Ninja trading system

By Tom DeGrace

@Tom DeGrace www.stockpickssystem.com Page 1 of 22

Contents

1. Introduction……………………………………….…………………….3

2. Stock Market History………………………….……………………….4

3. Investment Types…………………….………………………………...5

4. Famous Investors Pave the Way For System Investing…………. 11

5. Investing Rules to Avoid Getting Yourself in Trouble………..….16

6. Nifty 50……………………………………….…………………………..19

7. Trading Secrets & Clues …….…………………………………….…..20


Introduction

Hi there,

This is Tom DeGrace from www.stockpickssystem.com.

I started a blog to help people become better investors in the stock
market.

My background is that I have over 10 years experience in investing
and also specialize in mathematical formulas, which I learned from
my years as a computer programmer.

Check out my blog here www.stockpickssystem.com
Follow me on facebook www.facebook.com/StockPicksSystem
Follow me on Twitter www.twitter.com/StockPickSystem

Copyright & Disclaimer
All rights reserved. No part of this publication may be reproduced or transmitted in any form or
by any means, mechanical or electronic, including photocopying and recording, or by any
information storage and retrieval system, without permission in writing from the publisher.

This publication is designed to provide accurate and authoritative information in regard to the
subject matter covered. The information herein is based on the experience and opinion of the
author/publisher. The author/publisher and his distributors and associates are not accountable
for individual outcomes as a result of the information presented herein. The publishers disclaim
any personal liability, loss or risk incurred as a result of the use of any information or advice
contained herein, either directly or indirectly.


Stock Market History

If you have watched the stock market for long period of time, you
realize that it can be very unpredictable. One day bubbles flourish,
things could get any better and then the next day it seem like the
sky is falling. Wouldn't it be simpler to invest if there was some sort
of system that would take the guessing out of investing?

Now I'm not going to kid you, there is no foolproof system out
there. However in creating my system what I did is put the
mathematical odds that turn the tables hugely in our favor.
Before I get into how the system works, lets take a look back at
some historical data for the stock market.

Stock Market Return from 1900 to 2000


Just $1,000 invested in 1900 would be worth over $19.8 million by
the end of 1999.

At 15% average return per year, it only takes 30 years to turn
$15,000 to $1 million. So as we can see history is on our side when
it comes to overall market returns.

Investment Types

Investment types are investments such as cash, stocks,
commodities, collectibles, real estate and business. In choosing
which Investment type fits into your own personal investment goals
can have a major impact on your retirement plan. Each investment
type comes with its own risks and rewards. Here we try and talk
about the major types of investments that each has a global market
value of over 1 trillion dollars.

Investment Type Cash
Cash investments generally refers to investments where cash is
invested usually for a fixed interest rate return. The advantage with
cash investments is that there is relativity low risk compared to
investing in assets. The differences in which type of cash
investments includes the rate of return received the liquidity of the
investment. Cash investment types include CD’s, bonds, money
markets and FOREX investing. Government bonds, CD’s and money
markets carry the lowest risk and pay usually a fixed amount over a
period of time. Mortgage backed securities and corporate bonds


have a higher risk of default in which you could lose a substantial
amount if the secured asset loses value. FOREX investing is buying
currency on the foreign exchange markets which is done either to
speculate that a currency may go up or to hedge in case your
country’s currency declines.

Risks
A risk of cash investments is inflation in which case your cash loses
its buying power as inflation rises. There is also a small risk that a
currency could collapse and lose a huge amount of value over a
short period of time.

Investment Type Stocks
Stock investing can includes investing in things such as stocks &
options. You will need an online brokerage account in order to buy
& sell stocks on the stock market. As a shareholder of a company,
you in effect own a piece of that company and benefit from the
company increasing in value. The value of company goes up as the
company grows both sales and earnings. Generally as the economy
grows, company earnings increase and the stock market goes up. As
the economy falls and enters a recession, the stock market goes
down.

When determining the value of one stock over another, most look at
the P/E ratio (price to earnings), growth and its tangible book value.
A common belief is that a stock trading at a fair market value is
trading at P/E ratio that is even or less than its growth rate. Example
if Microsoft was growing at 15% per year, then a P/E of 15 or less is


warranted. The exception to this rule is that stocks with even no
growth usually trade at least 6-10 times earnings. This is because
the average inflation rate is 4% and stocks usually trade at least 2x
the inflation rate. Other things you might want to consider in
choosing stocks are growth potential, market leadership, earnings
to debt ratio, competition and stability of earnings. You can pick
your own individual stocks and or buy a basket of stocks in an ETF
or mutual fund. Some investors also may buy a fund that tracks a
popular index such as the DJIA, NASDAQ or the S&P 500.

Risks
A big risk to stock investing is that if a company goes bankrupt, the
stock value will go to zero and you the investor will end up with
nothing and the remaining company assets are sold with the
proceeds going to bondholders. If the company emerges from
bankruptcy, the bondholders then become the new owners of the
stock. Diversification can help shield investors from losses if one
company’s stock goes bankrupt. No Company in history has ever
gone bankrupt that has had no debt so buying companies with low
or no debt is a good idea. In a single year an overall stock index
such as the Dow or S&P 500 can lose over 50% of its value.
Though the benefit to owning stocks is that since 1900 the stock
market has produced an average return of 10% per year. Also by
owning stocks, you are hedging against inflation which can erode
the value of money over time.


Investment Type Commodities
Commodities is a physical substance that can include energy, food
and metals. Commodities tend to go up in times of high inflation
and when the economy is growing rapidly. Commodities can also go
up or down inversely to supply and demand when investors
speculate to future trends or as different commodities go in and out
of favor. Since commodities can move up rapidly sometimes over
50% in a single year for some, timing can be essential for capturing
short-term gains. Gold is a very popular commodity that people
invest in. Gold however isn’t used much in manufacturing and only a
limited amount of the gold produced is used in jewelry.

Risks
A large part of price movements of gold is driven solely by the
demand of investors. You can invest in commodities yourself by
buying an ETF, hedge or mutual fund. You can also buy futures to
speculate on the future price movements of commodities.

Investment Type Collectibles
Collectibles can include almost anything of value from baseball
cards to antiques to paintings. A collectible is a tangible asset which
value varies due to the demand by collectors. The less supply of the
individual collectable, the more value it has. So to protect from
oversupply, one would need to make sure the creator of the asset
whether an artist or manufacturer is no longer producing copies or
variants of the collectable.


Risks
Some risks while owning a collectable is that it could become
damaged over the course of time which could lower the value. Also
there is a risk of the item being stolen so you would need to keep it
in a safe place or have insurance to cover the item. When selling a
collectable, it may not be easy to find a buyer for niche collectibles
and auction houses can charge fees as high as 20% to sell the item
for you. Investing in collectibles can help hedge you against
inflation.

Investment Type Real Estate
Real estate investing is investing in things such as land, residential
and commercial property. Land investing is based on the
fundamental that there is only so much land available and demand
will continue to increase over time. However while holding land
there isn’t any cash being generated and you will still have to pay
for the taxes every year.

A common real estate investment is rental properties. The
investment strategy here is to rent the property to a tenant for a
fixed price hopefully covering the cost to hold the property. The
major benefit to investing real estate is that you can earn fixed rate
return often exceeding the return rate of bonds while at the same
time protecting yourself from inflation.

Risks
The risk with real estate investing is that the value of real estate
could fall or there could be some event that would happen that


would cause you to invest money into the property to keep it
functional such as the foundation cracking or a roof leaking. Also
owning real estate may require some of your personal time that
could be spent doing other things. By using leverage, you can
increase your returns however if you can’t afford to make your
mortgage payments, then you would lose all your equity if the bank
were to foreclose on the property.

There is an option to own a REIT (Real Estate Investment Trust)
which by law pays out 90% of it’s earnings to investors in the form
of dividends. A REIT is as easy to buy as a stock though as with
stocks, the value can move up and down with investor demand.

Investment Type Business
Rather you are stating your own business or investing in someone
else’s business, this type of investment has its own risks and
rewards. The different ways to invest in a business may include
starting your own business, buying a piece of some else’s business
or owning a fund that specializes in investing in new businesses
such as venture capital funds. When starting your own business,
there likely needs to be both time and money invested up front
before you are ready to sell a product or service to customers.

Risks
You may lose 100% of the money invested if you can’t make a profit
above what your fixed labor, marketing and operating costs are.
When owning a piece of someone else’s business, you may not see a


return on your investment unless there is either an agreement to
provide dividends or if the company goes public.
The major benefit to owning a business is that the returns can be
almost unlimited. There are many cases of an $10,000 investment
turning into over 1 million dollars in less than 10yr time. A business
is also a hedge against inflation.

Summary
As we see, there are a large variety of investment types to choose
from that has its risks and rewards. . The greater the return, the
greater the risk. You need to decide what your long-term goals are
in order to which investment type you want.

So Why Choose Stocks as an Investment Type?

Well for one thing stocks have outperformed all other asset classes.
To get rich over the long-term, your returns on investment need to
beat the #1 enemy of wealth building, INFLATION. If you are earning
a 4% yield on a 10yr bond and the inflation rate is 3% on average,
then you are only netting a 1% per year return. At that rate your
investing efforts would be similar to a dog chasing its own tail, a lot
of effort and getting nowhere.

Famous Investors Pave the Way for System Investing

Benjamin Graham was wiped out of all his assets during the Great
depression of 1929.Inspite of this, the partnership firm survived by


selling out all the personal assets of partners. Ben recollected his
strength and was back on his feet. During these ups and downs he
had learnt some valuable lessons. He shared these with the world
through the books he wrote. Simultaneously he took up lecturing in
Columbia University which was a partnership that continued for a
very long time.

In 1934, He along with David Dodd came up with the book, Security
Analysis. It is considered as the bible for those who are seriously
interested in investing since the day it has been penned. He came
up with his second book in 1949 The Intelligent Investor, which
Warren Buffet the second richest man in the world considers as the
best book ever written on investment. He got his first lesson of
investment from this book.

The partnership between Graham and Newman continued till
1956.Their firm never gave losses to its investors and earned an
annual return of 17%.He had seen business and investment markets
travel from the depths of Depression to the heights of recovery. To
his readers and keen learners he has left an incomparable legacy in
the form of his books and its theories. Graham retired from writing
and lecturing at Columbia in 1956. Benjamin Graham died in 1976,
with the reputation of being the “Father of investing(value)”.

Benjamin Graham coined the idea of Mr. Market. As per Graham, Mr.
Market is a lunatic partner in your firm who offers to sell his share
and buy your share in the business daily offering some price. That
price depends on his mood that may fluctuate, so one day


increasing the price and the other day decreasing it or not offering
anything at all. This rise and fall in prices gives the investor an
opportunity to purchase and sell the shares. If you are a careful and
a rational investor then your decisions shall not be based on the
mood of Mr. Market. The lesson behind Mr. Market parable is
obvious. The investor has to make his own decision based on the
net worth of investment and not price fluctuation. He has
summarized this very aptly “Basically, price fluctuations have only
one significant meaning for the true investor. They provide him with
an opportunity to buy wisely when prices fall sharply and sell wisely
when they advance a great deal. At other times he will do better if
he forgets about the stock market.”

In his words “An investment operation is one which, upon thorough
analysis, promises safety of principal and an adequate return.
Operations not meeting these requirements are speculative.” Before
making any investment decision, He studied the Balance sheet of the
company and its history of past 7 years. His fascination for numbers
led him to come up with the “Theory of Value investing” in 1934. It
is based on the assumption that two values are attached to a
company. The first is the market price – the value of the company
on the stock exchange. The second is a company’s business value.
Margin of safety is the difference between the market value and the
business value. The stocks should be sold when the market price
gets close to the business value. This concept became very popular
and is relevant even in today’s time.


He also likes companies that pay out dividends and are in good
financial shape. Graham looked for companies that are trading
below their historical P/E average and trading below 1.2 times book
value. Benjamin always tried to buy stocks that were trading at a
discount to their Net Current Asset Value. He suggested buying
stocks at 2/3rd of Companies net value and selling them as they
approach their net current assets. Clearly it should suit the investor
to buy shares when “Mr. Market” displays more insanity then
otherwise. By religiously following the Graham’s principles, its no
surprise that Warren Buffett has become second richest person in
the world.

Warren Buffet

Warren Buffett is the most successful investors our living times and
is one of the very few billionaires who have amassed wealth majorly
through investing in stocks. Warren Buffett is bestowed with titles
like “The Oracle of Omaha” and the “Sage of Omaha”. Warren Buffett
continues to shine bright as an Investor, Businessman and
Philanthropist. With a net worth of US $37 billion in 2009, Warren
Edward Buffett is ranked as the second richest man in the world,
just after his good friend Bill Gates who had the net worth of $40
Billion.

Warren Buffett is known as the Father of Value Investing and the
Investment Industry takes inspiration from his unique style of
investing. According to Buffett, the essence of value investing is to
buy stocks at less than their intrinsic value giving an investor fair


amount of Margin of Safety. Warren Buffet set a goal never to lose
money irrespective of the market conditions.

He is always prepared to take calculated risks as he always does the
planning beforehand. According to Warren Buffett “Noah did not
start building the Ark when it was raining”. Buffett prefers to invest
in simple and understandable businesses, checks out a company’s
track record for ROE (Return on Equity) and tries to predict the
growth of the company in next ten years.

He prefers to invest in companies that generate high ROE without
much debt. One of his principles was to invest in good companies
when they have a temporary problem or when the stock market is
low and creating bargain prices for outstanding businesses.

He does not care about the switching nature of the stock market.
For e.g. – the stock of the Coca Cola Company had gone up fivefold
the prior six years and over five-hundred fold the previous sixty
years when Buffett bought stocks worth $1 billion in Coca Cola. He
earned four times the money he invested and the profit still
continues to come in. In 1976 he purchased a very important
position in GEICO when the stock had fallen down from $61 to $2
and the basic opinion was that the stock was definitely going to
zero.

Warren Buffett avoided Pharma or Dot Com Companies for he never
invests in business that he is unable to understand or falls under his
circle of competence. He says that an investor should carefully study


the facts and figures, value the company’s future outlook, and
purchase when everything is in their favor. They should not try to
predict the direction of the stock market, the economy, interest
rates, or elections. The investors should concentrate only on a few
holdings. This way, the investors can be more careful and thorough
in their research. And it helps to eliminate the risk factor.

The Buy and Hold Investment strategy of Buffett has been
appreciated by investors all over. The concept is to buy an
outstanding business and hold it for years. This helps to achieve
returns which are commensurate to the economics of Business.

Warren Buffett prefers to invest in companies which can provide
their own management. Berkshire tries to work with the same
management which was there before its purchase. The only area
which is to the concern of Buffett is capital allocation and
compensation of top managers. Otherwise managers are free to
operate as they like. But Buffett also welcomes any matter on
business environment which his managers want to discuss with him.
It is indeed the strength of Buffett’s Principles that makes him so
successful in the investment industry.

Investing Rules to Avoid Getting Yourself in Trouble

Rule #1 NO CRUSHING DEBT!!!!
I have seen it a million times, an investor sees a once great company
trading at what appears to be a bargain price, so he buys the stock.


The company is often very well known, such as At&T, AOL, Xerox
and Tyco, and it may even still be growing both earnings and
revenue.

But these are companies that are at risk, and they will have to
continue to sell off assets just to stay afloat. And don’t expect them
to get anywhere near the market value in a distress sale. And, even
worse, in bankruptcy these assets go for only 20 cents on the dollar.
After a bankruptcy, typically all common shareholders receive
nothing and ownership of the company goes to the debt holders.
The debt holders can decide either to sell off assets to repay debt or
to take the company public again.

If you can add 1+2=3 then you should be able to read a balance
sheet. And it doesn’t hurt to check the SEC reports such as the 10-
Q. The fact is that no company with zero debt has ever gone
bankrupt.

The general rule we like to use is to buy stocks that have their
interest expense to income ratio at less than 25%.

Rule #2 Margin Trading is a Fools Game
The key to successful investing is having available cash to choose
the next best investing opportunity that comes along. When you get
into debt, you begin to lose your options and get trapped into your
original investments. Remember that all stocks can crash, and the
odds are, if you are high in margin, you will soon have a margin call
in which you could lose 75% of your money. As a general rule,


buying stock on margin is bad money management. The fact is that
90% of margins players get margined out. The more leveraged you
are, the greater chance you have of ruin.

Rule #3 Money Management
One of the important things to learn about investing is how to
manage risk. Anyone who has no respect for risk is on the road to
complete financial disaster. You often hear these great stories about
the guy who turned a small amount of money into a million dollars.
But what you don’t hear is that, years down the road, these same
people are often wiped out as a result of not respecting the risks
that go with investing. Learning how to pick investments that can
appreciate in both good and bad times is the key to successful
investing. Keep your reward-to-risk ratio at a minimum of 2:1, and
preferably 3:1 or higher. In other words, if you are risking 1 point
on each trade, you should be making, on average, at least 2 points.

Rule #4 Select High Quality Companies
This means no OTC stocks, no IPO's and small cap stocks. I want
companies that are proven market leaders. I exclusively only pick
companies that are trading in either the S&P 500 or S&P 400. The
only exception is that I will sometimes pick an international large
cap stock only if it trades on the U.S. exchange and it has a large %
of their sales coming from the U.S. Example of these stocks are
Sony, Nokia and HSBC.


Rule #5 Don’t try to hit the home run on every pick
Everyone wants to be the one to have their portfolio shoot up 200%
in a short amount of time. Fact is, there is no way to achieve this
without taking on severe risk. Have you ever heard of “The Tortoise
and the Hare”? The rabbit has more speed, but the turtle has more
determination, stamina, and consistency. The rabbit may get a fast
start, but the turtle wins the race.

The Nifty 50
Back some time ago someone came with the original Nifty 50. It was
a group of stocks that were market leaders as well as brand leaders
for their sector. These stocks did outperform the general market for
long period of time. The principle is if you pick you good companies
to begin with, then you will have an advantage over everyone else.

The Original Nifty 50

American Express J.C. Penney
American Home Products Johnson & Johnson
AMP Inc. Louisiana Land and Exploration
Anheuser-Busch Lubrizol
Avon Products Minnesota Mining and
Baxter International Manufacturing (3M)
Black & Decker McDonald’s
Bristol-Myers Merck & Co.
Burroughs Corporation MGIC Investment Corporation
American Hospital Supply Corp. PepsiCo
Chesebrough-Ponds Pfizer


The Coca-Cola Company Philip Morris Cos.
Digital Equipment Corporation Polaroid
Dow Chemical Procter & Gamble
Eastman Kodak Revlon
Eli Lilly and Company Schering Plough
Emery Air Freight Joe Schlitz Brewing
First National City Bank Schlumberger
General Electric Sears, Roebuck and Company
Gillette Simplicity Pattern
Halliburton Squibb
Heublein Brewing Company S.S. Kresge
IBM Texas Instruments
International Flavors and Upjohn
Fragrances The Walt Disney Company
International Telephone and Xerox
Telegraph

Trading Secrets & Clues
The stock market is made up of trillions of dollars of money. What
makes the stock market go or down is simple supply vs demand.
There is a constant battle going on between cash vs assets. When
there is fear in the markets the money moves into cash. When there
is optimism, money goes into assets. Over time inflation takes hold
so there is always a push in the long-run for asset values to climb
higher.


When you look at a stock's chart pattern, you can see these patterns
of peaks and valleys in a stock's price. Often if you buy at the low
point at say the 90 day moving average, you can then make a profit
in short period of time as the rises.

Book value bottom fishing can be very profitable as long you buy
stocks that don't have crushing debt or negative earnings. A private
company's value is anywhere between 4-5 times earnings. A pubic
company's bottom valuation is around 7-10 times earnings. Buying
stocks that a large portion of their current stock's value in book
value can give you some cushion during a market decline. Apple
computer at one point was trading at $12 which was almost their
cash on their books. Had you had bought low, you would have made
a fortune as the stock climbed up.

Often when the stock market is rising or falling, all the news
reporters look for the top story that is behind the move. It's not
always the case that daily news drives the markets. Often its a trend
in which the markets is trending down or up regardless of what
news is about to break. One big clue to which way the markets is
going to move is to look at the 10yr bond yield. When bonds are at
the low end of their moving average, it may signal that the stock
market is about to turn up. When bonds are high, it could mean that
a sell-off is coming soon.


A Little Info About My Blog

The blog I run at www.stockpickssystem.com offers many free
articles on a variety of topics. I also have a membership section that
is based on running an active trading portfolio of 20-30 stocks.
There is special formula that I use help maximize returns on every
single stock pick that is made. I urge you to check it out.

Follow me on Twitter www.twitter.com/StockPickSystem
Follow me on Facebook www.facebook.com/StockPicksSystem


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