TRADING AND INVESTING PROS

UNSTOPPABLE
TREND REPORT

FIVE TOTAL WEALTH

PRINCIPLES TO USE TODAY
(AND EVERY DAY FROM NOW ON)

FOR TIPS MEMBERS

TRADING AND Investors Report
From: Keith Fitz-Gerald
INVESTING PROS For: TIPS Members

Five Total Wealth

Principles to Use Today
(and Every Day from Now on)
Dear Trading and Investing Pros Reader,
Ive talked to thousands of investors over the years who are
absolutely convinced that they need to understand the markets most
complicated nuances to get ahead.

In reality, though, success comes down to just five things that I call
the Total Wealth Principles.

Get em right and you can make more money with less risk while
enjoying a peace of mind that the vast majority of investors will never
have. I know that sounds like a tall order, but its not. Or, at least, it
doesnt have to be.

You see, most investors fight the markets instead of going with the
flow. And in doing so, they doom themselves to pathetic returns that do
nothing but pad Wall Streets pockets.

I want you to understand these five Total Wealth Principles

because they will help you harness the awesome power of the markets
themselves. Then youll have the perspective needed to build the
financial future and, specifically, the profit potential, that you so richly
deserve.

Especially now, when weak economic data is building yet another

wave of panic among the 99% of investors who will never understand
what Im about to share with you.

Here are five Total Wealth principles to invest by and pitfalls to avoid.
 TRADING AND INVESTING PROS Investors Report

Total Wealth Principle No. 1:

Think Long-Term to Harness the Markets
Incredible Upward Bias
I often joke during my presentations around the world that we
are all born with common sense and that its just bred out of us
as adults. Usually that gets a good laugh, especially since weve all
touched the proverbial hot stove at one point or another in our lives
despite knowing better.

Nowhere is that more clear than when it comes to money.

Thats why investors assume that whatever is happening right

now is going to happen in the future. Its also why millions try to
find patterns in random data that they believe are meaningful, while
ignoring the information that actually means something.

Case in point: history. Data show very clearly that the markets
have a tremendous upside bias over time. There are all kinds of
reasons, but really it comes down to the fact that there is a constantly
increasingly supply of money chasing a finite number of stocks. So
prices increase.

If this doesnt make sense, think of it by imagining eggs at the

grocery store. If there are 1,000 eggs and only one shopper, the price
of those eggs will be pretty darn low. But if the situation is reversed
and there are 1,000 people who want the last egg, the price will go
through the roof.

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So why is it that investors panic and do exactly the opposite of what

they should be doing?

Simple because they dont understand what Im telling you:

namely, that capital is an expansive force. By its very nature, capital ties
into the growth of the companies that make up todays markets. Growth
translates into revenue, revenue to earnings, and, ultimately, earnings into
higher share prices.

Ergo, bear markets are not the excuse to run for the hills that
everybody thinks they are. Theyre nothing more than a short-term event
that does not mitigate the larger, longer-term picture.

I realize that runs counter to conventional wisdom, but hear me out.

Even the dot-bomb blowout and the Financial Crisis of 2008 are
nothing more than speedbumps in the grand scheme of things. In fact, if
you had bought a fund tracking the S&P 500 on July 1, 2007 the point
at which it reached an all-time high before the Financial Crisis began
and held those shares, youd still be sitting on total returns of more than
31% today.

To be clear, Im not advocating buy and hold. What I am trying to

demonstrate is that you can buy at an absolute peak and still have double
digit potential if you have the right perspective. Buy and manage is
always a better way to go but thats another Total Wealth Tactic for
another time.
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I want you to understand that periodic downturns are a fact of life.

More to the point, bear markets are normal because what they really
signify is opportunity in the bigger picture.

Buy low and sell high is how the game is most profitably played
especially when you confine your investments to growing companies in
Unstoppable Trends like we do.

Total Wealth Principle No. 2:

Be Mindful of Markets Reversion to the Mean
The second involves a concept called Mean Reversion.

Mean Reversion (in financial terms) states that stocks have an average
rate of return, or movement, that they will deviate from and then return to
over time.

For example, if stock ABC has historically returned 7% on average

over the last 50 years, but it returns 15% this year, traders can reasonably
though not always expect the stocks price to record smaller-than-
average growth the following year, to bring its growth for that period more
in line with its mean return.

Of course, sometimes companies see game changers that enable

the stock to see improved returns that are not just sudden, but sustainable.
That means stocks can experience a breakout (Tesla in 2012, Jazz
Pharmaceuticals in 2009) from which there is no reversion to the old mean
merely the establishment of a new one.

Of course, this works in reverse, too. Stocks can see death blows that
result in an unrecoverable decline. Like RadioShack, Blackberry, or even
Kodak, for instance.

My point is that understanding whether you are above or below the

trend line can tell you a lot about whether short-term market conditions
favor buying or selling.

If youre significantly above trend, the markets favor a retracement

lower. If youre below trend, an upward move.
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It all comes down to perspective.

Speaking of which

Total Wealth Principle No. 3:

Beware of the Market Timers
Understanding the historical returns of the markets and having a
good understanding of whether a correction or bull run is likely should
never be confused with market timing.

People who try to time the market buying when they think the
market has hit a nadir, or selling when they have a feeling it wont get any
higher are wrong a staggering percentage of the time.

Nobel Laureate William Sharpe observed in a 1975 study that a

market-timer would have to be correct 74% of the time to outperform a
simple index fund. SEI Corporation updated Sharpes work in 1992 with
a much longer time frame, dating from 1901 to 1992, and found that
timers would have to be right a staggering 91% of the time.
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 TRADING AND INVESTING PROS Investors Report

But that doesnt stop people from trying and, I might add, with
predictable results. Its no coincidence that DALBAR data shows that the
average investor who tried to time the markets achieved an annualized
return of just 2.53% for the 20 years from 1993 to 2013, in contrast with
the average annual return of 9.02% that the markets generated over the
same time frame.
The bottom line?
People tend to overestimate their ability to predict where the market
will be heading, so they make knee-jerk decisions based on how they feel
about things instead of using cold, hard logic to guide their behavior.
Get emotion out of the equation, quit trying to time things, and youll
be miles ahead of the herd.

Total Wealth Principle No. 4:

Understand Volatility and Black Swan
Events That Shape It
Very few investors understand that volatility has a shape, and an
extremely specific one at that.
Prior to the financial crisis, volatility was modelled around an equal
set of expectations using standard distribution models taught in every
high school statistics class.
Most commonly used for options, the price models are commonly
depicted as a volatility smile that shows you the relationship between
volatility and price.
While a complete discussion is beyond what we can do here in a
single column, what you need to know is that as volatility rises, options
prices rise along with it. In the old days it was a relatively evenly
distributed relationship, as you see above.
However, since October 19, 1987 a day traders refer to as Black
Monday when stock markets around the world crashed and the Dow
lost nearly 22% in a single day, theres been a change.
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Thats because the markets are now viewed as having very small but
permanent odds of a catastrophic failure. This is known as skew, and
makes buying protection more expensive than it theoretically should be,
and makes buying upside cheaper than it appears.

Imagine the volatility smile turned a bit, and youll get what I am
talking about.

Figure 1: Safehaven.com
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This is important even if you dont trade options.

Thats because the skew is indicating that prices can get out of
control on any downward move faster, and the move itself can be more
violent, compared to similar downside moves before 1987.

So, youve always got to have a risk management plan in place ahead
of time.

To me that means some combination of 1) only picking the best

stocks following unstoppable trends, 2) having trailing stops in place at
all times and 3) keeping risk to razor-thin levels. The stuff we walk about
all the time here at Total Wealth.

There are a number of reasons why this is the case, but much of it
has to do with the increasing computerization and indexing most of the
major trading houses engage in today, not to mention the interconnected
nature of our financial markets.

Incidentally, that brings me to

Total Wealth Principle No. 5:

Trade with Wall Streets Big Boys
Not Against Them
The machines are here. The percentage of trades in the U.S. that were
made by algorithmic programs rose from 25% in 2004 to more than 50%
by late 2009, according to Aite Group. Some estimates suggest as much
as 70% of total stock market volume is now machine-driven, with the
heaviest concentrations in the U.S. financial system.

Most investors believe this to be a disadvantage, but I disagree for

the simple reason that you have advantages as an individual investor that
big traders dont.

For instance, you can move in and out of the markets, adjusting
your positions at will in accordance with your specific profit objectives
and risk tolerances. Big traders have no choice but to keep their money
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moving. So theyve got to play games even if they dont want to, and
even if the markets are working against them.

If thats hard to believe, think about it this way. You can buy or sell a
few thousand shares of Microsoft and the markets wont even notice. But
an instructional trader cant just waltz in and buy a few million shares
without other traders noticing and beginning to trade against him.
This is why, for example, a JP Morgan trader named Bruno Iksil
got sideways and cost the company at least $6.2 billion in 2012. Once
competing traders heard he was in trouble, they began to bet against him
and profited even as he lost.
Thats why I recommend using limit orders, trailing stops, and even
options. Its not that I want you to do anything crazy.
Just the opposite, actually.
I want you to understand the big picture, along with all the tools
at your disposal, so you can protect yourself from Wall Streets
manipulation and beat them at their own game by exploiting trading
conditions to your benefit not theirs.
The way I see it, investing is a thinking game, and the more
strategically you approach it the more successful you will be, especially
if you keep these five Total Wealth principles in mind.
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To that end, Ill be back with a look at several of the most commonly
used order types you can put to work immediately.

Until next time,

Keith Fitz-Gerald

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