Merry Christmas & Happy Holidays!

Wishing u joyous holidays and a wonderful new year 2008.

dave

A wedding shoot at the Pan Pacific.

From Mexico, with Love.

the famous ARCH in the Baja Peninsula, separates the Sea of Cortex from the Pacific Ocean.

Sunrise taken from our time share apt in mexico, cabo san lucas.

The sea lion colony amongst the rocks

Sunset taken from the cruise ship.

(Pictures courtesy of ateo.)

Trading to Win: THE PSYCHOLOGY OF MASTERING THE MARKETS

"Trading to win" defines a goal-oriented approach designed to help
JL traders maximize their performance in a unique way¡ªby tapping
personal resources they might never know they had, by developing a ra-
tional strategy for trading, by learning new psychological skills, and by
letting go of unproductive, even maladaptive, behavior patterns.
This approach puts a special emphasis on learning to get rid of past
memories and erroneous notions around which people have organized
their lives. This book shows you how to commit to a future goal by sur-
rendering to it, and simultaneously relinquishing all thoughts of gain,
achievement, or attachment. Sounds paradoxical, you say? It is. That's
the point.

This system encourages you to trust a higher power that assists you
in realizing the power within yourself. Periodically it helps you refocus
on your goal, realigning yourself with your objectives. Then, you use
your objectives as a filter through which to make distinctions in the
present moment.

The world of trading is one of high stakes and high-risk activity.
The goal is, ostensibly, financial gain. Give up that goal, and you gain
the freedom to genuinely listen to the sounds of the marketplace and to
be able to read the movement of stock prices in a way that enables you
to increase your probability of success.

For master traders, the monetary result is secondary to the gratifica-
tion that comes from being able to make the right market call. They get
their primary satisfaction from having an idea about a stock and imple-
menting this idea in a profitable trade. Master traders trust their infor-
mation, sense the direction of the marketplace, and assess many other
variables before finally executing a lucrative trade.

This requires an enormous ability to abandon pride and to maintain
equanimity in the face of loss or excessive profit. The master trader
knows¡ªand you can learn¡ªthat neither despair nor euphoria should
cloud one's judgment. As you improve, the market becomes even more
challenging, requiring you to commit to bigger numbers or more com-
plex dimensions of the game. If you are willing, this can lead you to
give up more of your old habits and to become more at one with the
universe.

I have watched this occur in real-life traders. For the past six years I
have met weekly with a group of professional traders to explore the psy-
chological and emotional dimensions of their trading and to find ways
of maximizing their performance. The Trading to Win principles dis-
cussed in this book evolved from these seminars and have since been
tested and developed in several other trading settings. I am deeply in-
debted to Steve Cohen for making this opportunity possible and for
paving the way to a greater appreciation of these broader issues to the
traders in his and other firms.

(Because of the proprietary nature of many of the issues considered
in this book, I have not identified any specific traders by name. All per-
sonality profiles represent composites of the various traders and, al-
though there are female traders, the masculine persona has been used
throughout for realism in this currently male-dominated field.)

Reading the market's direction and the directions of specific
stocks is essential to trading success. It is like the childhood game of
musical chairs. In that game, you have to time your move so that you
do not jump for a chair before the music has stopped; you also don't
want to linger too long after the music stops so that there are no
seats left. This is the trader's dilemma as well. The more skilled you
are, the more patience you have, the longer you can stay in as the
stock rises or falls before you act. You stay in longer, and therefore
maximize your profits. However, you do not stay in so long that, by
holding declining stock in hope that it will turn around.

The same goes for being able to minimize your losses. Rather than
hoping and praying and rationalizing your hesitation by convincing
yourself that the stock will eventually turn around, you cut your
losses instead.

The Trading to Win program spotlights a set of philosophical and
behavioral principles that can help you to implement proactive trad-
ing strategies. This approach involves commitment, concentration,
recovery, and preparation for the next day. It enables you to trust
your true self.

This approach is not for the fainthearted. It puts much emphasis on
proactive trading strategies designed to produce exponential results. It
encourages you to do counterintuitive things¡ªsuch as admitting uncer-
tainty, fear, and lack of knowledge and asking for help; sharing informa-
tion; and facing vulnerability. All of this means letting go of ego and
arrogance, which blurs your focus on the marketplace. It compels you
to learn to communicate directly and clearly with others, whether they
be staff, associates, or floor brokers.

Trading to win obliges you to review each day's trades, so you can
see how you may have veered from your commitment, what dropped
out of your trading, and what commitment you must add to get the de-
sired result. You might need to raise the number of shares traded so they
are consistent with your level of commitment. You might have to aban-
don energy-draining behavior¡ªimpulsiveness, chest beating, whining,
and scalping (selling too soon to book a quick profit and missing the
larger upward movement of a stock). You'll need to understand how to
get out fast when stocks are dropping. You'll have to shed counterpro-
ductive habits, such as taking personal calls during trading times or rac-
ing home after the bell instead of reviewing the day with other traders
and coaches.

In addition, you must learn the appropriate role of money. In
trading, it's not so much to be rich or secure. It is a way of keeping
score. It is a way of defining the framework of events so that you can
determine what actions are needed in the present. Paradoxically, the
greater the amount of money, the more you must renounce your fo-
cus on it.

While this program has been developed for professional traders, its
principles have value for the ordinary trader as well. Sound trading ap-
plies to everyone, including the advanced trader who must regularly re-
turn to basics. Since it concentrates on a goal, yet makes you detach
your ego from it, it has relevance not only to investing, but to life as
well. I define "winning" as maximizing your own potential, as seeing
the world realistically, and as living life like the miracle it is. After all,
trading is a metaphor for the perilous yet exhilarating nature of living
on the edge.

What's the Concept, Doc?

The objective of this book is to try to get at the underlying thought
process behind trades. What are you are really thinking? What's moti-
vating you? Is it consistent With your style? Does it make sense for you?
Or are you governed at a given moment by emotion, by panic, or by
whatever is going on in the Street? The ultimate objective is to be much
more capable of reading the tape and reading the changes in the market
in terms of what is occurring based on what you understand about it.
You'll hear colleagues discuss in these pages things that they don't nor-
mally like to talk about, such as weakness or getting away from one's
game plan.

'Trading, like sports, involves a high degree of uncertainty and un-
predictabilityj This means playing in unfamiliar territory. Many books
explore basic trading and basic psychological concepts such as relax-
ation, but don't link psychology and trading behavior. My aim is to de-
velop the thought processes essential for trading in the realm of
uncertainty. Whether you are hammered by fear or animated by eupho-
ria, both can throw you off your game.

It is important to understand why you may lose after you win big,
or why you may sometimes feel that you don't deserve to win, or feel
guilty about it, or have an attitude about money that colors your trad-
ing. To be a super-trader, you must learn not to forget your discipline
and not to forget to respect the market. How do you surrender and
yet keep your consciousness and your alertness so you can move in
and out?

Trading is a very high-pressure game. It triggers a lot of defensive-
ness that on the surface looks very rational and reasonable. I hope that
this book raises your level of awareness of certain critical processes so
that you can begin to use them in your work.

What Do I Mean by a Strategy?
Once you set a specific goal for the year, you must ask how you are go-
ing to meet it. How many trades at what size would you have to make
in order to make your number? What should your team look like? What
general rules must you establish in terms of holding on, doubling up, or
getting out of positions?
If you reply with a shrug, "Well, I want to do as well as I can," you
are less likely to get there. To reach your target, you'll have to elevate
your game to a level where you say, "Okay, this is what I'm going
to do."
Why have rules? Because some moves, which you can find in your
own database, consistently work. Forget the standard litany of rational-
izations. You can always blame Alan Greenspan, or the market, or the
fact that it's February. But regardless of different styles, certain princi-
ples remain immutable. If a stock goes down and you own it, you're
losing money. "I'm going to make it a long-term trade," you say? You
still lost money today. "It's a six-month trade" or "a three-month
trade"? Maybe. But today you were hoping and wishing; you read
something in Barron's, but it doesn't happen. You may keep thinking
that you can make up for the loss, but, in fact, you would make much
more if your losses were less.

Once you stop having too great a tolerance for a high level of loss,
you can start raising your monthly profit and loss (P&L) significantly.
Some traders, even substantial ones, stay in positions even if they're
dropping, because they are "macho" and can "tolerate pain." The stock
will eventually come back, they tell themselves. But you are not a wimp
if you get out of a losing position.

One trader I know had to learn to get out at three points. Next he
learned to get out at one and a half, and he made more money. Now he
has to take the next big step: learning that it's okay to run away from a
losing stock. So if he's making four thousand dollars and he starts cut-
ting his losses, he can make five or six thousand.

Heaven on Earth.

(Pictures courtesy of Ateo, taken at the North East Cascades and the Pearrygian.)

I = Institutional Sponsorship: A Little Goes a Long Way

It takes big demand to move supply up, and the largest source of
demand for stocks is by far the institutional buyer. A stock certainly
does not need a large number of institutional owners, but it should have
at least a few such sponsors. Three to ten might be a minimum or rea-
sonable number of mutual fund sponsors, although some stocks might
have a good deal more.

The would-be winning investor should learn to sort through and rec-
ognize that certain institutional sponsors are more savvy, have a
stronger performance record, and are better at choosing stocks than
others are. I call it analyzing the quality of sponsorship.

What Is Institutional
Sponsorship?

Sponsorship may take the form of mutual funds; corporate pension
funds; insurance companies; large investment counselors; hedge funds;
bank trust departments; or state, charitable, and educational institutions.
For measurement purposes, I do not consider brokerage firm
research department reports as institutional sponsorship, although a
few exert influence on certain securities. Investment advisory services
and market letter writers are also not considered to be institutional or
professional sponsorship in this definition.

Financial services such as Vickers and Arthur Weisenberger & Co. pub-
lish fund holdings and investment performance records of various insti-
tutions. In the past, mutual funds have tended to be slightly more
aggressive in the market, but banks have managed larger amounts of
money. More recently, numerous new "entrepreneurial type" investment
counseling firms have been organized to manage institutional monies.
Performance figures for the latest 12 months plus the last three- to
five-year period are usually the most relevant. However, results may
change significantly as key portfolio managers leave one money man-
agement organization and go to another. The institutional leaders con-
tinually rotate and change.

For example, Security Pacific Bank (now merged into Bank America)
had somewhat modest performance in its trust investment division up
to 1981. But with the addition of new management and more realistic
concepts in the investment area, it polished up its act to the point that
it ranked at the very top in performance in 1982. In 1984, the top man-
ager of Security Pacific left and formed his own company, Nicolas
Applegate of San Diego.

If a stock has no professional sponsorship, chances are that its perfor-
mance will be more run-of-the-mill. The odds are that at least several of
the more than 1000 institutional investors have looked at the stock and
passed it over. Even if they are wrong, it still takes large buying to stimu-
late an important price increase in a security.

Also, sponsorship provides buying support when you want to get out of
your investment. If there is no sponsorship and you try to sell your stock
in a poor market, you may have problems finding someone to buy it.
Daily marketability is one of the great advantages of owning stock.
(Real estate is far less liquid and commissions and fees are much high-
er.) Institutional sponsorship helps provide continuous marketability
and liquidity.

Is It "Overowned" by
Institutions?

A stock can also have too much sponsorship and become "overowned."
Overowned is a term we coined and began using in 1969 to describe a
stock whose institutional ownership had become excessive. In any case,
excessive sponsorship can be adverse since it merely represents large
potential selling if anything goes wrong in the company or the general
market. On the other hand, Snapple, in April 1993, was underowned.
The "favorite 50" and other lists of the most widely owned institu-
tional stocks can be rather poor, and potentially risky, prospect lists. By
the time performance is so obvious that almost all institutions own a
stock, it is probably too late. The heart is already out of the watermelon.

An Unassailable Institutional
Growth Stock Tops

In June 1974, we put Xerox on our institutional sell list at $115. We
received unbelievable flack because Xerox was then one of the most
widely held institutional stocks and had been amazingly successful up to
that point. However, our research indicated it had topped and was
headed down in price.

Institutions made Xerox their most widely purchased stock for that
year. Of course that didn't stop it from tumbling in price. What it did
prove was how sick the stock really was at that time, since it declined
steadily in spite of such buying. The episode did bring us our first large
insurance company account in New York City in 1974.

They had been buying Xerox on the way down in the $80s until we
persuaded them they should be selling instead of buying.

Famous Last Words "We'll
Never Sell Avon Products"

We tried that same year to get another well-known eastern insurance
company to sell Avon Products at $105, and I recall the head of their
investment organization pounding the table and saying, "We'll never
sell Avon Products; it's such an outstanding company." I wonder if they
still have it?

Professionals, like the public, love to buy on declines. They also make
mistakes and incur losses. In many ways, some institutions are like the
public. Money management organizations have their experienced and
realistic decision makers, as well as their less seasoned or unrealistic
portfolio managers and analysts.

It is, therefore, not always as crucial to know how many institutions
own a stock as it is to know which of the better ones own or have pur-
chased a particular stock in the last quarter. The only important thing
about the number of institutional owners is to note the recent quarterly
trend. Is the number of sponsors increasing or decreasing?

Note New Stock Positions
Bought in the Last Quarter

New institutional positions acquired in the last quarter are more rele-
vent. Many investors find that disclosures of a fund's new commitments are
published after the fact, too late to be of any real value. This is riot true.
These reports are available publicly about six weeks after the end of a
fund's quarter. The records are very helpful to those who can single out
the wiser selections and understand correct timing and the proper use
of charts.

Additionally, half of all institutional buying that shows up on the New
York Stock Exchange ticker tape may be in humdrum stocks and much
of the buying may be wrong. However, out of the other half you may
have some truly phenomenal selections.

Your task, then, is to weed through and separate the intelligent, high-
ly informed institutional buying from the poor, faulty buying. Though
difficult, this will become easier as you learn to apply and follow the
rules, guidelines, and principles presented in this book.

Institutional trades usually show up oil the stock exchange ticker tape
in most brokers' offices in transactions of 1000 shares up to 100,000
shares or more. Institutional buying and selling accounts for more than
70% of the activity in most leading companies. I estimate that close to
80% or 90% of the important price movements of stocks on the New
York Stock Exchange are caused by institutional orders.

As background information, it may be valuable to find out the invest-
ment philosophy and techniques used by certain funds. For example,
Pioneer Fund in Boston has always emphasized buying supposedly
undervalued stocks selling at low P/E ratios, and its portfolio contains a
larger number of OTC stocks. A chartist probably would not buy many
of Pioneer's stocks. On the other hand, Keystone S-4 usually remains
fully invested in the most aggressive growth stocks it can find. Evergreen
Fund, run by Steve Lieber, does a fine job of uncovering fundamentally
sound, small companies.

Jim Stower's Twentieth Century Ultra and his Growth Investors funds
use computer screening to buy volatile, aggressive stocks that show the
greatest percentage increase in recent sales and earnings.
Magellan and Contra Fund in Boston scours the country to get in
early on every new concept or story in a stock. Some other manage-
ments worth tracking might be AIM Management, Nicolas Applegate,
Thomson, Brandywine, Berger, and CGM. Some funds buy on new
highs, others try to buy around lows and may sell on new highs.

In a capsule, buy stocks that have at least a few institutional sponsors
with better-than-average recent performance records.

(Excerpt from 'How To Make Money in Stocks')

Crossroads

Have a Wonderful Weekend.

Enjoy.

L= Leader or Laggard: Which is Your Stock?

Most of the time, people buy stocks they like, stocks they feel good
about, or stocks they feel comfortable with, like an old friend, old
shoes, or an old dog. These securities are frequently sentimental, drag-
gy slowpokes rather than leaping leaders in the overall exciting stock
market.

Let's suppose you want to buy a stock in the computer industry. If you
buy the leading security in the group and your timing is sound, you
have a crack at real price appreciation.

If, on the other hand, you buy equities that haven't yet moved or are
down the most in price, because you feel safer with them and think
you're getting a real bargain, you're probably buying the sleepy losers
of the group. Don't dabble in stocks. Dig in and do some detective
work.

Buy among the Best Two or
Three Stocks in a Group

The top two or three stocks actionwise in a strong industry group can
have unbelievable growth, while others in the pack may hardly stir a
point or two. Has this ever happened to you?

In 1979 and 1980, Wang Labs, Prime Computer, Datapoint, Rolm
Corp., Tandem Computer, and other small computer companies had
five-, six-, and seven-fold advances before topping and retreating, while
grand old IBM just sat there and giants Burroughs, NCR, and Sperry
Rand turned in lifeless price performances. In the next bull market
cycle, IBM finally sprang to life and produced excellent results. Home
Depot advanced 10 times from 1988 to 1992, while Waban and
Hechinger, the laggards, clearly underperformed.

Avoid Sympathy Stock Moves

There is very little that's really new in the stock market. History just
keeps repeating itself. In the summer of 1963, I bought Syntex, which
afterwards advanced 400%. Yet most people would not buy it then
because it had just made a new high in price at $100 and its P/E ratio,
at 45, seemed too high.

Several investment firms recommended G. D. Searle, a sympathy play,
which at the same time looked much cheaper in price and had a similar
product to Syntex's. But Searle failed to produce stock market results.
Syntex was the leader, Searle the laggard.

Sympathy plays are stocks in the same group as a leading stock, but
ones showing a more mediocre record and weaker price performance.
They eventually attempt to move up and follow "in sympathy" the pow-
erful price movement of the real group leader.

In 1970, Levitz Furniture became an electrifying stock market winner.
Wickes Corp. copied Levitz and plunged into the warehouse furniture
business.

Many people bought Wickes instead of Levitz because it was cheaper
in price. Wickes never performed. It ultimately got into financial trou-
ble, whereas Levitz increased 900% before it finally topped. As Andrew
Carnegie, the steel industry pioneer, said in his autobiography, "The
first man gets the oyster; the second, the shell."

Is the Stock's Relative Price
Strength Below 70?

Here is a simple, easy-to-remember measure that will help tell you if a
security is a leader or a laggard. If the stock's relative price strength, on
a scale from 1 to 99, is below 70, it's lagging the better-performing
stocks in the overall market. That doesn't mean it can't go up in price,
it just means if it goes up, it will probably rise a more inconsequential
amount.

Relative strength normally compares a stock's price perfor-
mance to the price action of a general market average like the Standard
& Poor's (S&P) Index, or in some cases, all other stocks. A relative
strength of 70, for example, means a stock outperformed 70% of the
stocks in the comparison group during a given period, say, the last six
or twelve months.

The 500 best-performing listed equities for each year from 1953
through 1993 averaged a relative price strength rating of 87 just before
their major increase in price actually began. So the determined winner's
rule is: Avoid laggard stocks and avoid sympathy movements. Look for
the genuine leaders!

Most of the better investment services show both a relative strength
line and a relative strength number and update these every week for a
list of thousands of stocks.

Relative strength numbers are shown each day for all stocks listed in
the Investor's Business Daily NYSE, AMEX, and NASDAQ price tables.
Updated relative strength numbers are also shown in Daily Graphs
charting service each week.

Pick 80s and 90s That Arc in
a Chart Base Pattern

If you want to upgrade your stock selection and concentrate on the best
leaders, you could consider restricting your buys to companies showing
a relative strength rank of 80 or higher. Establish some definite disci-
pline and rules for yourself.

If you do this, make sure the stock is in a sound base-building zone
(proper sideways price consolidation pattern) and that the stock is not
extended (up) more than 5% or 10% above this base pattern. This will
prevent you from chasing stocks that have raced up in price too rapidly
above their chart base patterns. For example, in the Reebok chart
shown at the end of Chapter 3, if the exact buy point was $29, the stock
should not be purchased more than 5% or 10% above $29.

If a relative price strength line has been sinking for seven months or
more, or if the line has an abnormally sharp decline for four months or
more, the stock's behavior is questionable.

Why buy an equity whose relative performance is inferior and strag-
gling drearily behind a laige number of other, better-acting securities
in the market? Yet most investors do, and many do it without ever look-
ing at a relative strength line or number.

Some large institutional portfolios are riddled with stocks showing
prolonged downtrends in relative strength. I do not like to buy stocks
with a relative strength rating below 80, or with a relative strength line
in an overall downtrend.

In fact, the really big money-making selections generally have a rela-
live strength reading of 90 or higher just before breaking out of their
first or second base structure. A potential winning stock's relative
strength should be the same as a major league pitcher's fast ball. The
average big league fast ball is clocked about 86 miles per hour and the
outstanding pitchers throw "heat" in the 90s.

The complete lack of investor awareness, or at least unwillingness, in
establishing and following minimum realistic standards for good stock
selection reminds me that doctors many years ago were ignorant of the
need to sterilize their instruments before each operation. So they kept
killing off excessive numbers of their patients until surgeons finally and
begrudgingly accepted studies by a young French chemist named Louis
Pasteur on the need for sterilization.

It isn't very rewarding to make questionable decisions in any arena.
And in evaluating the American economy, investors should zero in on
sound new market leaders and avoid anemic-performance investments.

Always Sell Your Worst
Stock First

If you own a portfolio of equities, you must learn to sell your worst-per-
forming stocks first and keep your best-acting investments a little
longer. In other words, sell your cats and dogs, your losers and mistakes,
and try to turn your better selections into your big winners.

General market corrections, or price declines, can help you recognize
new leaders if you know what to look for. The more desirable growth
stocks normally correct l'/2 to 2/2 times the general market averages.
However as a rule, growth stocks declining the least (percentagewise) in
a bull market correction are your strongest and best investments, and
stocks that plummet the most are your weakest choices.

For example, if the overall market suffers a 10% intermediate term
falloff, three successful growth securities could drop 15%, 20%, and
30%. The ones down only 15% or 20% are likely to be your best invest-
ments after they recover. Of course, a stock sliding 35% to 40% in a
general market decline of 10% could be flashing you a warning signal,
and you should, in many cases, steer clear of such an uncertain actor.

Pros Make Mistakes Too

Many professional investment managers make the serious mistake of
buying stocks that have just suffered unusually large price drops. In
June 1972, a normally capable, leading institutional investor in
Maryland bought Levitz Furniture after its first abnormal price break in
one week from $60 to around $40. The stock rallied for a few weeks,
rolled over, and broke to $18.

Several institutional investors bought Memorex in October 1978,
when it had its first unusual price break. It later plunged.
Certain money managers in New York bought Dome Petroleum in
September 1981 after its sharp drop from $16 to $12, because it seemed
cheap arid there was a favorable story going around Wall Street on the
stock. Months later Dome sold for $1, and the street talk was that the
company might be in financial difficulties.

None of these professionals had recognized the difference between
the normal price declines and the highly abnormal corrections that
were a sign of potential disaster in this stock.

Of course, the real problem was that these expert investors all relied
solely on fundamental analysis (and stories) and their personal opinion
of value (lower P/E ratios), with a complete disregard for what market
action could have told them was really going on. Those who ignore what
the marketplace is saying usually suffer some heavy losses.

Once a general market decline is definitely over, the first stocks that
bounce back to new price highs are almost always your authentic leaders.
This process continues to occur week by week for about three months
or so, with many stocks recovering and making new highs. To be a truly
astute professional or individual investor you must learn to recognize
the difference between normal price action and abnormal activity.
When you understand how to do this well, people will say you have "a
good feel for the market."

Control Data-Abnormal
Strength in a Weak Market

During a trip to New York in April 1967, I remember walking through a
broker's office on one day when the Dow Jones Industrial Average was
down over twelve points. When I looked up at the electronic ticker tape
showing prices moving across the wall, Control Data was trading in
heavy volume at $62, up SV-j points for the day. I immediately bought
the stock at the market, because I knew Control Data well, and this was
abnormal strength in the face of a weak overall market. The stock sub-
sequently reached $150.

In April 1981, just as the 1981 bear market was commencing, MCI
Communications, a Washington, D.C.-based telecommunications stock
trading in the over-the-counter market, broke out of a price base at $15.
It advanced to the equivalent of $90 in the following 21 months.
MCI tripled in a declining market. This was a great example of abnor-
mal strength during a weak market. Lorillard did the same thing in the
1957 bear market. Software Toolworks soared in January 1990.

So don't forget: It seldom pays to invest in laggard performing stocks
even if they look tantalizingly cheap. Look for the market leader.

(Excerpt from How To Make Money in Stocks.)

What Is .

Highly recommended film to catch. A film that truly gives different meaning to different people. We are given a deep sense of self-awareness for such contemplation of the 'higher truth' . The key is in the discovery, not in the believing.

S = Supply and Demand; Small Capitalization Plus Big Volume Demand

The law of supply and demand determines the price of almost every-
thing in your daily life. When you go to the grocery store and buy fresh
lettuce, tomatoes, eggs, or beef, supply and demand affects the price.

The law of supply and demand even impacted the price of food and
consumer goods in former Communist, dictator-controlled countries
where these state-owned items were always in short supply and frequently
available only to the privileged class of higher officials in the bureaucracy
or in the black market to comrades who could pay exorbitant prices.

The stock market does not escape this basic price principle. The law
of supply and demand is more important than all the analyst opinions
on Wall Street.

Big Is Not Always Better

The price of a common stock with 300 million shares outstanding is
hard to budge up because of the large supply of stock available. A
tremendous volume of buying (demand) is needed to create a rousing
price increase.

On the other hand, if a company has only 2 or 3 million shares of
common stock outstanding, a reasonable amount of buying can push
the stock up rapidly because of the small available supply.
If you are choosing between two stocks to buy, one with 10 million
shares outstanding and the other with 60 million, the smaller one will
usually be the rip-roaring performer if other factors are equal.

The total number of shares of common stock outstanding in a com-
pany's capital structure represents the potential amount of stock avail-
able for purchase.

The stock's "floating supply" is also frequently considered by market
professionals. It measures the number of common shares left for possi-
ble purchase after subtracting the quantity of stock that is closely held
by company management. Stocks that have a large percentage of owner-
ship by top management are generally your best prospects.

There is another fundamental reason, besides supply and demand,
that companies with large capitalizations (number of shares outstand-
ing) as a rule produce dreadful price appreciation results in the stock
market. The companies themselves are simply too big and sluggish.

Pick Entrepreneurial
Managements Rather Than
Caretakers

Giant size may create seeming power and influence, but size in corpora-
tions can also produce lack of imagination from older, more conserva-
tive "caretaker managements" less willing to innovate, take risks, and
keep up with the times.

In most cases, top management of large companies does not own a
meaningful portion of the company's common stock. This is a serious
defect large companies should attempt to correct.

Also, too many layers of management separate the senior executive
from what's really going on out in the field at the customer level. And
in the real world, the ultimate boss in a company is the customer.
Times are changing at a quickening pace. A corporation with a fast-
selling, hot new product today will find sales slipping within three years
if it doesn't continue to have important new products coming to market.

Most of today's inventions and exciting new products and services are
created by hungry, innovative, small- and medium-sized young compa-
nies with entrepreneurial-type management. As a result, these organiza-
tions grow much faster and create most of the new jobs for all
Americans. This is where the great future growth of America lies. Many
of these companies will be in the services or technology industries.

If a mammoth-sized company occasionally creates an important new
product, it still may not materially help the company's stock because
the new product will probably only account for a small percentage of
the gigantic company's sales and earnings. The product is simply a little
drop in a bucket that's just too big.

Institutional Investors Have a
Big Cap Handicap

Many large institutional investors create a serious disadvantage for
themselves because they incorrectly believe that due to their size they
can only buy large capitalization companies. This automatically elimi-
nates from consideration most of the true growth companies. It also
practically guarantees inadequate performance because these investors
may restrict their selections mainly to slowly decaying, inefficient, fully
matured companies. As an individual investor, you don't have this limi-
tation.

If I were a large institutional investor, I would rather own 200 of the
most outstanding, small- to medium-sized growth companies than 50 to
100 old, overgrown, large-capitalization stocks that appear on every-
one's "favorite fifty" list.

If you desire clear-cut factual evidence, the 40 year study of the great-
est stock market winners indicated more than 95% of the companies
had fewer than 25 million shares in their capitalization when they had
their greatest period of earnings improvement and stock market perfor-
mance. The average capitalization of top-performing listed stocks from
1970 through 1982 was 11.8 million shares. The median stock exhibited
4.6 million shares outstanding before advancing rapidly in price.

Foolish Stock Splits Can Hurt

Corporate management at times makes the mistake of excessively split-
ting its company's stock. This is sometimes done based upon question-
able advice from the company's Wall Street investment bankers.
In rny opinion, it is usually better for a company to split its shares 2-'
for-1 or 3-for-2, rather than 3-for-l or 5-for-l. (When a stock splits 2-for-
1, you get two shares for each one previously held, but the new shares
sell for half the price.)

Overabundant stock splits create a substantially larger supply and may
put a company in the more lethargic performance, or "big cap," status
sooner.

It is particularly foolish for a company whose stock has gone up in
price for a year or two to have an extravagant stock split near the end of
a bull market or in the early stage of a bear market. Yet this is exactly
what most corporations do.

They think the stock will attract more buyers if it sells for a cheaper
price per share. This may occur, but may have the opposite result the
company wants, particularly if it's the second split in the last couple of
years. Knowledgeable professionals and a few shrewd traders will proba-
bly use the oversized split as an opportunity to sell into the obvious
"good news" and excitement, and take their profits.

Many times a stock's price will top around the second or third time it
splits. However, in the year preceding great price advances of the lead-
ing stocks, in performance, only 18% had splits.

Large holders who are thinking of selling might feel it easier to sell
some of their 100,000 shares before the split takes effect than to have to
sell 300,000 shares after a 3-for-l split. And smart short sellers (a rather
infinitesimal group) pick on stocks that are beginning to falter after
enormous price runups¡Xthree-, five-, and ten-fold increases¡Xand
which are heavily owned by funds. The funds could, after an unreason-
able stock split, find the number of their shares tripled, thereby dramat-
ically increasing the potential number of shares for sale.

Look for Companies Buying
Their Own Stock in the
Open Market

One fairly positive sign, particularly in small- to medium-sized compa-
nies, is for the concern to be acquiring its own stock in the open market-
place over a consistent period of time. This reduces the number of shares
of common stock in the capital structure and implies the corporation
expects improved sales and earnings in the future.

Total company earnings will, as a result, usually be divided among a
smaller number of shares, which will automatically increase the earn-
ings per share. And as we've discussed, the percentage increase in earn-
ings per share is one of the principal driving forces behind outstanding
stocks.

Tandy Corp., Teledyne, and Metromedia are three organizations that
successfully repurchased their own stock during the era from the mid-
1970s to the early 1980s. All three companies produced notable results
in their earnings-per-share growth and in the price advance of their
stock.

Tandy (split-adjusted) stock increased from $2 4 to $60 between 1973
and 1983. Teledyne stock zoomed from $8 to $190 in the thirteen years
prior to June 1984, and Metromedia's stock price soared to $560 from
$30 in the six years beginning in 1977. Teledyne shrunk its capitaliza-
tion from 88 million shares in 1971 to 15 million shares and increased
its earnings from $0.61 a share to nearly $20 per share with eight differ-
ent huvbacks.

Low Corporate Debt to Equity
Is Usually Better

Alter you have picked a stock with a small or reasonable number of
shares in its capitalization, it pays to check the percentage of the
firm's total capitalization represented by long-term debt or bonds.
Usually the lower the debt ratio, the safer and better the company.
Earnings per share of companies with high debt-to-equity ratios can
be clobbered in difficult periods of high interest rates. These highly
leveraged companies generally are deemed to be of poorer quality and
higher risk.

A corporation that has been reducing its debt as a percent of equity
over the last two or three years is well worth considering. If nothing
else, the company's interest expense will be materially reduced and
should result in increased earnings per share.
The presence of convertible bonds in a concern's capital structure
could dilute corporate earnings if and when the bonds are converted
into shares of common stock.

It should be understood that smaller capitalization stocks are less liq-
uid, are substantially more volatile, and will tend to go up and down
faster; therefore, they involve additional risk as well as greater opportu-
nity. There are, however, definite ways of minimizing your risks, which
will be discussed in Chapter 9.

Lower-priced stocks with thin (small) capitalization and no institu-
tional sponsorship or ownership should be avoided, since they have
poor liquidity and a lower-grade following.

A stock's daily trading volume is our best measure of its supply and
demand. Trading volume should dry up on corrections and increase
significantly on rallies. As a stock's price breaks out of a sound and
proper base structure, its volume should increase at least 50% above
normal. In many cases, it can increase 100% or more.

In summary, remember: stocks with a small or reasonable number of
shares outstanding will, other things being equal, usually outperform
older, large capitalization companies.

(Excerpt from 'How To Make Money in Stocks')

Sino Techfibre

As requested. Sino Techfibre has establish a base support at the 61.8% retracement from the high of 1.64 to the low of 1.10. From todays price actions, resistance levels to break through are at 1.40/1.44/1.52 while support levels are at 1.37/1.30 . Volume count of 10mil and above on an upwards move would be bullish and high chance of breaking through resistance levels.

N = New Products, New Management, New Highs; Buying at the Right Time

N = New Products,
New Management,
New Highs:
Buying at the Right Time

It takes something new to produce a startling advance in the price of
a stock.
This something new can be an important new product or service, sell-
ing rapidly and causing earnings to accelerate above previous rates of
increase. It could also be new top management in a company during
the last couple of years. A new broom sweeps clean, or at least may
bring inspiring ideas and vigor to the ball game.

Or the new event could be substantial changes within the company's
industry. Industrywide shortages, price increases, or new technology
could affect almost all members of the industry group in a positive way.

New Products That Created
Super Successes

1. Rexall's new Tupperware division, in 1958, helped push the com-
pany's stock to $50 a share, from $16.
2. Thiokol in 1957-1959 came out with new rocket fuels for missiles,
propelling its stock from $48 to the equivalent of $355.
3. Syntex, in 1963, marketed the oral contraceptive pill. In six months
the stock soared from $100 to $550.
4. McDonald's, in 1967-1971, with low-priced fast food franchising,
snowballed into an 1100% profit for stockholders.
5. Levitz Furniture stock increased 660% in 1970-1971, with the pop-
ularity of their giant warehouse discount furniture centers.
6. Houston Oil & Gas, in 1972-1973, with a major new oil field ran up
968% in 61 weeks and later in 1976 picked up another 367%.
7. Computervision stock advanced 1235% in 1978-1980, with the
introduction of new Cad-Cam factory automation equipment.
8. Wang Labs Class B stock grew 1350% in 1978-1980, due to the cre-
ation of their new word-processing office machines.
9. Price Company stock shot up more than 15 times in 1982-1986
with the opening of a southern California chain of innovative
wholesale warehouse membership stores.
10. Amgen developed two successful new biotech drugs, Epogen and
Neupogen, and the stock raced ahead from 60% in 1990 to the
equivalent of 460% in January 1992.
11. Cisco Systems, another California company, created routers and
networking equipment that allowed company links with geographi-
cally dispersed local area computer networks. The stock advanced
over 2000% in 3V2 years.
12. International Game Technology rose an astounding 1600% in
1991-1993 with new microprocessor-based gaming products.

In our study of greatest stock market winners from 1953 through
1993, we discovered more than 95% of these stunning successes in
American industry either had a major new product or service, new man-
agement, or an important change for the better in the conditions of
their particular industry.

The Stock Market's Great
Paradox

There is another fascinating phenomenon we found in the early stage
of all winning stocks. We call it "the great paradox." Before I tell you
what this last new observation is, I want you to look at three typical
stocks shown on the next page. Which one looks like the best buy to
you? Which stock would you probably avoid?

Among the thousands of individual investors attending my investment
lectures in the 1970s, 1980s, and 1990s, 98% said they do not buy stocks
that are making new highs in price.

The staggering majority of individual investors, whether new or expe-
rienced, feel delightful comfort in buying stocks that are down substan-
tially from their peaks.

I have provided extensive research for over 600 institutional investors
in the United States. It is my experience that most institutional money
managers are also bottom buyers¡Xthey, too, feel safer buying stocks
that look cheap because they're either down a lot in price or selling
near their lows.

The hard-to-accept great paradox in the stock market is that what
seems too high and risky to the majority usually goes higher and what
seems low and cheap usually goes lower. Haven't you seen this happen
before?

In case you find this supposed "high-altitude" method a little difficult
to boldly act upon, let me cite another study we conducted. An analysis
was made of the daily newspapers' new-high and new-low stock lists dur-
ing several good, as well as poor, market periods.

Our findings were simple. Stocks on the new-high list tended to go
higher, and those on the new-low list tended to go lower.
Put another way, a stock listed in the financial section's new-low list of
common stocks is usually a pretty poor prospect, whereas a stock mak-
ing the new-high list the first time during a bull market and accompa-
nied by a big increase in trading volume might be a red-hot prospect
worth checking into. Decisive investors should be out of a stock long
before it appears on the new-low list.

You may have guessed by now what the last intriguing new realization
is that I promised to disclose to you earlier. So here are the three stocks
you had to choose among on the previous page, Stock A, Stock B, and
Stock C. Which one did you pick? Stock A (Syntex Corp, see below) was
the right one to buy. The small arrow pointing down above the weekly
prices in July 1963 shows the same buy point at the end of Stock A in
July on the previous page. Stock B and Stock C both declined.

When to Correctly Begin
Buying a Stock

A stock should be close to or actually making a new high in price after
undergoing a price correction and consolidation. The consolidation
(base-building period) in price could normally last anywhere from seven
or eight weeks up to fifteen months.

As the stock emerges from its price adjustment phase, slowly resumes
an uptrend, and is approaching new high ground, this is, believe it or
not, the correct time to consider buying. The stock should be bought
just as it's starting to break out of its price base.

You must avoid buying once the stock is extended more than 5% or
10% from the exact buy point off the base. Here is an example of the
proper time to have bought Reebok, at $29, in February 1986 before it
zoomed 260%. The second graph shows the correct time to have bought
Amgen at $60¡Xin March 1990¡Xbefore it jumped more than sixfold.

How Does a Stock Go from
$50 to $100?

As a final appeal to your trusty common sense and judgment, it should
be stated that if a security has traded between $40 and $50 a share over
many months and is now selling at $50 and is going to double in price,
it positively must first go through $51, $52, $53, $54, $55, and the like,
before it can reach $100.

Therefore, your job is to buy when a stock looks high to the majority
of conventional investors and to sell after it moves substantially higher
and finally begins to look attractive to some of those same investors.
In conclusion: Search for corporations that have a key new product
or service, new management, or changes in conditions in their industry.
And most importantly, companies whose stocks are emerging from
price consolidation patterns and are close to, or actually touching, new
highs in price are usually your best buy candidates. There will always be
something new occurring in America every year. In 1993 alone, there
were nearly 1,000 initial public offerings. Dynamic, innovative new com-
panies¡ bundle of future, potential big winners.

(Excerpt from 'How To Make Money in Stocks')

A = Annual Earnings Increases; Look for Meaningful Growth

If you want to own part of a business in your home town, do you
choose a steadily growing, successful concern or one that is unsuccess-
ful, not growing and highly cyclical?

Most of you would prefer a business that is showing profitable growth.
That's exactly what you should look for in common stocks. Each
year's annual earnings per share for the last five years should show an
increase over the prior year's earnings. You might accept one year
being down in the last five as long as the following year's earnings
quickly recover and move back to new high ground.

It is possible that a stock could earn $4 a share one year, $5 the next
year, $6 the next, and the following year¡X$2. If the next annual earn-
ings statement were $2.50 versus the prior year's $2 (+ 25%), that would
not be a good report. The only reason it may seem attractive is that the
previous year ($2) was so depressed any improvement would look good.
In any case, the profit recovery is slow and is still substantially below the
company's peak earnings of $6:

Select Stocks with 25% to
50% Annual Growth Rates

Owning common stock is just the same as being a part owner in a busi-
ness. And who wants to own part of an establishment showing no growth?
The annual compounded growth rate of earnings in the superior firms
you hand pick for purchasing stock in should be from 25% to 50%, or
even 100% or more, per year over the last 4 or 5 years.

Between 1970 and 1982, the average annual compounded earnings
growth rate of all outstanding performing stocks at their early emerging
stage was 24%. The median, or most common, growth rate was 21% per
year, and three out of four of the prominent winners revealed at least
some positive annual growth rate over the five years preceding the giant
increase in the value of the stock. One out of four were turnarounds.
A typical successful yearly earnings per share growth progression for a
company's latest five-year period might look something like $.70, $1.15,
$1.85, $2.80, $4.

The earnings estimate for the next year should also be up a healthy
percentage; the greater the percentage, the better. However, remember
estimates are opinions. Opinions may be wrong whereas actual reported
earnings are facts that are ordinarily more dependable.

What Is a Normal Stock
Market Cycle?

Most bull (up) market cycles last two to four years and are followed by a
recession or bear (down) market and eventually another bull market in
common stocks.

In the beginning phase of a new bull market, growth stocks are usual-
ly the first sector to lead the market and make new price highs. Heavy
basic industry groups such as steel, chemical, paper, rubber, and
machinery are commonly more laggard followers.

Young growth stocks will usually dominate for at least two bull market
cycles. Then the emphasis may change for the next cycle, or a short
period, to turnaround or cyclical stocks or newly improved sectors of
the market, such as consumer growth stocks, over-the-counter growth
issues, or defense stocks that sat on the sidelines in the previous cycle.
Last year's bloody bums become next year's heroes. Chrysler and
Ford were two such spirited turnaround plays in 1982. Cyclical and
turnaround opportunities led in the market waves of 1953¡X1955,
1963-1965, arid 1974-1975. Papers, aluminums, autos, chemicals, and
plastics returned to the fore in 1987. Yet, even in these periods, there
were some pretty dramatic young growth stocks available. Basic industry
stocks in the United States frequently represent older, more inefficient
industries, some of which are no longer internationally competitive and
growing. This is perhaps not the area of America's future excellence.
Cyclical stocks' price moves tend to be more short-lived when they do
occur, and these stocks are much more apt to suddenly falter and
encounter disappointing quarterly earnings reports. Even in the stretch
where you decide to buy strong turnaround situations, the annual com-
pounded growth rate could, in many cases, be 5% to 10%.

Requiring a company to show two consecutive quarters of sharp earn-
ings recovery should put the earnings for the latest twelve months into,
or very near, new high ground. If the 12 months earnings line is shown
on a chart, the sharper the upswing the better. This will make it possi-
ble in many cases for even the "old dog" about-face stock to show some
annual growth rate for the prior five-year time period. Sometimes one
quarter of earnings turnaround will suffice if the earnings upswing is so
dramatic that it puts the 12 months ended earnings line into new highs.

Check the Stability of a
Company's Five-Year
Earnings Record

While the percentage rate of increase in earnings is most important, an
additional factor of value, which we helped pioneer in the measure-
ment and use of, is the stability and consistency of the past five years'
earnings. We display the number differently than most statisticians do.
Our stability measurements are expressed on a scale from 1 to 99.
The lower the figure, the more stable the past earnings record. The fig-
ures are ca^ulated by plotting quarterly earnings for the last five years
and fitting a trend line around the plot points to determine the degree
of deviation from the basic earnings trend.

Growth stocks with good stability of earnings tend to show a stability
figure below 20 or 25. Equities with a stability rating over 30 are more
cyclical and a little less dependable in their growth. All other things
being equal, you may want to choose the security showing a greater
degree of consistency and stability in past earnings growth.
Earnings stability numbers are usually shown immediately after a
company's five-year growth rate, although most analysts and investment
services do not bother to make the calculation.

If you primarily restrict your selections to ventures with proven
growth records, you avoid the hundreds of investments having erratic
earnings histories or a cyclical recovery in profits that may top out as
they approach earnings peaks of the prior cycle.

How to Weed Out the Losers
in a Group

When you investigate a specific industry group, using the five-year
growth criteria will also help you weed out 80% of the stocks in an
industry. This is because the majority of companies in an industry have
lackluster growth rates or no growth.

When Xerox was having its super performance of 700% growth from
March 1963 to June 1966, its earnings growth rate averaged 32% per
year. Wal-Mart Stores, a discount retailer, sported an annual growth
rate from 1977 to 1990 of 43% and boomed in price an incredible
11,200%. Cisco Systems growth rate in October 1990 was an enormous
257% per year and Microsoft's was 99% in October 1986, both before
their long advances.

The fact that an investment possesses a good five-year growth record
doesn't necessarily cause it to be labeled a growth stock. Ironically, in
fact, some companies called growth stocks are producing a substantially
slower rate of growth than they did in several earlier market eras. These
should usually be. avoided. Their record is more like a fully matured or
nearly senile growth stock. Older and larger organizations frequently
show slow growth.

New Cycles Create New
Leaders

Each soaring new cycle in the stock market will catapult fresh leader-
ship stocks to the attention of the market, some of which will begin to
be called growth stocks. The growth record in itself, however, is only a
starting point for would-be victorious investors, and it should be the
first of many earnings measurements you should check.
For example, companies with outstanding five-year growth records of
30% per year but whose current earnings in the last two quarters have
slowed significantly to + 15% and + 10% should be avoided in most
instances.

Insist on Both Annual and
Current Quarterly Earnings
Being Excellent

We prefer to see current quarterly earnings accelerating or at least main-
taining the trend of several past quarters. A standout stock needs a
sound growth record during recent years but also needs a strong current
earnings record in the last few quarters. It is the unique combination of
these two critical factors, rather than one or the other being outstanding,
that creates a superb stock, or at least one that has a higher chance of
true success.

Investor's Business Daily provides a relative earnings ranking (based
on the latest five-year annual earnings record and recent quarterly earn-
ings reports) for all common stocks shown in the daily NYSE, AMEX,
and OTC stock price quotation tables.

More than 6000 stocks are compared against each other and ranked on
a scale from 1 to 99. An 80 earnings per share rank means a company's
current and five-year historical earnings record outclassed 80% of all
other companies.

The earnings record of a corporation is the most critical, fundamental
factor available for selecting potential winning stocks.

Are Price-Earning Ratios
Important?

Now that we've discussed the indispensable importance of a stock's cur-
rent quarterly earnings record and annual earnings increases in the last
five years, you may be wondering about a stock's price-to-earnings
(P/E) ratio. How important is it in selecting stocks? Prepare yourself for
a bubble-bursting surprise.

P/E ratios have been used for years by analysts as their basic measure-
ment tool in deciding if a stock is undervalued (has a low P/E) and
should be bought or is overvalued (has a high P/E) and should be sold.
Factual analysis of each cycle's winning stocks shows that P/E ratios
have very little to do with whether a stock should be bought or not. A
stock's P/E ratio is not normally an important cause of the most suc-
cessful stock moves.

Our model book studies proved the percentage increase in earnings
per share was substantially more crucial than the P/E ratio as a cause of
impressive stock performance.

During the 33 years from 1953 through 1985 the average P/E for the
best performing stocks at their early emerging stage was 20 (the Dow
Jones Industrial's P/E at the same time averaged 15). While advancing,
these stocks expanded their P/Es to approximately 45 (125% expansion
of P/E ratio).

..to be continued..

(Excerpt from 'How To Make Money from Stocks')

C = Current Quarterly Earnings Per Share: How Much Is Enough?

M/A-Com Inc.
Humana Inc.
Kirby Exploration Co.

What did shares of the above-mentioned microwave component man-
ufacturer, hospital operator, and oil Service Company have in common?
From 1977 to 1981, they all posted price run-ups surpassing 900%.
In scrutinizing these and other past stock market superstars, I've
found a number of other similarities as well.

For example, tradiiig volume in these sensational winners swelled
substantially before their giant price moves began. The winning Stocks
also tended to shuffle around in price consolidation periods for a few
months before they broke out and soared. But one key variable stood
out from all the rest in importance: the profits of nearly every outstand-
ing stock were booming.

The common Stocks you select for purchase should show a major per-
centage increase in the current quarterly earnings per share (the most
recently reported quarter) when compared to the prior year's same
quarter.

Earnings per share are calculated by dividing a company's total after-
tax profits by the company's number of common shares outstanding.
The percentage increase in earnings per share is the single most impor-
tant element in stock selection today.

The greater the percentage of increase, the better, as long as you
aren't misled by comparing current earnings to nearly nonexistent
earnings for the year earlier quarter, like 1 cent a share.

Ten cents per share versus one cent may be a 900% increase, but it is
definitely distorted and not as meaningful as $1 versus $.50. The 100%
increase of $1 versus $.50 is not overstated by comparison to an unusu-
ally low number in the year ago quarter.

I am continually amazed at how many professional pension fund
managers, as well as individual investors, buy common stocks with the
current reported quarter's earnings flat (no change), or even worse,
down. There is absolutely no reason for a stock to go anywhere if the
current earnings are poor.

Even if the present quarter's earnings are up 5% to 10%, that is sim-
ply not enough of an improvement to fuel any significant upward price
movement in a stock. It is also easier for a corporation currently show-
ing a mere increase of 7% or 8% to suddenly report lower earnings the
next quarter.

Seek Stocks Showing Big
Current Earnings Incrcascs

In our models of the 500 best performing Stocks in the 40 years from
1953 through 1993, three out of four of these securities showed earn-
ings iricreases averaging rnore than 70% in the latest publicly reported
quarter before the Stocks began their major price advance. The one out
of four that didn't show solid current quarter increases did so in the
very next quarter, and those increases averaged 90%!

If the best Stocks had profit increases of this magnitude before they
advanced rapidly in price, why should you settle for mediocre or down
earnings?

Our study showed that among all big gainers between 1970 and 1982,
86% reported higher earnings in their most recently published quarter,
and 76% were up over 10%. The median earnings increase was 34%
and the rnean (average) was up 90%.

You may find that only about 2% of all Stocks listed for trading on the
New York or American stock exchanges will, at any one time, show
increases of this proportion in current quarterly net iiicome.
But, remember you want to find the exceptional Stocks rather than
the lackluster ones, so set your sights high and Start looking for the
superior Stocks, the small number of real leaders. They are there.
Success is built on dreanis and ideas; however, it helps to know exact-
ly what you're looking for. Before you Start your search for tomorrow's
super stock market leader, let nie teil you about a few of the traps and
pit falls.

Watch Out for Misleading
Reports of Earnings

Have you ever read a corporation's quarterly earnings report that stated,
"We had a terrible first three months. Prospects for our Company are turn-
ing down due to inefficiencies in the home office. Our competition just
came out with a better product, which will adversely affect our sales.
Furthermore, we are losing our shirt on the new midwestern Operation,
which was a real blunder on management's part."

No! Here's what you see. "Greatshakes Corporation reports record sales
of $7.2 million versus $6 million (+ 20%) for the quarter ended March
31." If you own their stock, this is wonderful news. You certainly are not
going to be disappointed. You think this is a fine Company (otherwise you
wouldn't own its stock), and the report confirms your thinking.
Is this record-breaking sales armouncement a good report? Let's sup-
pose the Company also had record earnings of $2.10 per share of stock for
the quarter. Is it even better now?

What if the $2.10 was versus $2 (+ 5%) per share in the same quarter
the previous year? Why were sales up 20% and earnings ahead only 5%?
Something might be wrong¡Xrnaybe the company's profit margins are
crumbling. At any rate, if you own the stock, you should be concerned and
evaluate the Situation closely to see why the earnings increased only 5%.
Most investors are impressed with what they read, and companies love
to put their best foot forward. Even though this corporation may have had
all-time record sales, up 20%, it didn't mean much. You must be able to
see through slanted published presentations if you want the vital facts.
The key factor for the winning investor must always be how much the
current quarter's earnings are up in percentage terms from the same quar-
ter the year before!

Let's say your Company discloses that sales climbed 10% and net income
advanced 12%. This sounds good, but you shouldn't be concerned with
the company's total net income. You don't own the whole organization.
You own shares of stock in the corporation. Perhaps the Company issued
additional shares or there was other dilution of the common stock. Just
because sales and total net income for the Company were up, the report
still may not be favorable. Maybe earnings per share of common stock
inched up only 2% or 3%.

The Debate on Overemphasis
of Current Earnings

Recently it has been noted that Japanese firms concentrate more on
longer-term profits rather than on trying to maximize current earnings
per share.

This is a sound concept and one the better-managed organizations in
the United States (a minority of companies) also follow. That is how
well-managed entities create colossal quarterly earnings increases, by
spending several years on research, developing superior new products,
and cutting costs.

But don't be confused. You as an individual Investor can afford to wait
until the point in time when a Company positively proves to you its
efforts have been successful and are starting to actually show real earn-
insrs increases.

Requiring that current quarterly earnings be up a hefty amount is just
another smart way the intelligent Investor can reduce the risk of exces-
sive mistakes in stock selection.

Many corporations have mediocre management that continually pro-
duces second-rate earnings results. I call them the "entrenched main-
tainers." These are the companies you want to avoid until someone has
the courage to change top management. Ironically, these are generally
the companies that strain to pump up their current earnings a dull 8%
or 10%. True growth companies with outstanding new products do not
have to maximize current results.

Look for Accelerating
Quarterly Earnings Growth

My studies of thousands of the most successful concerns in America
proved that virtually every corporate stock with an outstanding upward
price move showed accelerated quarterly earnings increases some time
in the previous ten quarters before the towering price advance began.
Therefore, what is crucial is not just that earnings are up or that a
certain price-to-earnings ratio (a stock's price divided by its last twelve
months' earnings per share) exists; it is the change and improvement
from the stock's prior percentage rate of earning increases that causes a
supreme price surge. Wall Street now calls these earnings surprises.
I once mentioned this concept of earnings acceleration to Peter
Vermilye, the former head of Citicorp's Trust Investment Division in
New York City. He liked the term and feit it was much more accurate
and relevant than the phrase "earnings momentum" sometimes used by
Investment professionals.

If a Company's earnings are up 15% a year and suddenly begin spurt-
ing 40% to 50% a year, it usually creates the basic conditions for impor-
tant stock price improvement.

Check Other Key Stocks in
the Group

For added safety, it is wise to check the industry group of your stock.
You should be able to find at least one other noteworthy stock in the
industry also showing good current earnings. This acts as a confirming
factor. If you cannot find any other impressive stock in the group dis-
playing strong earnings, the chances are greater that you have selected
the wrong investment.

Note the date when a company expects to report its next quarterly
earnings. One to four weeks prior to the report's release, a stock fre-
quently displays unusual price strength or weakness, or simply "hesitates"
while the market and other equities in the same group advance. This
could give you an early clue of an approaching good or bad report. You
may also want to be aware and suspicious of stocks that have gone several
weeks beyond estimated reporting time without the release of an earn-
ings announcement.

One last point to clarify: You should always compare a stock's per-
centage increase in earnings for the quarter ended December, to the
December quarter a year earlier. Never compare the December quarter
to the immediately prior September quarter.

You now have the first critical rule for improving your stock selection:
Current quarterly earnings per share should be up a major percentage
(at least 20% to 50% or more) over the same quarter last year. The best ones
might show earnings up 100% to 500%! A mediocre 8% or 10% isn't
enough! In picking winning stocks, it's the bottom line that counts.

-Excerpt from William O'Neal's How To Make Money in Stocks.

How To Make Money In Stocks.

Introduction:
Learning from the Greatest
Winners

In the following chapters, I will show you exactly how to pick more big
winners in the stock market and how to substantially reduce your losses
and mistakes. I will examine and discuss other Investments, as well.
In the past, most people who bought and sold Stocks either had
mediocre results or lost money because of their clear lack of knowledge.
But no one has to lose money.

This book will provide you with most of the investment understand-
ing, skills, and methods you need to become a more successful Investor.
I believe that most people in this country and many others through-
out the free world, young and old, regardless of profession, education,
background, or economic position, can and defmitely should own com-
mon stock. This book isn't written for an elite but for the millions of lit-
tle guys and gals everywhere who want a chance to be better off.
YOU CAN If you are a typical working man or woman or a
START SMALL beginning Investor, it doesn't take a lot of
money to Start. You can begin with as little as
$500 to $1000 and add to it as you earn and
save more money. I began with the purchase
of just five shares of Procter & Gamble when
I was only 21 and fresh out of school.

You live in a fantastic tinie of unlimited opportunity, an era of out-
standing new ideas, emerging industries, and new frontiers. But you
have to read to learn how to recognize and take advantage of these
extraordinary Situation<<.

The opportunities are out there for everyone. You are now witnessing
a New America. We lead the world in high technology, medical
advancements, Computer Software, military capabilities, and innovative
new entrepreneurial companies. The communist socialist System was
finally relegated to the ash heap of history under Ronald Reagan and
our System of freedom and opportunity serves as a prime success model
for the majority of countries in the world.

It is not enough today to just work and earn a salary. To do the things
you want to do, to go the places you want to go, to have the things you
want to have in your life, you absolutely must save and invest intelligent-
ly. The second income from your Investments and the net profits you
can make will help you reach your goals and provide real security.
SECRET TIP #1 The first Step in learning to pick stock market
winners is for you to examine leading winners
of the past to learn all the characteristics of the
most successful Stocks. You will learn from this
observation what type of price patterns these
Stocks developed just before their spectacular
price advances.

Other key factors you will uncover include what kind of Company
quarterly-earnings reports were publicly known at the time, what the
annual earnings histories of these organizations had been in the prior
five years, what amount of stock trading volume was present, what
degree of relative price strength occurred in the price of the Stocks
before their enormous success, how many shares of common stock were
outstanding in the capitalization of each Company, how many of the
greatest winners had significant new products or new management, and
how many were tied to strong industry group moves caused by impor-
tant changes occurring in an entire industry.

It is easy to conduct this type of practical, commonsense analysis of
past successful leaders. I have already completed such a comprehensive
study. In our historical analysis, we selected the greatest winning Stocks
in the stock market each year (in terms of percentage increase for the
year), spanning more than 40 years.

We call the study The Record Book of Greatest Stock Market Winners.
It covers the period from 1953 through 1993 and analyzes in detail over
500 of the biggest winning companies in recent stock market history:
super Stocks such as Texas Instruments, whose price soared from $25 to
$250 from January 1958 through May 1960; Xerox, which escalated
from $160 to the equivalent of $1340 from March 1963 to June 1966;

Syntex, which leaped from $100 to $570 in only six rnonths during the
last half of 1963; Dome Petroleum and Prime Computer, which respec-
tively advanced 1000% and 1595% in the 1978-1980 stock market;
Limited Stores, which wildly excited lucky shareowners with a 3500%
increase between 1982 and 1987; and Cisco Systems, which advanced
from a split-adjusted $1.88 to $40.75 between October 1990 and March
1994. Home Depot and Microsoft both increased more than 20 times
during the 1980s and early '90s. Home Depot was one of the all-time
great performers jumping twentyfold in less than 2 years from its initial
public offering in September of 1981 and then again climbing another
10 times from 1988 to 1992. All of these companies offered exciting
new products and concepts.

Would you like to know the common characteristics and secret rules
of success we discovered from this intensive study of all past glamorous
stock market leaders?

It's all in the next few chapters and in a simple easy-to-remember for-
mula we have named C-A-N S-L-I-M. Write the formula down, and
repeat it several times so you won't forget it.

Each letter in the words C-A-N S-L-I-M Stands for one of the seven
chief characteristics of these great winning Stocks at their early develop-
ing stages, just before they made huge profits for their shareholders.
You can learn how to pick winners in the stock market, and you can
become part owner in the best companies in the world. So, let's get
started right now. Here's a sneak preview of C-A-N S-L-I-M.

C = Current Quarterly Earnings Per Share: How Much Is Enough?
A = Aimual Earnings Increases: Look for Meaiiingful Growth.
N = New Products, New Management, New Highs: Buying at the Right Time.
S = Supply and Demand: Small Capitalization Plus Volume Demand.
L = Leader or Laggard: Which Is Your Stock?
I = Institutional Sponsorship: A Little Goes a Long Way.
M = Market Direction: How to Determine It?

(Excerpt from William O'Neal's How to make money in stocks.)

The Principles of Successful Trading

Over many years of trading, I've found certain principles to be true. Understanding and using basic principles provides an anchor of sanity when trading in a crazy world. Whenever I find myself under stress, questioning my judgement or my ability to trade successfully, I pull out these basic trading principles and review them.

Don't Try to Predict the Future

I used to think that there were experts and geniuses out there who knew what was going to happen in the markets. I thought that these traders and market gurus were successful because they had figured out how to predict the markets. Of course, the obvious question is that if they were such good traders, and if they knew where the market was going, why were they teaching trading techniques, selling systems and indicators, and writing newsletters? Why weren't they rich? Why weren't they flying to the seminars on their Lear Jets?

NO ONE KNOWS WHERE THE MARKET IS GOING

It took me a long rime to figure out that no one really understands why the market does what it does or where it's going. It's a delusion to think that you or any one else can know where the market is going. I have sat through hundreds of hours of seminars in which the presenter made it seem as if he or she had some secret method of divining where the markets were going. Either they were deluded or they were putting us on. I have seen many complex Fibonacci measuring methods for determining how high or low the market would move, how much a market would retrace its latest big move, and when to buy or sell based on this analysis. None has ever made
consistent money for me.

NO ONE KNOWS WHEN THE MARKET WILL MOVE

It also has taken me a long time to understand that no one knows when the market will move.There are many individuals who write newsletters and/or books, or teach seminars, who will tell you that they know when the market will move.Most Elliot Wave practitioners, cycle experts, or Fibonacci time traders will try to predict when
the market will move, presumably in the direction they have also predicted. I personally have not been able to figure out how to know when the market is going to move. And you know what? When I tried to predict, I was usually wrong, and I invariably missed the big move I was anticipating, because "it wasn't time."
It was when I finally concluded that I would never be able to predict when the market will move that I started to be more successful in my trading. My frustration level declined dramatically, and I was at peace knowing that it was OK not to be able to predict or understand the markets.

Know that Market Experts aren't Magicians

Some of the experts that try to predict the markets actually make money trading the markets; however, they don't make money because they have predicted the market correctly, they make money because they have traded the market correctly.

THEY DON'T PROFIT FROM THEIR PREDICTIONS

There is a huge difference between trading correctly and making an accurate market prediction. In the final analysis, predicting the market is not what's important. What is important is using sound trading practices. And if sound trading habits is all that is important, there is no reason to try to predict the markets in the first place. This is the reason system trading makes so much sense.

THEY HAVE LEARNED TRADING DISCIPLINE

I have watched many market gurus continually make incorrect market predictions and still break even or make a little money because they have followed a disciplined approach to trading. More importantly, they used the exact same principles that I will show you how to use in creating your system. It is these principles that make the money, not the prediction. To be a disciplined trader, you have to know how and why to enter the market, when to exit the market, and where to place your money management stops. You need to manage your risk and maximize your cash flow. A sound trading system includes entries, exits, and stops as well as sound cash management strategies.Even the market gurus and famous traders don't make money from their predictions, they make it from proper trading discipline. Over the years, they have learned the discipline to control their risk through money management. They have learned to take the trades as they come, and not forgo a trade because they are second-guessing their system or the market. These are the same practices that you will learn to include in your trading system.

THEY PROFIT FROM SOUND CASH MANAGEMENT & RISK CONTROL

Sound money management and risk control are the keys to being a profitable trader. I will say over and over again, it is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure. I often tell the story of the great fish restaurant that opened up just down the street from my office. It opened with great fanfare and was ranked in the top five restaurants in the city. The food was outstanding. But it only took a little more than a year and this great restaurant was out of business. Why? Because the key to running a good restaurant is not the food. It is cash management and risk control. It is making sure your business is run efficiently, keeping your costs (risk) in control, and managing your staff effectively. If you believe that the taste of the food is what makes a great restaurant, think of how great the food is at your favorite fast food restaurant. But, someday, watch how well that restaurant is run. Just as in the restaurant business, the key to profits in trading is not in the prediction or the indicator, but how well the trading system is designed and executed. The ability to achieve risk control and cash management will make the difference between a successful trader and an unsuccessful trader. If you ever have the opportunity to watch a successful trader, you will see
that they don't worry about where the market is going or about predicting when the next big move will take place. They aren't looking to tweak their indicator. They are worried about their risk on each trade. Is the trade being executed correctly? How much of their total account is at risk? Are the stops in the right place? And so on.

THEY DON'T HAVE SUPERIOR PERFORMANCE NUMBERS

If you want to have some fun, look at the performance of a successful market expert, one who is known for his or her market predictions and trading expertise. You will find that their performance numbers really aren't any better than an average trading system. The percentage of profitable trades, the return on the account, average profit to average loss, number of losing trades in a row.. .all of these trading parameters are within the average trading system performance parameters.Why is this? Because you can't predict where the market will go and when it will move. But if
you use correct system trading disciplines, you will make money whether you try to predict the market or just trade a good system. You might as well save yourself a lot of time, energy, and mental anguish and trade a good system.

-Excerpt from 'Trading as a Business' , next post 'Be In Harmony with the Market'

Trading as a Business

Prologue: Where to Begin

Let's begin with the markets themselves, and with fear and greed. We have all heard the cliches about fear and greed. They rule the markets. In fact, that's all the markets are-- reflection of these emotions. In order to make money trading, you must learn to control your fear and greed.

Overcoming Fear and Greed

We all have to deal with our runaway emotions at various times in life, and these emotions really begin to run away when we trade. Bill Williams' used to say in his seminars that trading was the clearest window into your own personal psychology, clearer than any other endeavor. I think he was right.

UNDERSTANDING THE MARKETS

We give in to our fear when we don't take the next trade because we've just been through a string of losers and fear losing again. We give in to our fear when we put our stop loss too close and get stopped out of a trade without giving the trade enough room to develop. We give in to our fear when we freeze as a trade starts to lose money, and we don't take the exit signal because we're afraid of losing money.
We give in to our greed when we take a profit early, before the regular signal, because we don't want to give back any of the profits. We give in to our greed when we trade more contracts or shares than we normally would because we feel good about this trade.

So we start with the question, "How can we understand the markets?" If we understand how they work, we can get a better understanding of ourselves, and in turn be better traders.

Controlling greed takes discipline. As far as fear, Peter Steidlmayer explained in his work with Market Profile that markets exist for one purpose and one purpose only--they exist to facilitate trade. Facilitating trade means that the markets will do anything they can to get individuals to participate in the market. How they do this is through movement. Markets move up and down searching for buyers and sellers.
The crucial point here is that markets must move for their survival. Understanding this literally changed the way I thought about the markets. Think about it. Markets have to move! This concept is major for anyone who has had to sit through a trend-following system trading in a sideways market. The knowledge that the market has to move eventually changes the way you look at trading. It gives you confidence that the string of losses can't continue indefinitely. It eliminates the fear!

You see, Steidlmayer explained that if a market does not facilitate trade, it will die. If it does not continue to bring traders in, to lure the buyers and sellers, the market will cease to exist. And the prime directive of a market is survival. To keep traders interested, the market has to move. It cannot remain in a small trading range or traders will lose money, become disinterested and leave. Eventually there will be less and less liquidity, traders will stop trading, and the market
will die.

Knowing that a market must facilitate trade and move, or else die, has given me great confidence in trading. When I am forced to trade through quiet markets, I remember this principle. This principle has reduced my fear and increased my confidence immeasurably.

SYSTEM TRADING: MAKING GOOD BUSINESS SENSE

For me, system trading is the only answer to the problem of fear and greed, and it is the only logical way to take advantage of the concept of Market Facilitation.
First, trading a system provides the discipline necessary to begin overcoming fear and greed.

Trading a system that has been back tested on historical, quantifiable data is a major way to inject discipline into your trading and to begin to control your fear and greed. If we think of a trading system as a small business, we can design our business to make money based on historical simulations. Then, our job becomes the implementation of the system rather than the interpretation of the market. If the system loses money and busts, we change the system. It's a matter of good business sense.

Second, if we know that a market must facilitate trade to stay alive, we can devise systems that guarantee that we will always be in for that inevitable big move. If we know that the big move will eventually come, and devise the system accordingly, our task becomes to minimize the drawdown (investment) while we wait. I have never been able to predict when the market was going to facilitate trade and get in for the big move. Instead, I have devised systems to ensure that I will be in for the big ride and my losses will be minimized while I wait. It's just a matter of good business sense.

As a businessman, I have concluded that the only rational way to trade the markets is to trade a system. All of the hocus-pocus about predicting when this market will move, and how far, is just that--Xhocus-pocus. The people that make the big money are the ones who don't try to predict tops and bottoms but who consistently take a little out of the middle. The only logical way to do this consistently is through a well thought-out, well-designed system. It's a matter of good business sense.

THE ADVANTAGE OF TECHNOLOGY

Anyone serious about finding a profitable system should use the latest technology and the best software available. This means learning how to use a computer.
When I started trading, all historical testing had to be done by hand. This was labor intensive and very time consuming. It was necessary to peruse charts visually and record the simulated entries and exits by hand.

For intra-day charts, this process was even more time consuming--the charts had to be printed with the indicators on them and for a significant length of time (several months). If these indicators didn't prove to be profitable, the process had to be repeated for the next month with revised indicators. This process continued month after month. It would sometimes take me three to six months to find a system that would work under current market conditions.

System Writer, followed of course by TradeStation, was the first computer program to help eliminate this labor intensive historical testing. Using TradeStation to do your testing has three distinct benefits.

The first is the amount of time saved. With TradeStation on a fast PC, it's possible to test in 5 to 30 minutes systems that literally used to take hours or days to test by hand. If you place any value on your time, this cost savings alone is impressive.
Second, you can avoid mental mistakes. I have, in both myself and in talking to other researchers, found a propensity for making mistakes when performing manual historical testing.

On many occasions I have found myself changing the system midstream. I have sometimes made the assumption that of course I wouldn't have taken that particular trade, when the reality is I probably would have, or of course I would have moved my stop up, when in reality I probably wouldn't have, and so on.

I can recall many situations where, when testing manually, I got different results on different days with the same data and the same system. I was either in a different frame of mind or in a different emotional state and actually made different decisions on the same data!

A computer, however, cannot trade a system differently tomorrow using the same parameters and data as it is using today. Its logic is consistent and can't play tricks on it. For historical testing, you can avoid this very real problem by using a computer.

Third, you can be more creative. Rather than spend all of your time doing the testing, you can have the computer do the testing and you can spend your time researching new trading ideas.

System development is like any other business. It's very unusual to find a successful business where only one individual has designed the product, does the marketing, is engaged in product development, and runs the machine to produce, package, and ship the product.

It is much easier and less stressful to hire a staff to handle the paperwork and production employees to make the product. The entrepreneur can then spend his or her valuable time in product development and planning the future of the company rather than running day-to-day operations.

As the futures and securities industry continues to grow, more and more traders will enter this business. The competition for profits will continue to increase. For example, in the early '80s it was very easy to make a lot of money day-trading the S&P. I used a simple dual moving average crossover system on 5-minute bar charts. There were proportionately very few intra-day traders with computers that were competing for profits. But since then, with the increase in the number of traders using intra-day charts, these very rudimentary indicators have stopped working. When everyone started using them, the profits dried up. It is much more difficult in today's markets to make the money that was there in the early years. The standard indicators just aren't that effective anymore.

Don't Believe What I Say

The final thing I want to tell you before you delve into this book is not to believe anything I say. Check it out for yourself. It would be a mistake for you to accept anything I say without a complete personal investigation, testing it for yourself and either proving or disproving the principles and techniques that I discuss. Just because I say it doesn't mean that it's true. It's what I believe to be true and has stood the test of time for me. But I urge you to be a skeptic, to think everything through and make sure it makes sense to you. Accept the things that work for you and
reject those that don't. The idea behind this book is to give you enough information so you can be self-sufficient. You shouldn't have to depend on anyone for your trading profits. You can do this yourself.

So we begin with three principles. First, the market must facilitate trade to survive; it must eventually make the big move. Second, you must be state of the art to compete, which means using the latest PC technology and TradeStation. Third, you can do this yourself, and you should not take what anyone says for granted.
You have the tools to be independent--to do this yourself.

Do not believe in anything simply because YOU have heard it.
Do not believe in traditions because they have been handed down for many generations.
Do not believe in anything because it is spoken and rumored by many.
Do not believe in anything simply because it is found written in your books.
Do not believe in anything merely on the authority of your teachers and elders.
But after observation and analysis, when you find that anything agrees with reason... then accept it
and live up to it.
-The Buddha

-Excerpt from Trading as a Business, next post: The Principles of Successful Trading.