This document provides an overview of critical trading approaches and asset allocation strategies. It discusses key concepts like asset allocation, growth vs value vs momentum investing, portfolio design and analysis, and guidelines for dealing with losses. The document also covers related topics such as venture capital, IPOs, stock selection processes, and general rules of investing.

1. Critical Trading Approaches
“It takes 20 years to build a reputation and five
minutes to ruin it. If you think about that, you’ll do
things differently”.
Warren Buffett

2. Index
1
Asset Allocation
2
Venture Capitalist and the IPO
3
The Selection Process
4
Designing your own portfolio
5
Portfolio Analysis
6
Dealing with loses
7
Rules of the trade

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Asset Allocation
• Term that describes the
diversification of your
investment dollars in order to
mitigate risk, as well as, take
advantage of market cycles
and trends
• One of the most important concepts in investing is asset
allocation. Once you have determined your time horizon
and the risk tolerances you can live with, it’s time to
determine what sector or group of stocks is attracting the
most investment dollars

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Asset Allocation
– asset allocation: 30 + years to retirement
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% aggressive/small cap – 25%
% growth / large cap – 25%
% international – 20%
% bonds – 15%
% cash – 15%
– asset allocation: 20 + years
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% aggressive/small cap – 25%
% growth / large cap – 30%
% international – 15%
% bonds – 15%
% cash – 15%

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Asset Allocation
– asset allocation: 10 + years
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% aggressive/small cap – 20%
% growth / large cap – 30%
% international – 15%
% bonds – 20%
% cash – 15%
– asset allocation: retired
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% aggressive/small cap – 5%
% growth / large cap – 30%
% international – 5%
% bonds – 50%
% cash – 10%

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Asset Allocation
• Volume increases: helps determine which sectors are on the
move (www.equitytrader.com)
• Life cycle funds: funds that are monitored (age and risk
tolerance)
– invests money as a lump sum or monthly savings into strategic
portfolios that take into account interest rates, bull and bear
markets, big-and small-cap stocks, bonds and cash
– problem is that these funds are too diversified to be effective
– too much diversification means being in a good sector and a bad
sector at the same time, the two performances cancelling each
other out

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Asset Allocation
• Age = under 30
– investment position: lump sum to invest
• 60% aggressive growth fund / 30% moderate or big cap growth fund
• rest in cash
– investment position: no funds available
• save on a monthly deposit plan with aggressive growth fund
• investing once a month, dollar-cost averaging
– when the market is high, you buy fewer shares
– when the market is low, you buy more shares
– your investment amount is constant
– trick is not the rate of return , it is the number of shares you own
– every uptick: more cash, downtick: buying opportunity

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Asset Allocation
• Age = 35 to 45
– investment position: lump sum to invest
• keep 10 % cash
• split remaining 90% into two growth funds, preferably in two
different fund families
• 2 funds, 2 families spreads the risk
– investment position: no funds available
• if you start from scratch, get aggressive, but not stupid
• invest in aggressive fund ($2K), same amount into a less aggressive
growth fund
• when you have done that, keep splitting your deposits between the
two as long as you can

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Asset Allocation
• Age = over 45
– investment position: lump sum to invest
• 60% growth fund / 35% reputable bond fund (reinvest
dividends)
• keep the rest in cash/keep saving
– investment position: no funds available
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•
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need a killer offense and an even better defense
each month’s deposit in an aggressive growth fund
save a minimum of 20% of your gross income
let the money that earns interest earn more interest
Benjamin Franklin called compound interest one of the
greatest inventions ever (which one would you choose
$us. 500,000 vs. 1 cent a day for 31 days)

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Asset Allocation
• Trends on the market:
– identifying the general trend of the
market is an important factor every investor
needs to determine
– not enough to just review the prices of
some stocks you are interested
– market trends have life spans marked
by a beginning, midlife and an end
– watch market averages a.k.a stock indexes
(http://money.cnn.com/data/us_markets/)

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Asset Allocation
• Stock Indexes:
– each index supplies vital
information as to the nature
of each day’s trading
– by watching them you can
get a feel for the broad
market’s performance
“Its better to be out of the market wishing you were
in, than to be in the market, wishing you were out”

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Asset Allocation
• Stock Indexes:
• Dow Jones Industrial Average($INDU)
– represents only 30 stocks
• Nasdaq Composite ($COMP)
– all domestic and foreign listed on Nasdaq exchange
• S&P 500 ($SPX)
– tracks the movement of 500 companies
• Russell 2000 ($RUT)
• NYSE Composite ($NYA)
• Dow Utilities ($DJU)

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Asset Allocation
• Market Action:
– 3 out of 4 stocks follow the general trend of the market, thus
assessing overall market action on day to day basis is key
– moving averages: (www.quote.com)
• versatile technical indicator used to track price changes using
time lengths
• basic method of determining performance: review a price
chart
• prices plotted every day with volume to create a visual picture
of the stock movement
• 50 day moving average (50 DMA): take the last 50 days’ closing
prices on either a stock or index – add them and divide by 50,
each day the oldest price is dropped and add the newest

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Asset Allocation
• Market Action:
– bull market: Many an optimist has become
rich by buying
out a pessimist.” Robert G. Allen
• bar graph of daily prices are above 200 day moving average
• interest rates are steady or declining
• unemployment numbers are increasing
• inflation steady or dropping
• earnings increases compared to same quarter last year
• advance/decline line is clearly positive (more winners than losers)
• market closes at high for the day
• strong volume on up days – rallies for several days in a row
• trend line is clearly positive
• pessimism still exists (fear still exists)

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Asset Allocation
• Market Action:
– bear market:
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bar graph of daily prices are below 200-day moving average
interest rates are increasing
inflation is on the rise
earnings are declining when compared to last year
advance/decline line is negative (more losers than winners)
market sells off toward the close or at the lows for the day
weak volume on up days, big volume on down days (selling-off)
trend line is clearly negative
optimism is still clearly evident (greed still exists)

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Asset Allocation
• Market Action:
– signal to buy or sell occurs when a shorter average crosses
a longer one

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Asset Allocation
• Market Action:
– a stock will bounce or rise again when it reaches the 50-day
moving average (investors feel crossover confirms the
support level and once again buy the stock)
• support level – historical price level at which falling prices
stop falling
– on the other hand the stock may continue to sell off if the
50-DMA drops below the 200-DMA (in this case, the sell off
sends the stock down sharply in a no confidence vote)
• the 50-DMA serves as a resistance point instead
• resistance level – historical price level at which rising prices
have a hard time breaking through the upside

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Asset Allocation
• Trading Approaches: (growth / value / momentum)
– growth investing: a relatively new stock that continues to
show healthy expansion and strong earnings
• invests its profits rather than providing dividends
• earnings are growing more rapidly than the average
• develop new products and services
• usually priced higher (terms of P/E ratios) than value
stocks
• as long as earnings grow, investors assume the price of
the stock will grow as well

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Asset Allocation
• Trading Approaches: (growth / value / momentum)
– value investing: investor concerned with a company’s
tangible assets and not concerned with future earning
prospects
• value stock signifies bargain because stock appears to be
priced below its real worth
• value investors look to a company’s balance sheet
• finding value means discovering something others have failed
to see that provides hidden value to the company
• primary objective of a value investor is to use fundamental
analysis to buy a company for less than what the investor
thinks it is really worth

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Asset Allocation
• Trading Approaches: (growth / value / momentum)
– momentum investing: investor is technically oriented than
value investors (technical analysis)
• market continues in same direction for a certain time frame,
the market is said to have momentum
• utilizes price and volume statistics for predicting the strength
or weakness of a current market
• concerned with the stock’s price pattern rather than the
company’s earnings, (P/E) ratio or other
• shorter term and looks for results immediately
• look for overbought or oversold stocks: locate turning points
• momentum charts and rate of change (ROC) can help initiate
momentum investing

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Asset Allocation
• Trading Approaches: (growth / value / momentum)
– momentum investing:
• ROC: makes directs comparisons between current and past
prices on a continual basis
• oscillators: indicators used to identify stocks and options with
overbought or oversold prices that may trigger a trend reversal
– the trick to momentum investing is being able to anticipate
when the primary trend is going to reverse, so the investor
can get out of the position profitably

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Venture Capital and the IPO
• business is unproven, bank is unlikely
to lend money to a new concern
without substantial security
• many business turn to VC’s (Venture
Capitalists), because new businesses
are considered high risk investments
• VC will invest in stages as more
capital is needed and certain
benchmarks are achieved

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Venture Capital and the IPO
– each stage brings increasing percentages levels of
equity to the VC
– VC’s have to have a way to convert their investments
back into cash – this is usually done through some sort
of exit strategy – most commonly an initial public
offering (IPO) or some merger

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Venture Capital and the IPO
– IPO is the first time that shares are made available to the
public
– before the offering, the company has to comply with a
wide range of rules and regulations from the SEC
(Prospectus)
• prospectus : a formal written
document that describes the
plan for a proposed business
enterprise, that investors need
to make an investment decision

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Venture Capital and the IPO
– IPO is a liquidity event for the initial investor
– determining initial sales price for an IPO is
an art and a science
– nearly impossible to tell how reasonable
the initial price is beforehand
– pre-IPO hype creates a huge demand
for shares
– sometimes the price stays higher than the
IPO price, other times it sinks to never
recover
– very aggressive game

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The Selection Process
• many ways to select a stock from the
obvious to the balance sheet
– basics any buyer wants to see before
investing in stock:
• market sector it is in and what is the
competition like?
• how entrepreneurial minded is the
management?
– Apple/Steve Jobs (turned sinking ship)
– GE / Jack Welch (mature company into a
growth machine)

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The Selection Process
– do you understand what they do?
• high tech companies attracted and burned tons of
investors, who bought anything with a dot-com
– focus in a few sectors
• trying to learn about the entire market is virtually
impossible
– find out what the experts think
• brokerage’s firm research
– www.zacks.com

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Designing Your Own Portfolio
• personal choice is the landmark
of portfolio design
– create a hypothetical example with
3 stocks:
• growth and income –
telecommunications - AT&T
(NYSE:T)
• growth only (no income) – coffee
company - Starbucks
(Nasdaq:SBUX)
• aggressive growth – newly formed
co’s. – Facebook (Nasdaq:FB)

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Portfolio Analysis
• method for keeping track of portfolio is subjective:
adhering to objectives and risk tolerance is one of
the keys to success
– changes in valuation can skew this balance to a more
aggressive one weighting than originally planned
– example:
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GM $72 x 500 shares = $36,000- 80% of portfolio
RMBS $18 x 500 shares = $9,000 – 20% of portfolio
GM goes up to $74 and RMBS goes up to $73
> GM = 37,000 and RMBS = $36,500 for a 50% / 50% portfolio
(number of shares unchanged)
• aggressive portfolio and time horizon will define how you
rebalance it

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Portfolio Analysis
– beta: a stock volatility is
measured against the overall
market
• if it is more volatile than the Dow –
beta greater than 1.0
• if it is less volatile than the Dow –
beta smaller than 1.0
– besides price, it makes sense to
monitor the sectors your stocks
are in – Value Line web site
(www.valueline.com)

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Dealing with Losses
• no matter how careful your investment choices
are, you are still going to pick a loser now and again
– Investor Business Daily’s William O’Neil: recommends selling
a stock once you’ve incurred a 7% to 8% decline from the
purchase price
– the market will humble you
• you’ll sell too soon and the stock will continue on to
make a monster-sized move (British Energy / own
experience)
• you’ll buy at the top and take a painful, embarrassing loss

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Dealing with Losses
– you won’t buy, trying to
outsmart the market and it will
leave the station without you
– if you invest long enough, these
circumstances will beset you
– “cut your looses early”
– preservation of capital: most
important thing you can master

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Dealing with Losses
– control your loses:
• stock has lost value from the time
purchased
• how has the overall market perform
during the same time?
• if market has done better than your
stock, do not double down (to buy more
to lower your price basis – tax
implications)
• know your parameters before you buy a
stock – if it drops this much, I am selling

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Rules of the Trade
• If you are a novice, these rules might help you to stay
in the game long enough to get good at it
– stay away from chat rooms
– avoid stock tips from magazines
(top 10 stocks to own
today, how about tomorrow?)
– use education not magazines –
read Barron’s, FT, WSJ
– be selective in the counsel you
seek – use a few people to
bounce your ideas

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Rules of the Trade
– know your competition
– predetermine your exit point prior to
opening a trade – maximum loss
– use caution when you average down
– be a gracious loser and take your looses easily – never try to
justify a bad trade by trying to convince yourself it will turn
into a winner – loosing trade is to be viewed as overhead
– don’t fight the trend, don’t get sucked into believing you are
smarter than the market – costly mistake
– missed opportunities exist only in your mind – like a
“trufi”, another will come

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Rules of the Trade
– the human side of every person is the worst enemy to
successful trading – fear and greed can not be avoided, but
they can be minimized by planning your trade and trading
your plan
– never risk more than you an afford to loose –heart of low
risk trading
– become a proficient computer geek

38. THANK YOU VERY MUCH