money they deserve.

The primary criterion, be it P/E or price, will not always give a buy/sell indication. In fact, most of the time (and sometimes for very long periods) the primary criterion will not meet the parameters to form the preliminary basis for a change in basic portfolio modeling. The primary criterion (depending on which method—projected earnings, lagging P/Es, or price—is chosen) is by far the most time consuming aspect of our timing technique.

The ancillary criteria are designed to confirm or reject the primary indication. The ancillary criteria (aside from a few rare exceptions) will always be issuing a buy or sell bias. Without an indication from the primary criterion, there is no need to be concerned with the ancillary facets in basic portfolio modeling because there can be no change.

There are twelve ancillary criteria, which might at first seem too burdensome to calculate. However, most (if not all) can be determined by a casual glance at major financial publications (Barron's or The Wall Street Journal). A weekly review of the ancillary criteria can probably be attained within 10 minutes after the sources are identified.

For the ancillary criteria to confirm the primary criterion, a minimum of six ancillary criteria must be in place.

Institutional Cash Reserves

If all markets involve predator/prey relationships, to acquire the cash of others requires that the others actually have cash from which they can be parted. Because of the specific stocks we utilize, as well as the growing dominance of institutions in day-to-day trading patterns, those institutions against whom we compete are important sources of profit.

The term institutional cash reserves refers to the ratio of institutional holding of cash (or cash equivalents) to common stock. The higher the institutional cash reserves, the more money they have available for the purchase of stock. The lower the cash reserves, the lower the institution's ability to buy stock irrespective of sentiment. To emphasize the importance of this institutional cash:noncash ratio, it was all you needed to understand to avoid the crash of 1987. At the time, the institutions were so lured into the stock market and their cash reserves became so depleted, they could not support stock prices. It was an inevitable splat time because of the depletion of possible buying demand.

Institutional cash reserves are tabulated regularly by a variety of surveys that scan mutual funds and/or pensions (Lipper, Herzfeld, a wide variety of brokerage firms, and the like) and the results regularly published in major financial publications.

For our purposes, all we need to know is the change in the cash:noncash ratio relative to where it was four weeks ago (or the next nearest reporting period depending on the source utilized).

BUY: The cash amount has increased. We have isolated potential buying demand that can be lured into the market to push prices higher.

SELL: The cash amount has decreased. The institutions are depleting their buying power, making themselves increasingly weak (perhaps helpless) in providing price support and thereby allowing selling supply to more easily dominate and depress prices.

Public Cash Reserves

Because of the rapid growth of institution's dominating trading activity, it has become popular to dismiss the public as an important market factor. However, as we have discussed in detail in previous chapters, the public is a very important factor, not only because of the predictable behavioral patterns of individuals, but because of the effects these patterns have on the institutions in which the public has entrusted funds.

We monitor this group's cash status by the weekly reporting of the total assets of money market funds. Money market fund assets include monies from groups other than the public, but for our purposes the changes in money market fund assets is all that is necessary for this criterion.

The weekly money market fund asset figures are reported in all major financial publications. Our comparison period is four weeks.

BUY: The amount (gross, no ratio needed) has increased. This isolates potential buyers (buying demand) and the associated potential for higher stock prices.

SELL: The amount has decreased. The amount of potential buying demand is lessening, and selling supply can more easily become dominant to depress stock prices.

Yield

There is a widespread belief that a corporation's growth is enhanced by a low dividend payout, based on the logic that the money not paid out in dividends can be reinvested in the corporation thereby facilitating its expansion. This is logical and essentially true, but is not as important as many believe. As we will clearly demonstrate in a later discussion of actual results, the total return (capital appreciation plus dividends) of the stocks on our Master List is about the same irrespective of perceived growth rates.

We like money in any form, and if it happens to come from dividends, that's just fine. In fact, it is so fine that dividend yield can be valid stock selection factor all by itself.

The problem with selecting stock simply on the basis of the highest dividend yield is that dividends (as with earnings) are not constant. A fat dividend yield could suddenly go poof if the dividend is lowered or omitted. This risk is reduced by the construction of the Master List, which attempts to confine interest to issues of demonstrated superior fundamental quality, affording both above average dividend protection and dividend growth.

In employing this method of stock selection, all you need to do is, at the time of a buy indication, review the Master List and select the issues that have the highest dividend yield and that have experienced a price decline over the chosen comparison time period. In the publication of this type of portfolio modeling, the Report uses a four-week price comparison to match that associated with the primary criterion and several of the ancillary criteria. As previously discussed, the actual time periods compared depend on individual preference.

Price

Although most elements of the financial media and analytical community are quick to dream up reasons to justify any price change, the fact is that many price shifts have no fundamental basis and are simply natural imbalances in demand/supply. Since our objective is to buy low and sell high, it seems logical to review the Master List at the time of a buy indication and select the issues that have experienced the sharpest percentage price decline over the chosen comparison period. This percentage price shift is so significant that price change in itself can be considered a valid method of stock selection.

In the published portfolio modeling, again using a four-week comparison period, at the time of a buy indication the issues on the Master List are reviewed to isolate those that have experienced the greatest percentage decline. Those issues that are down the most are chosen for purchase.

Again, the importance of the Master List comes into play. If a corporation turns into garbage, its stock is going to go down. If a corporation reaps fantastic profits, its stock is going to go up. In such instances, the price changes are the result of not a basic demand/supply price dislocation creating over/under valuation; the price shift is based on true underlying fundamentals. The Master List's design is to confine interest only to those issues of demonstrated superior fundamental quality, thereby allowing clearer focus on price changes that are not related by true underlying fundamental change. In other words, the Master List is a conscious attempt to isolate stocks that become more attractive as their prices drop.

Oversimplification?

The initial reaction to determining specific stock selection by these three methods might be that it is too simple to really be valid. No complex mathematical formulas are involved. There is no need for computer assistance. Neither is there a need for a staff of analysts or heeding the predictions of puffed-up gurus. And there is not even any need to pay much attention to the financial media beyond acquiring the necessary data to determine if a buy/sell point has been established as well as the specific stocks involved.

The fact of the matter is that we have found the market to be quite simple. It is often presented, and consequently perceived, as complex, but we have found its core to be nothing other than a straightforward, repetitive, man-made business.

Recognizing this basic, underlying simplicity and comparing it to the rantings of many analysts and media sensationalism, you can gain insight as to why the simplicity is widely overlooked by the majority and always will be. The majority within the analytical community will always attempt to present a reason to justify any price change, after it occurs, in the context of the reasoning being most easily accepted by clientele. Because of the assumed, widespread belief that all price changes are based on fundamental change, the consensus among analysts repeatedly ignores structural and/or psychological pressures that can create prices that are extremely divergent from underlying fundamental norms.

To understand how an erroneous consensus can develop, place yourself in the position of an institutional analyst, keeping in mind that job preservation provides some nice things, such as food and shelter. Now let's say the market makes a significant move because of psychological and/or structural pressures that move prices well away from underlying fundamentals. You are asked to explain why. If you say you don't know, you look stupid to clientele (after all, you are being paid to know everything), and you risk loss of employment. Your image, as well as your future, might very well depend on providing an answer that is most easily accepted by your clientele, which have been conditioned by you and/or other analysts to believe that every price change is justified by a purely fundamental factor. Looking about at what the other analysts say is the cause of the price change, you simply repeat what they are saying and join the consensus. You are one of the group. Even if absolutely wrong, your retaining employment is enhanced because you are in full agreement with your peers (they can't fire everybody).

The sentiment among analysts is reinforced by most elements of the financial media which (in its attempt to generate sales) stresses uncommon events.

The sales structure of the securities industry is also a powerful force that is bolstered by the consensus among analysts and concentrated media attention. It is elementary logic that a sale is made easiest when the customer is predispositioned to making a decision.

The consensus among analysts plus media concentration plus the sales structure of the securities industry combine to create tremendous pressures that can make the exception appear to be the rule. Consequently, chasing price after the fact of price change creates a lure that ignores the market's underlying simplicity. It also ignores the basic logic that profit. ability requires being properly positioned before the fact of price change.

As background to this technique, remember one of the criteria for stock selection is institutional involvement. The issues utilized, therefore, are suitable for investment consideration by at least some institutions.

This allows us a valid comparison: matching the results obtained by our methods with those obtained by institutional management over the same time period. Similar comparisons can be made by measuring the market performance that was (or could have been) obtained by following the recommendations of any broker or advisor as well as providing a valid comparison with popular market averages.

The reason for this is not to identify relative competence, but to eliminate a possible bias. If the techniques employed used little known stocks or information not widely distributed, it would detract from the validity of the results. That is, to enhance the validity of the techniques, the methods must incorporate data available to other investors during the same time period.

The timing techniques being employed use no special or inside information. All stocks utilized are well-known and widely followed. The information used in determining specific stock selection was (is) easily available.

Another aspect incorporated to eliminate bias is that the stocks utilized are usually higher-priced with relatively high trading volumes. This adds to the validity of the results. Methods using low-priced, low-volume stocks can be biased to the point of total invalidation. For example, low-priced, low-volume stocks could be easily changed in price by the action of a few individuals who through their own activities create price changes and the illusion that they have acquired actual profits. This illusion of actual price change has been used in fraudulent schemes where the investor is talked into buying a low-priced, low-volume stock from a crook who "makes a market" in the stock. The investor is unaware that the elevated price was made up at the discretion of the crook since no one else is interested in the stock. Seeing the appreciation, the crook sells the investor another stock with the same result, etc, . . . until the day comes that the investor wants to sell and there is no real market.

Crooks aside, percentage price fluctuations in low-priced stocks can often be dramatic on very low volume. Because of this, parallel (or even close to parallel) returns in actual practice would be impossible. Note that, because of this effect, many published advisory "services" that tout low price/low-volume stocks can be extremely misleading. For example, they could recommend a stock and then their followers proceed to bid up the price by their own buying. The service then identifies the price advance as an indication of the service's "ability" and may recommend sale at the higher price. The followers sell, thereby forcing price down in the same magnitude that their selling had advanced the price. The "service" looks good, but the followers could never obtain prices parallel to the service's recommendation because the appropriate prices were never really available. In other words, the followers bought high and sold low, while the service created the impression of success.

A malady shared by many analysts is selective memory loss. When they are correct, they become vocal to attract attention to their ability. When they are wrong, they shut up, and the error is forgotten. Another manifestation of selective memory loss is the "cover all your bases babble," i_nwhich market forecasts go something like, "If the market does not remain unchanged, it will advance unless a decline occurs." Such yappings are extremely common, but absolutely worthless to anyone except the analyst who, after employing selective memory loss, can point to any market outcome as proof of forecasting ability.

We, the authors, are in the market in real time. Our livelihoods are dependent on accurate price forecasting. There is no place for selective memory loss and associated nonsense. The results of our decisions are clear and crisp: Either we have acquired the money of fellow market participants or lost. Period.

In demonstrating the basic Time Overlay investment technique, we developed a format involving several controls making hindsight or omission virtually impossible and allowing the method to be easily used in actual market endeavors.

The specific application of the Time Overlay method is followed in a weekly Report which has been published continuously since January 1, 1977 by Drach Market Research.

The Report is prepared following the close of the last trading day of the week (Friday, unless a holiday when preparation is conducted on Thursday).

The Report is always mailed before trading begins the following week. This preparation and mailing sequence prohibits any possibility of waiting until the next week begins before presenting the forecast for that week.

The Report is very specific—no "if s." It states clearly and specifically to BUY, or SELL, or DO NOTHING. The text is devoted to an explanation of current positioning and outlook.

The Report uses only the week's closing prices. There are no qualifications to buy or sell if this or that happens. When a buy or sell decision is made, it is firm using the week's closing price. Period. No buy or sell decisions are contingent on anything that happens between publications of the weekly Report.

Everyone wants a system, and there are hundreds of analysts who clamor for attention as they lay claim to having found the fail safe road to riches.

Mastering the market through hindsight is easy. Just look back at what has occurred, copy the consensus, or make up your own reasons why the price changes occurred, and, presto, you have a foolproof system. The process of developing "the great system" is therefore fairly simple. Sift through the mounds of data the market has accumulated throughout its 200-year history and see what would have worked. Then, going back over the data, tabulate the results and claim that, because this is what happened in the past, it will surely repeat in the future. You can then claim to have achieved the past results.

This is a very common practice among system seekers, and in some cases the underlying analytical search is valid. However, in most cases the discovered system is nothing other than what would be a normal bell- shaped curve created by random results. In other words, something can be derived that looks wonderful, but it is really only a random variable that has no real validity in future investments. Another thing about this group's "discoveries" is that they almost invariably point to results obtained in hindsight. They are concerned in proving their merit by listing what could have happened after the "system" was discovered. They did not acquire their results through real time foresight by making their forecasts known and presenting them in a format prohibiting any form of hindsight or omission.

This lack of foresight is extremely clear when you take a careful look at the hundreds of entities (ranging from independent analysts to brokerage firms, to pension funds, to mutual funds, to anybody else wanting to manage others' money). They all claim they can do it better because they have the best system, when actually their results are a function of hindsight or tainted by selective memory loss.

The line of system sellers is dramatically shortened when confined to those who have documented results that eliminate any possibility of hindsight or omission. Some entities (such as mutual funds) are forced into full disclosure (and by their results most would probably prefer otherwise), but most system sellers have not really presented their work in a credible format requiring documented foresight.

Our concern is with reality, not hindsight or hypocrisy.

The Time Overlay Concept

Keep our objective in mind: to extract profit from the stock market through the buying and selling of common stocks. Although risk can never be eliminated from stock market participation, the goal of profit consistency requires that a conscious, rational effort be made for risk minimization.

Beyond developing a realistic understanding of the nature of the market, our risk minimization involves two distinct, specific elements. (1) We want to confine investment interest to stocks that are of superior fundamental quality and that therefore are less likely to present any nasty fundamental surprises. (2) We would prefer to have the overall movement of the market on our side by means of a market timing technique.

By confining our interest to the Master List, it is helpful to reinforce the concept that we are dealing with a market within a market. At any given time, each individual stock we monitor will vary as to its over- or underpricing with the others in the group. At the time of a buy indication, we only want to invest in the issues on the Master List that appear relatively discounted to the others. In effect, by being so selective we are employing an aspect of market timing through our selection process.

Relative to overall market timing, we will not buy or sell in the published portfolio modeling unless the primary and ancillary criteria are in agreement. Although the stocks on our Master List generally parallel the major market averages, because of the small number of issues we monitor, it is possible that our list will not always be directly aligned with the popularized averages.

Our method of participation involving market timing involves two distinct and separate analytical elements: specific stock selection and market timing. We term this combination Time Overlay: one analysis combined (or overlaid) with another analysis.

Although we find the basic Time Overlay method satisfactory in achieving our objectives of profit consistency and return, several factors can significantly increase return in actual market endeavors.

1. Rotation.

The published models are very strict. They will only change positions during outright buy/sell points that can only occur on the Report's publication date. The models completely disregard price movements between the predetermined, published mechanical buy/sell periods. Almost invariably, better prices are available at times other than the instant of a published buy/sell indication.

We know, by the results derived over the many years of the modeling's publication, what the average percentage return per position is by strictly adhering to the published buy/sell points. We also know that each stock selected has an equal chance of concluding profitably irrespective of price fluctuations between the predetermined buy/sell points. If we can get equal or better prices than those of the published models between buy/sell points, there is no reason not to capture gains before an outright sell signal.

Knowing that prices fluctuate, we can attempt to take advantage of the intervening price movements by rotating our positions. For example, let's say there is a buy indication and two stocks (A and B) appear equally suitable for purchase, and both are selling at 20. We purchase stock A. Rather than wait for a sell signal, we decide that we will take our profit if we realize a 10-percent gain. The 10-percent profit would capture a return greater than that averaged by the published models for individual positions. (Any parameter can be used, it is a matter of personal preference). Now, let's say that our stock (A) advances to 22, meeting our 10-percent objective, and that stock B has stayed at 20. We do not want to reduce our investment level because there has not been a sell indication. We sell stock A, taking the profit and move to stock B. Then, let's say stock B goes to 22 providing us our 10-percent profit, and stock A has fallen back to 20. We sell stock B and rotate back to stock A, and so on, until there is an indication to sell out entirely and/or reduce the investment level.

In actual managed accounts, the rotational process is utilized and, to date, without exception accounts incorporating rotation have outperformed the published Time Overlay models. During exceptionally volatile periods, the incorporation of rotation can create very active trading. However, during such periods and/or during extended market cycles, the use of rotation can dramatically improve results.

2. Optimizing Rotational Selections.

In the previous rotation example, the rotational selections were made from stocks selected at the time of buy indications without consideration of the other issues on the Master List.

This is an unnecessary constraint. It is possible that, at the time a purchase is warranted because of a rotational sale, there might be a stock on the Master List that is a better bargain than any of those selected at the time of a buy indication. In actual rotational trading, we move to whatever stock appears most undervalued from all those on the Master List, irrespective of whether they are being held as open positions in the published modeling. This wider selection generally expands return.

3. Delaying Buying.

The published modeling is designed to be early. That is, lower prices are available after buy indications and higher prices are available after sell indications. As discussed, this is necessary to assure that compensation has been made for transaction costs and to provide sufficient price latitude so that the method can be duplicated in actual trading.

At the time of a buy indication, each specific stock selected has an equal chance of concluding profitably. Price fluctuations between the predetermined buy/sell points are of no concern to the strict models because nothing is going to happen between the buy/sell points.

Price fluctuations (both up and down) between the predetermined buy/sell points can be significant and, since each position has an equal chance of concluding profitably, there can often be some advantage in waiting until after a buy signal and then selecting issues that are demonstrating relative discounting. For example, let's say that there is a buy signal and two stocks (A and B) are selected, each at a price of $20. Instead of buying one immediately, we wait and see that stock A is remaining at $20 and stock B has declined to $18. We then buy B because it is relatively discounted, having an equal chance of being above its initial published purchase price as does stock A when specified to be sold.

In our real time application of the Time Overlay portfolio modeling, we do not wait until after a buy indication to begin expanding the investment level. Although better prices become available after the buy indication, we usually get them anyway because of the rotational aspects. In fact, because of the rotational advantages, we are often a bit more aggressive in our investment level than the Report. However, for those wishing to avoid the sometimes rapid trading associated with rotation and/or the added analytical time, delaying buying and emphasizing the most discounted issues can often significantly increase return.

Remember that the list is designed to isolate issues that are suitable to be considered for investment. The actual selection during any given buy point depends on a variety of factors.

How much time is necessary to spend on each stock to employ the methods? Very little time need be spent. The only thing you need to do is to note the stock's price and volume at regularly spaced time intervals. That's all. The information is in the financial pages of most newspapers. The spaced time intervals depend on the individual investor. At this point, however, note only that the most optimal intervals for individual investors can be anywhere from one week to several months, depending on the chosen level of involvement in trading activity. The lower the level of trading activity, the further spaced the time intervals will be.

It may appear that our filtering process is nothing other than the application of a subjective, academic process to isolate stocks that have demonstrated superior fundamental quality, which could be of little benefit in the "ever changing" investment environment. This is not the case. The use of the list is far more practical than theoretical for several reasons.

1. A major cause of investor disappointment is misdirection created by confusion. It is virtually impossible for an individual investor or money manager within the largest institution to personally be able to differentiate the merits of the tens of thousands of specific alternate investments. Those who espouse such ability have transcended both physical and mental possibilities. So be warned.

By focusing on the Master List, you reduce the entire spectrum of alternate investment types to a manageable number. In effect, the list becomes your investment world. Nothing outside that world matters. Almost all industry groups are covered. Transaction costs can be minimized. You can buy within this world in anticipation of higher prices or sell (short) within this world in expectation of lower prices, or employ a variety of other techniques. Although the "market" has been condensed to reasonable proportions, there has not been a proportionate reduction in the number of opportunities. In fact, by confining investment to a core of basic alternatives, the probability of profit in any given transaction, as well as higher annualized return over time, is greatly enhanced.

2. The market is largely a brain game in which the decision to buy or sell can be greatly influenced by emotion. Psychological pressure can displace logic and thereby enhance the possibility of error. Our goal is to attempt to eliminate error.

For most investors, the problems associated with mental stress are complicated by the financial press, which (in doing its job) concentrates on the sensational. The sensational, by definition, is not the rule. However, because of the constant media attention to the exceptions, such exceptions can easily become misjudged and become the "rule." The investor can begin to chase exceptions, losing sight of basic realities and eventually becoming trapped by the professional. Neither the exceptional nor the sensational are consistent. Consistent profit is our objective.

By reducing the number of corporations that warrant investment consideration to a relatively small number, the investor is provided with the benefit of familiarity, which greatly reduces possible errors induced by emotion.

However, most positions were taken directly against prevailing analytical/media sentiment. From this it might be inferred that, because we have profited in 48 of 50 positions taken, the dominant feeling among analysts and the media is in error around 95 percent of the time when dealing with our stocks. Having pocketed their money, we feel that is exactly the case, the Master List being our primary bulwark against enticement by emotional nonsense.

Gluttons may not have a lot of patience, but they have energy to burn. As you may have guessed from reading about the traits of gluttons or if you are guilty of this sin yourself, these individuals are manic in their investing. They eat, sleep, and breathe investments. They spend a lot of time and mental energy weighing their various options and engaging in internal debates about what to do. They also love talking investing, not only with other investors and professionals but with anyone who will tolerate their obsession. They also spend a great deal of time on their trades, exploring esoteric stocks and funds and immersing themselves in the technical details.

Not all of this is bad, but ultimately, a significant amount of their energy is misdirected. Therefore, here are some ways that investing gluttons can put their considerable amount of energy to better and more profitable use:

Research investments before making them. This may not be as exciting as doing an actual trade or talking with a professional, but it can be a much more productive use of your time. Spend less time trading and more time figuring out what trades make the most sense. Information tends to have a "sedating" effect on overactive investors. The more they learn, the more conservative they become.

Make an effort to spend free time on noninvesting activities. The best investors will tell you they need to get away from the business regularly in order to think clearly about it and gain perspective on it. If you go home from work and go online and do research and trade in the after- market for hours, you will have no perspective and view investing like a rank amateur. Therefore, force yourself to go on vacations, spend time with your family, take up a new hobby, and the like. In other words, take your mind off investing periodically so when you come back to it, you'll do so with a clear mind.

Concentrate your energy on a smaller number of trades. Gluttons tend to disperse their energy over numerous investments. They spend a little time and effort on each one, which may add up to a lot, but it's not focused energy. When you're considering an investment, consider it seriously. This means doing your homework, talking to pros and giving yourself some time to reflect on the advisability of moving forward. As we suggested earlier, investing gluttons need to learn discipline, and one great way of doing so is by expending more energy in a focused way on a relatively small number of investments.