I am looking forward to reading more about the Cara 100.

It would also be great if you could prepare the "BC -20", meaning the top 20 stocks to short when the Bear finally arrives...

Thanks for the acknowledgement Bill. I do feel the BC 100 is important to the vast majority of "average" long term investor (I use average to imply those individuals who wish to participate in the wonders of long term compounding with a reasonable return expectation without the need of an intermediary like a mutual fund etc; as opposed to the above average or elite investor who on a short term basis will have the ability to seek out investments which maximize his compounding potential over the long term).

My recognition of this comes not from a lack of understand of the principles of sound shorter term investing; but of the realization of my own limitations.

This limitation is not due to a lack of intelligence if you will; but the recognition that I presently lack the speed to compete. A sports analogy may prove useful as to the use of the term "speed".

Being most familiar with the sports of American football and baseball I take my examples from them.

In football the ball is often given to a player who must than advance the ball on the filed of play, while avoiding opposing participants, with the assistance of blockers. Often these blockers will create openings (or holes) which allow the player to scamper between two opposing players (think Moses and the Red Sea).

While this may all sound simple to understand, the reality is that in its execution it is surprisingly complex because this "hole" that opens up is only open for the briefest of moments. But even though I understand what will come (the hole opening) the reality is I do not have ability to evaluate the chances of successfully exiting on the other side and the speed to do so.

The same applies for baseball and the art of hitting. A baseball thrown takes about .5 seconds to reach a batter. Therefore, a batter must determine whether the pitch ball is one that should be hit and initiate the physical reaction to hit the ball in under that amount of time. Again while I understand what is involved I simply lack the speed to judge and implement.

Why is the above important to me as it relates to investing?

Well the above is not significant because it demonstrates the power of raw speed; rather it is significant because it demonstrates that the importance lies not in the mere possession of speed but the ability to determine when that speed is appropriate and where to apply it.

For me I believe shorter term investing requires not only speed (the ability to execute a trade) but quick judgment as to the application of that speed (make a value determination in a compressed amount of time, minutes, hours, or days).

While most people of reasonable intelligence may be able to develop the skill necessary to do the above, the reality is that due to external obligations (family, work, and school) they do not have the time to do so. I know I don't at this point. Therefore, in the short term they are at a disadvantage as compared to professionals.

But with a long term horizon, the game moves at a much more reasonable pace, where time (or the expansion of it) levels the playing field as to analysis.

Investing may be the only "sport" where the average participant is allowed to compete against the elite professionals. How many of us would love to defend the goal against Gretsky, catch a pass from Unitas, go one on one with Jordan. Yet everyday millions of average people get the opportunity to compete with and against the best of the investment world.

The marriage of fundamentally sound investment for the long term with the technical identification of business cycles is a concept which in my opinion will help the widest audience (although it may not appeal to the elite traders who read your blog).

And that is why I am glad you are focusing on further discussion on this topic.

Steven

Bill, echoing the thanks for the effort you put into your blog & especially for the sharing and teaching portions of what you present. This "little people" appreciates your resource.

I look forward to seeing your formal Bill Cara 100 list.

At some point would it be possible to discuss position sizing and maybe even stop losses?

From your past posts I've gleaned much including:
1. Be skeptical and even cynical when listening to the nice men and women inside my TV telling me about what stocks I should be buying.
2. Same thing when it comes to many gov't. economic news releases.
3. Focus on prices. Buy weakness, sell strength.
4. Use technical tools to help identify price weakness. RSI and MACD are a couple of good indicators, there are others.
5. Focus on prices. Recognize levels of accumulation and recognize distribution zones.
6. Focus on prices. Use strategies of over writing puts and/or calls to lower a position's costbase.
7. Continually try to keep learning. History and cycles often repeat themselves. Knowing the past can sometimes take some of the surprise out of the future.

I haven't seen much mentioned about position sizing. When a situation is identified that it clearly is within an accumulation zone what are some of the considerations regarding sizing? I know that individual circumstances will determine appropriate allocation of capital however can you give some guidelines to consider when trying to calculate building a portfolio?

Some individuals indicate that for longer term positions 5% of the basket is an appropriate size for a position. Once (maybe even before?) a position is established a stop loss point should also be known. I've seen the 8% number mentioned before for longer term positions -- 8% of 10% would be just under 1% of the total basket.

For shorter term trades I've seen larger allocations of capital accompanied with tighter stops.

Anyways, just wondering if at some point you could possibly discuss the position sizing and risk management topics. It will be impossible for many of "the little peoples" to hold all BC100 stocks and I'm trying to determine how to best think about the risk management part of trading prices.

Thanks again for the hours of work you put into this site Bill, it is much appreciated!

Richard Saunders

Nice piece on 'basics' of making money-

http://www.frontlinethoughts.com/article.asp?id=mwo041406

Rich Man, Poor Man

By Richard Russell

Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline, and desire. I say "for the great majority of people," because if you're a Steven Spielberg or a Bill Gates you don't have to know about the Dow or the markets or about yields or price/earnings ratios. You're a phenomenon in your own field, and you're going to make big money as a by-product of your talent and ability. But this kind of genius is rare.

For the average investor, you and me, we're not geniuses so we have to have a financial plan. In view of this, I offer below a few rules and a few thoughts on investing that we must be aware of if we are serious about making money.

I. The Power of Compounding

Rule 1: Compounding. One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money. When I taught my kids about money, the first thing I taught them was the use of the "money bible." What's the money bible? Simple, it's a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. You need knowledge of the mathematical tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including the following extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306.

In this study we assume that investor B opens an IRA at age 19. For seven consecutive periods he puts $2,000 into his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions -- he's finished.

A second investor, A, makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he's 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A's 33 additional contributions.

This is a study that I suggest you show to your kids. It's a study I've lived by, and I can tell you, "It works." You can work your compounding with muni-bonds, with a good money market fund, with T-bills, or say with five-year T-notes.

Rule 2: Don't Lose Money. This may sound naive, but believe me it isn't. If you want to be wealthy, you must not lose money; or I should say, you must not lose BIG money. Absurd rule, silly rule? Maybe, but MOST PEOPLE LOSE MONEY in disastrous investments, gambling, rotten business deals, greed, poor timing. Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big-time -- in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own businesses.

Rule 3: Rich Man, Poor Man. In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur, and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.

The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money-market funds, stocks, and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.

The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry or gold is on the "giveaway" table, he buys art or diamonds or gold. In other words, the wealthy investor puts his money where the great values are.

And if no outstanding values are available, the wealthy investors waits. He can afford to wait. He has money coming in daily, weekly, monthly. The wealthy investor knows what he is looking for, and he doesn't mind waiting months or even years for his next investment (they call that patience).

But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).

And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values, so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest, earns it. He who doesn't understand interest, pays it." The little guy is the typical American, and he's deeply in debt.

The little guy is in hock up to his ears. As a result, he's always sweating -- sweating to make payments on his house, his refrigerator, his car, or his lawn mower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money -- fast. And he dreams of those "big, juicy mega-bucks." In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down escalator.

But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.

Rule 4: Values. The only time the average investor should stray outside the basic compounding system is when a given market offers outstanding value. I judge an investment to be a great value when it offers (a) safety, (b) an attractive return, and (c) a good chance of appreciating in price. At all other times, the compounding route is safer and probably a lot more profitable, at least in the long run.

II. Time

TIME: Here's something they won't tell you at your local brokerage office or in the "How to Beat the Market" books. All investing and speculation is basically an exercise in attempting to beat time.

"Russell, what are you talking about?"

Just what I said -- when you try to pick the winning stock or when you try to sell out near the top of a bull market or when you try in-and-out trading, you may not realize it but what you're doing is trying to beat time.

Time is the single most valuable asset you can ever have in your investment arsenal. The problem is that none of us has enough of it.

But let's indulge in a bit of fantasy. Let's say you have 200 years to live, 200 years in which to invest. Here's what you could do. You could buy $20,000 worth of municipal bonds yielding, say, 5.5%.

At 5.5% money doubles in 13 years. So here's your plan: each time your money doubles you add another $10,000. So at the end of 13 years you have $40,000 plus the $10,000 you've added, meaning that at the end of 13 years you have $50,000.

At the end of the next 13 years you have $100,000, you add $10,000, and then you have $110,000. You reinvest it all in 5.5% munis, and at the end of the next 13 years you have $220,000 and you add $10,000, making it $230,000.

At the end of the next 13 years you have $460,000 and you add $10,000, making it $470,000.

In 200 years there are 15.3 doubles. You do the math. By the end of the 200th year you wouldn't know what to do with all your money. It would be coming out of your ears. And all with minimum risk.

So with enough time, you would be rich -- guaranteed. You wouldn't have to waste any time picking the right stock or the right group or the right mutual fund. You would just compound your way to riches, using your greatest asset: time.

There's only one problem: in the real world you're not going to live 200 years. But if you start young enough or if you start your kids early, you or they might have anywhere from 30 to 60 years of time ahead of you.

Because most people have run out of time, they spend endless hours and nervous energy trying to beat time, which, by the way, is really what investing is all about. Pick a stock that advances from 3 to 100, and if you've put enough money in that stock you'll have beaten time. Or join a company that gives you a million options, and your option moves up from 3 to 25 and again you've beaten time.

How about this real example of beating time. John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter "lacked intellectual leadership." Walter got $26 million for that little stint in a severance package. That's what you call really beating time. Of course, a few of us might have another word for it -- and for AT&T.

III. Hope

HOPE: It's human nature to be optimistic. It's human nature to hope. Furthermore, hope is a component of a healthy state of mind. Hope is the opposite of negativity. Negativity in life can lead to anger, disappointment, and depression. After all, if the world is a negative place, what's the point of living in it? To be negative is to be anti-life.

Ironically, it doesn't work that way in the stock market. In the stock market hope is a hindrence, not a help. Once you take a position in a stock, you obviously want that stock to advance. But if the stock you bought is a real value, and you bought it right, you should be content to sit with that stock in the knowledge that over time its value will out without your help, without your hoping.

So in the case of this stock, you have value on your side -- and all you need is patience. In the end, your patience will pay off with a higher price for your stock. Hope shouldn't play any part in this process. You don't need hope, because you bought the stock when it was a great value, and you bought it at the right time.

Any time you find yourself hoping in this business, the odds are that you are on the wrong path -- or that you did something stupid that should be corrected.

Unfortunately, hope is a money-loser in the investment business. This is counterintuitive but true. Hope will keep you riding a stock that is headed down. Hope will keep you from taking a small loss and, instead, allow that small loss to develop into a large loss.

In the stock market hope gets in the way of reality, hope gets in the way of common sense. One of the first rules in investing is "don't take the big loss." In order to do that, you've got to be willing to take a small loss.

If the stock market turns bearish, and you're staying put with your whole position, and you're HOPING that what you see is not really happening -- then welcome to poverty city. In this situation, all your hoping isn't going to save you or make you a penny. In fact, in this situation hope is the devil that bids you to sit -- while your portfolio of stocks goes down the drain.

In the investing business my suggestion is that you avoid hope. Forget the siren, hope; instead, embrace cold, clear reality.

IV. Acting

ACTING: A few days ago a young subscriber asked me, "Russell, you've been dealing with the markets since the late 1940s. This is a strange question, but what is the most important lesson you've learned in all that time?"

I didn't have to think too long. I told him, "The most important lesson I've learned comes from something Freud said. He said, 'Thinking is rehearsing.' What Freud meant was that thinking is no substitute for acting. In this world, in investing, in any field, there is no substitute for taking action."

This brings up another story which illustrates the same theme. J.P. Morgan was "Master of the Universe" back in the 1920s. One day a young man came up to Morgan and said, "Mr. Morgan, I'm sorry to bother you, but I own some stocks that have been acting poorly, and I'm very anxious about these stocks. In fact worrying about those stocks is starting to ruin my health. Yet, I still like the stocks. It's a terrible dilemma. What do you think I should do, sir?"

Without hesitating Morgan said, "Young man, sell to the sleeping point."

The lesson is the same. There's no substitute for acting. In the business of investing or the business of life, thinking is not going to do it for you. Thinking is just rehearsing. You must learn to act.

That's the single most important lesson that I've learned in this business.

Again, and I've written about this episode before, a very wealthy and successful investor once said to me, "Russell, do you know why stockbrokers never become rich in this business?"

I confessed that I didn't know. He explained, "They don't get rich because they never believe their own bullshit."

Again, it's the same lesson. If you want to make money (or get rich) in a bull market, thinking and talking isn't going to do it. You've got to buy stocks. Brokers never do that. Do you know one broker who has?

A painful lesson: Back in 1991 when we had a perfect opportunity, we could have ended Saddam Hussein's career, and we could have done it with ease. But those in command, for political reasons, didn't want to face the adverse publicity of taking additional US casualties. So we stopped short, and Saddam was home free. We were afraid to act. And now we're dealing with that failure to act with another and messier war.

In my own life many of the mistakes I've made have come because I forgot or ignored the "acting lesson." Thinking is rehearsing, and I was rehearsing instead of acting. Bad marriages, bad investments, lost opportunities, bad business decisions -- all made worse because we fail for any number of reasons to act.

The reasons to act are almost always better than the reasons you can think up not to act. If you, my dear readers, can understand the meaning of what is expressed in this one sentence, then believe me, you've learned a most valuable lesson. It's a lesson that has saved my life many times. And I mean literally, it's a lesson that has saved my life.

One qualification to my desire to see more on the BC 100...I do not mean to imply that I expect Bill to provide me with a list of his 100 stocks to call my own (although from a research point of view I would like to see it).

My actual desire is to understand Bill's methods and analysis as to how he determines a company for inclusion to the BC 100. This is because while there may be objective factors and tests which indicate that a company (or several) has an advantage in its industry...the inclusion of a particular company to each individual's best of list can only be a subjective process based on individual knowledge and experience.

I believe Bill has said as much.

Steven-

Everyone would like to see it. His "regulars" know a fair amount of them, but not the entire list. Bill had promised it when the market finally tanked, so that all could benefit. But with re-inflation, who knows how long the Fed can game this thing. I am glad for the opportunity to look at the full list.

Another good list of 'rules' from Doug Kass-

http://www.thestreet.com/markets/activetraderupdate/10278406.html

"My Tenets of Investing"

https://www.gmo.com/NR/rdonlyres/AD724D1A-CF2F-49D9-B00F-8EB32D79BE4D/1223/7YrForecasts306.pdf

If GMO is correct on asset allocation return expectations... 1) what are Americans thinking with that negative savings rate? 2) will social security be so secure for the boomers? will they accept politically a cut in what the govt will provide given their own lack of foresight? 3) what will be the impact to earnings when pension plans have to reduce return expectations further 4) how much can the fed guarantee on pensions when companies file bnkrpcy?

What is the most likely, politically acceptable solution for policy makers to head off these long term destabilizing risks?

Could helicopters and printing presses be involved?

stockman:

Thanks for the Richard Russell article .. "Acting" along with "Patience" are the controls for our investment trigger finger.

A season for all things .. Bill, I believe 'tis' the "Sharing" Season.