Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends

INTRODUCTION

Opportunities for Great Wealth Are Everywhere—You Just Need to See Them

Spotting a reliable stock trend is like surfing a wave. If you’ve ever watched someone surf—or been lucky enough to surf yourself—you know that most of the time in the water is spent waiting, watching, alert, being one with nature. What is all the vigilance for? Good surfers wait to spot the perfect wave. When it finally comes, they’re able to catch it for a great ride.

Creating wealth is similar. It is all about spotting opportunity, being open to the investment possibilities inherent all around you in your life, and, most important, perceiving a trend before it becomes a trend. At just the right time, a perceptive investor jumps on a developing trend like a great wave and surfs it all the way to the bank.

But what exactly are the best trends to jump on right now? If you’re looking to find a trend list in this book, you should put it down right now. You won’t find me telling you about the trend du jour. Consult the latest edition of your favorite TV money show or your favorite financial blog or magazine for that kind of information. But beware. The pundits will most likely be telling you about yesterday’s trends. Also, millions of others will be getting that information at the same time. Invest in China! Social networking is the next big thing! Video on Demand will make you rich! The problem with books and pundits telling you about the specific trends of today is that tomorrow these tips will be useless. The very nature of trends is that they are constantly in flux. Just as a wave rolls in, then crashes against the shore and is gone forever, if you don’t ride a trend at the right moment, you will lose it. I don’t want to tell you about a wave that’s already crashed. I want this book to teach you a skill that you can use today, tomorrow, and ten years from now.

I’ll show you how to spot a reliable emerging trend yourself before the pundits are onto it. I’ll help you hone your opportunity-spotting skills, and I’ll lay out how you can use trend-spotting techniques to make good money today—and for the rest of your life. I actually prefer to think of trend spotting as a form of spying: constantly looking for clues in places other people don’t expect to find them, never letting anything slip by unnoticed, always paying attention to your surroundings.

From the time I was just a kid, selling sunglasses on the boardwalk at the Jersey Shore, to my successful career in money management, to my role as a Financial Life Coach for AOL and a television commentator, I have found that spotting trends is the key to becoming rich. You didn’t need to go to business school, or to any school for that matter. You don’t need to have a sophisticated knowledge of financial models and data. You don’t need to have lots of money. It often seems so hard to get rich, but the truth is that you simply need to be able to see a good money opportunity before others do—and jump on it. This book will show you how, and it will show you that you are perfectly capable of doing it yourself. All you need in order to think in a trend-spotting way are the simple techniques that I’ll show you.

As you get a feel for these techniques, you will grow more and more comfortable with your ability to see a good wave coming. A confident trend surfer is usually the most successful at making money. As you spend more time surfing, you will make more decisions that pay off, and your confidence will grow. Not every pick will be a winner. The key is not to let your confidence get destroyed by mistakes, and to learn from them instead. And remember: Don’t get overconfident! That’s a sure way to find yourself wiping out completely.

As you gain confidence, you’ll also learn which waves are the ones you know how to ride. What might seem like a good wave to the next person is not necessarily a good wave for you. Not every investor is the same. High-risk investors are like high-risk surfers: They look for the big waves, dropping into 20-footers by helicopter in Hawaii, taking amazing rides but with equally brutal wipeouts. They ride risky trends, go for broke—and sometimes end up that way. A measured investor, in contrast, rides the 5-footers; some of them are awesome, others fizzle out, but rarely do these surfers completely bite it. And then there are cautious boogie boarders, surfing small waves, never coming up big but almost never getting hurt, either. Knowing your investing style and limitations as you head into the investing game helps you home in on trends you are willing to jump onto—whether risky but potentially incredibly lucrative or very safe but with lesser payout.

My personal investing style isn’t that of a hard-core surfer, but I’m also not afraid to catch a fairly big wave when I see it coming. There is no right or wrong investing style, and my intention in this book is not to sell you on one over the other. But understanding your risk tolerance helps you know what kinds of wave you are most comfortable riding and will help you apply the tips I give you. It is also important to remember several points as you home in on your surfing style:

Diversifying is crucial. No matter what your surfing style, it is important to diversify your investments. Don’t pour all your money into the stock market, even if you are a high-risk surfer. Many investment books provide a formula for how much you should keep in low-risk cash and bond investments versus high-risk stock market investments. I’m not a proponent of one over another, but I am a proponent of spreading your money around—whether in a traditional savings account, stocks, bonds, mutual funds, index funds, real estate trusts (REITs), or any other investment vehicle. Even within stocks, it’s wise to diversify among companies in different sectors. Just as you wouldn’t have wanted your life savings to be wiped out with the dot-com crash, you should spread your investments across different sectors so you can surf past future wipeouts. Keep some cash for a rainy day, invest some of your money in safer, albeit lower-yielding investments like bonds and certificates of deposit, and if your style permits, put some money in higher-risk stocks.

Don’t be afraid to start your own stock portfolio.

Although it is important to diversify your money, if you are able to put some portion of your investing funds into building your own portfolio of individual stocks, the payoffs can well exceed the returns from investing in bonds, CDs, and even stocks owned through mutual funds or index funds. As the Wharton professor Jeremy Siegel points out in his book Stocks for the Long Run, stock market returns have averaged more than 14 percent a year since 1982, and they have averaged more than 10 percent a year since 1926. Despite what professional money managers out there may tell you, you can do just as well as they, if not better, investing your own money if you know what to look for. Of course they are going to tell you they know better than you, because their jobs depend on people like you giving them your money to invest—and often taking heavy fees off the top. But take a look at the average performance of a mutual fund: the market tends to outperform the fund. This means, if you are investing wisely in the market, you stand a very good chance of making more money than you’d make had you let a professional money manager with a fancy business degree invest it for you.

    This should be a fun process—as if you were collecting something like baseball cards. You want to like and understand the companies you invest in. You want to build a portfolio made up of stock from individual companies you’ve picked, as well as from diversified mutual funds or indexes like the S& P 500 or the Russell 2000, or internationally diversified mutual funds that have reduced risk.

Be smart in the amount you put into the stock market. You don’t need to be a millionaire to start out. An investor can start out with $500, $5,000, or $50,000. Although some brokerages have minimums of $2,000, many don’t have any minimums at all anymore. My rule of thumb is to be aware that whatever I invest in the market is at risk. Whatever I put in, I have to be willing to lose. Of course, I hope this will never happen to either of us. But remembering that my invested money is at risk helps me measure the amount that I want to put into the market and the amount I’d rather put into safer investments. It’s also important to know that you don’t need to dump all your money into a single stock that you think has promise.

    Take baby steps in the beginning. If you like a company, invest a few hundred dollars. If things are trending in a positive direction, then pick up some more shares, even if they might be a bit more expensive than the initial investment. The most important point when you are building your own portfolio is…

How many should I own? Often, people who are just building a portfolio for the first time ask me, How many stocks should I include? If you are including in your portfolio diversified mutual funds or index funds, you will automatically own quite a few different stocks. But in terms of the stocks you pick on your own, you can have as few as one stock to as many as thirty. It depends on how much you want to watch them and how much time you have to devote. I personally own ten stocks at a time, never more.

     I like to know what I own, and I take chances that are based on really having conviction about a company and believing that I am ahead of everyone else. Remember, the more stocks you own, the more you have to pay attention to your portfolio, because it’s critical that you know what’s going on with each. Which means…

Always do your homework. As with all types of investments, don’t ride any waves blindly when it comes to stock picking. You must do your homework before putting your money into any company. The first rule of investing in individual stocks is that you’ve got to be sure to check the company’s fundamental financials. I will introduce some ways to do so a little later in the book, and there is no shortage of good information about this on the web and in magazines and books. Don’t worry: nothing I ask you to do gets too technical. The basics are really quite easy and not very time intensive, especially given how readily accessible the necessary financial reports are online.

Buy low, sell high. This rule is the key to trend surfing. Jump in when the wave is just starting, jump off before it crashes. It’s obvious, but it bears repeating, and you’ll hear it from me again and again in this book. But don’t get too obsessed with timing. By this, I mean don’t be afraid to jump on a wave because you think it might dip lower first, and don’t be afraid to jump off a wave because you fear it might grow a bit more after you’ve dumped it. As long as you sell higher than you bought, you will end up ahead. (Keep tax considerations in mind, though: Uncle Sam will want a share of your gains.)

     Maybe you’ll find you could have surfed the wave a little longer and made more, but don’t beat yourself up over it. It’s always better to leave a little on the table than to wipe out with less than you put in!

How do you actually buy and sell? There are many ways the average investor can buy and sell stocks: through brokerages and, now more than ever, online. Do your research about the fees involved. There are many discount brokers today offering free or flat rates. In addition to broker fees, pay attention to possible maintenance fees, custodial fees, and other costs (especially with mutual funds and international funds). When you are selling, be aware of your tax bracket and the tax implications of short-term and long-term gains. You don’t want to be surprised when April 15 rolls around and the IRS serves you with a big tax bill.

Think to the future. It is so easy to get caught up in the now. So many of us want results today, and if we see returns, we want to spend them immediately. But think to tomorrow. Be an investor rather than a day trader. One of the best waves you’ll catch is when you buy a stock today that grows because of a future trend. If your homework on the stock tells you so, it can be worthwhile to hold onto some of these for a while. Besides thinking about future trends and the future of your stocks, you also want to think about your future. You want to put as much as you can into a retirement account. Whether a Roth, a deductible, or a nondeductible retirement account, an IRA of one kind or another is crucial. There are plenty of reliable books and website articles that will help you choose the best way to invest