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Ninja trading system


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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.

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Ninja trading system

  1. 1. By Tom DeGrace@Tom DeGrace Page 1 of 22
  2. 2. Contents1. Introduction……………………………………….…………………….32. Stock Market History………………………….……………………….43. Investment Types…………………….………………………………...54. Famous Investors Pave the Way For System Investing…………. 115. Investing Rules to Avoid Getting Yourself in Trouble………..….166. Nifty 50……………………………………….…………………………..197. Trading Secrets & Clues …….…………………………………….…..20 @Tom DeGrace Page 2 of 22
  3. 3. IntroductionHi there,This is Tom DeGrace from started a blog to help people become better investors in the stockmarket.My background is that I have over 10 years experience in investingand also specialize in mathematical formulas, which I learned frommy years as a computer programmer.Check out my blog here www.stockpickssystem.comFollow me on facebook me on Twitter & DisclaimerAll rights reserved. No part of this publication may be reproduced or transmitted in any form orby any means, mechanical or electronic, including photocopying and recording, or by anyinformation storage and retrieval system, without permission in writing from the publisher.This publication is designed to provide accurate and authoritative information in regard to thesubject matter covered. The information herein is based on the experience and opinion of theauthor/publisher. The author/publisher and his distributors and associates are not accountablefor individual outcomes as a result of the information presented herein. The publishers disclaimany personal liability, loss or risk incurred as a result of the use of any information or advicecontained herein, either directly or indirectly. @Tom DeGrace Page 3 of 22
  4. 4. Stock Market HistoryIf you have watched the stock market for long period of time, yourealize that it can be very unpredictable. One day bubbles flourish,things could get any better and then the next day it seem like thesky is falling. Wouldnt it be simpler to invest if there was some sortof system that would take the guessing out of investing?Now Im not going to kid you, there is no foolproof system outthere. However in creating my system what I did is put themathematical odds that turn the tables hugely in our favor.Before I get into how the system works, lets take a look back atsome historical data for the stock market.Stock Market Return from 1900 to 2000 @Tom DeGrace Page 4 of 22
  5. 5. Just $1,000 invested in 1900 would be worth over $19.8 million bythe 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 whenit comes to overall market returns.Investment TypesInvestment types are investments such as cash, stocks,commodities, collectibles, real estate and business. In choosingwhich Investment type fits into your own personal investment goalscan have a major impact on your retirement plan. Each investmenttype comes with its own risks and rewards. Here we try and talkabout the major types of investments that each has a global marketvalue of over 1 trillion dollars.Investment Type CashCash investments generally refers to investments where cash isinvested usually for a fixed interest rate return. The advantage withcash investments is that there is relativity low risk compared toinvesting in assets. The differences in which type of cashinvestments includes the rate of return received the liquidity of theinvestment. Cash investment types include CD’s, bonds, moneymarkets and FOREX investing. Government bonds, CD’s and moneymarkets carry the lowest risk and pay usually a fixed amount over aperiod of time. Mortgage backed securities and corporate bonds @Tom DeGrace Page 5 of 22
  6. 6. have a higher risk of default in which you could lose a substantialamount if the secured asset loses value. FOREX investing is buyingcurrency on the foreign exchange markets which is done either tospeculate that a currency may go up or to hedge in case yourcountry’s currency declines.RisksA risk of cash investments is inflation in which case your cash losesits buying power as inflation rises. There is also a small risk that acurrency could collapse and lose a huge amount of value over ashort period of time.Investment Type StocksStock 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 thecompany increasing in value. The value of company goes up as thecompany grows both sales and earnings. Generally as the economygrows, company earnings increase and the stock market goes up. Asthe economy falls and enters a recession, the stock market goesdown.When determining the value of one stock over another, most look atthe 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 istrading at P/E ratio that is even or less than its growth rate. Exampleif Microsoft was growing at 15% per year, then a P/E of 15 or less is @Tom DeGrace Page 6 of 22
  7. 7. warranted. The exception to this rule is that stocks with even nogrowth usually trade at least 6-10 times earnings. This is becausethe average inflation rate is 4% and stocks usually trade at least 2xthe inflation rate. Other things you might want to consider inchoosing stocks are growth potential, market leadership, earningsto debt ratio, competition and stability of earnings. You can pickyour own individual stocks and or buy a basket of stocks in an ETFor mutual fund. Some investors also may buy a fund that tracks apopular index such as the DJIA, NASDAQ or the S&P 500.RisksA big risk to stock investing is that if a company goes bankrupt, thestock value will go to zero and you the investor will end up withnothing and the remaining company assets are sold with theproceeds going to bondholders. If the company emerges frombankruptcy, the bondholders then become the new owners of thestock. Diversification can help shield investors from losses if onecompany’s stock goes bankrupt. No Company in history has evergone bankrupt that has had no debt so buying companies with lowor no debt is a good idea. In a single year an overall stock indexsuch 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 stockmarket has produced an average return of 10% per year. Also byowning stocks, you are hedging against inflation which can erodethe value of money over time. @Tom DeGrace Page 7 of 22
  8. 8. Investment Type CommoditiesCommodities is a physical substance that can include energy, foodand metals. Commodities tend to go up in times of high inflationand when the economy is growing rapidly. Commodities can also goup or down inversely to supply and demand when investorsspeculate to future trends or as different commodities go in and outof favor. Since commodities can move up rapidly sometimes over50% in a single year for some, timing can be essential for capturingshort-term gains. Gold is a very popular commodity that peopleinvest in. Gold however isn’t used much in manufacturing and only alimited amount of the gold produced is used in jewelry.RisksA large part of price movements of gold is driven solely by thedemand of investors. You can invest in commodities yourself bybuying an ETF, hedge or mutual fund. You can also buy futures tospeculate on the future price movements of commodities.Investment Type CollectiblesCollectibles can include almost anything of value from baseballcards to antiques to paintings. A collectible is a tangible asset whichvalue varies due to the demand by collectors. The less supply of theindividual collectable, the more value it has. So to protect fromoversupply, one would need to make sure the creator of the assetwhether an artist or manufacturer is no longer producing copies orvariants of the collectable. @Tom DeGrace Page 8 of 22
  9. 9. RisksSome risks while owning a collectable is that it could becomedamaged over the course of time which could lower the value. Alsothere is a risk of the item being stolen so you would need to keep itin a safe place or have insurance to cover the item. When selling acollectable, it may not be easy to find a buyer for niche collectiblesand auction houses can charge fees as high as 20% to sell the itemfor you. Investing in collectibles can help hedge you againstinflation.Investment Type Real EstateReal estate investing is investing in things such as land, residentialand commercial property. Land investing is based on thefundamental that there is only so much land available and demandwill continue to increase over time. However while holding landthere isn’t any cash being generated and you will still have to payfor the taxes every year.A common real estate investment is rental properties. Theinvestment strategy here is to rent the property to a tenant for afixed price hopefully covering the cost to hold the property. Themajor benefit to investing real estate is that you can earn fixed ratereturn often exceeding the return rate of bonds while at the sametime protecting yourself from inflation.RisksThe risk with real estate investing is that the value of real estatecould fall or there could be some event that would happen that @Tom DeGrace Page 9 of 22
  10. 10. would cause you to invest money into the property to keep itfunctional such as the foundation cracking or a roof leaking. Alsoowning real estate may require some of your personal time thatcould be spent doing other things. By using leverage, you canincrease your returns however if you can’t afford to make yourmortgage payments, then you would lose all your equity if the bankwere 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 formof dividends. A REIT is as easy to buy as a stock though as withstocks, the value can move up and down with investor demand.Investment Type BusinessRather you are stating your own business or investing in someoneelse’s business, this type of investment has its own risks andrewards. The different ways to invest in a business may includestarting your own business, buying a piece of some else’s businessor owning a fund that specializes in investing in new businessessuch as venture capital funds. When starting your own business,there likely needs to be both time and money invested up frontbefore you are ready to sell a product or service to customers.RisksYou may lose 100% of the money invested if you can’t make a profitabove what your fixed labor, marketing and operating costs are.When owning a piece of someone else’s business, you may not see a @Tom DeGrace Page 10 of 22
  11. 11. return on your investment unless there is either an agreement toprovide dividends or if the company goes public.The major benefit to owning a business is that the returns can bealmost unlimited. There are many cases of an $10,000 investmentturning into over 1 million dollars in less than 10yr time. A businessis also a hedge against inflation.SummaryAs we see, there are a large variety of investment types to choosefrom that has its risks and rewards. . The greater the return, thegreater the risk. You need to decide what your long-term goals arein 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 tobeat the #1 enemy of wealth building, INFLATION. If you are earninga 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 yourinvesting efforts would be similar to a dog chasing its own tail, a lotof effort and getting nowhere.Famous Investors Pave the Way for System InvestingBenjamin Graham was wiped out of all his assets during the Greatdepression of 1929.Inspite of this, the partnership firm survived by @Tom DeGrace Page 11 of 22
  12. 12. selling out all the personal assets of partners. Ben recollected hisstrength and was back on his feet. During these ups and downs hehad learnt some valuable lessons. He shared these with the worldthrough the books he wrote. Simultaneously he took up lecturing inColumbia University which was a partnership that continued for avery long time.In 1934, He along with David Dodd came up with the book, SecurityAnalysis. It is considered as the bible for those who are seriouslyinterested in investing since the day it has been penned. He cameup with his second book in 1949 The Intelligent Investor, whichWarren Buffet the second richest man in the world considers as thebest book ever written on investment. He got his first lesson ofinvestment from this book.The partnership between Graham and Newman continued till1956.Their firm never gave losses to its investors and earned anannual return of 17%.He had seen business and investment marketstravel from the depths of Depression to the heights of recovery. Tohis readers and keen learners he has left an incomparable legacy inthe form of his books and its theories. Graham retired from writingand 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 shareand buy your share in the business daily offering some price. Thatprice depends on his mood that may fluctuate, so one day @Tom DeGrace Page 12 of 22
  13. 13. increasing the price and the other day decreasing it or not offeringanything at all. This rise and fall in prices gives the investor anopportunity to purchase and sell the shares. If you are a careful anda rational investor then your decisions shall not be based on themood of Mr. Market. The lesson behind Mr. Market parable isobvious. The investor has to make his own decision based on thenet worth of investment and not price fluctuation. He hassummarized this very aptly “Basically, price fluctuations have onlyone significant meaning for the true investor. They provide him withan opportunity to buy wisely when prices fall sharply and sell wiselywhen they advance a great deal. At other times he will do better ifhe forgets about the stock market.”In his words “An investment operation is one which, upon thoroughanalysis, promises safety of principal and an adequate return.Operations not meeting these requirements are speculative.” Beforemaking any investment decision, He studied the Balance sheet of thecompany and its history of past 7 years. His fascination for numbersled him to come up with the “Theory of Value investing” in 1934. Itis based on the assumption that two values are attached to acompany. The first is the market price – the value of the companyon the stock exchange. The second is a company’s business value.Margin of safety is the difference between the market value and thebusiness value. The stocks should be sold when the market pricegets close to the business value. This concept became very popularand is relevant even in today’s time. @Tom DeGrace Page 13 of 22
  14. 14. He also likes companies that pay out dividends and are in goodfinancial shape. Graham looked for companies that are tradingbelow their historical P/E average and trading below 1.2 times bookvalue. Benjamin always tried to buy stocks that were trading at adiscount to their Net Current Asset Value. He suggested buyingstocks at 2/3rd of Companies net value and selling them as theyapproach their net current assets. Clearly it should suit the investorto buy shares when “Mr. Market” displays more insanity thenotherwise. By religiously following the Graham’s principles, its nosurprise that Warren Buffett has become second richest person inthe world.Warren BuffetWarren Buffett is the most successful investors our living times andis one of the very few billionaires who have amassed wealth majorlythrough investing in stocks. Warren Buffett is bestowed with titleslike “The Oracle of Omaha” and the “Sage of Omaha”. Warren Buffettcontinues to shine bright as an Investor, Businessman andPhilanthropist. With a net worth of US $37 billion in 2009, WarrenEdward Buffett is ranked as the second richest man in the world,just after his good friend Bill Gates who had the net worth of $40Billion.Warren Buffett is known as the Father of Value Investing and theInvestment Industry takes inspiration from his unique style ofinvesting. According to Buffett, the essence of value investing is tobuy stocks at less than their intrinsic value giving an investor fair @Tom DeGrace Page 14 of 22
  15. 15. amount of Margin of Safety. Warren Buffet set a goal never to losemoney irrespective of the market conditions.He is always prepared to take calculated risks as he always does theplanning beforehand. According to Warren Buffett “Noah did notstart building the Ark when it was raining”. Buffett prefers to investin simple and understandable businesses, checks out a company’strack record for ROE (Return on Equity) and tries to predict thegrowth of the company in next ten years.He prefers to invest in companies that generate high ROE withoutmuch debt. One of his principles was to invest in good companieswhen they have a temporary problem or when the stock market islow 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 fivefoldthe prior six years and over five-hundred fold the previous sixtyyears when Buffett bought stocks worth $1 billion in Coca Cola. Heearned four times the money he invested and the profit stillcontinues to come in. In 1976 he purchased a very importantposition in GEICO when the stock had fallen down from $61 to $2and the basic opinion was that the stock was definitely going tozero.Warren Buffett avoided Pharma or Dot Com Companies for he neverinvests in business that he is unable to understand or falls under hiscircle of competence. He says that an investor should carefully study @Tom DeGrace Page 15 of 22
  16. 16. the facts and figures, value the company’s future outlook, andpurchase when everything is in their favor. They should not try topredict the direction of the stock market, the economy, interestrates, or elections. The investors should concentrate only on a fewholdings. This way, the investors can be more careful and thoroughin their research. And it helps to eliminate the risk factor.The Buy and Hold Investment strategy of Buffett has beenappreciated by investors all over. The concept is to buy anoutstanding business and hold it for years. This helps to achievereturns which are commensurate to the economics of Business.Warren Buffett prefers to invest in companies which can providetheir own management. Berkshire tries to work with the samemanagement which was there before its purchase. The only areawhich is to the concern of Buffett is capital allocation andcompensation of top managers. Otherwise managers are free tooperate as they like. But Buffett also welcomes any matter onbusiness environment which his managers want to discuss with him.It is indeed the strength of Buffett’s Principles that makes him sosuccessful in the investment industry.Investing Rules to Avoid Getting Yourself in TroubleRule #1 NO CRUSHING DEBT!!!!I have seen it a million times, an investor sees a once great companytrading at what appears to be a bargain price, so he buys the stock. @Tom DeGrace Page 16 of 22
  17. 17. The company is often very well known, such as At&T, AOL, Xeroxand Tyco, and it may even still be growing both earnings andrevenue.But these are companies that are at risk, and they will have tocontinue to sell off assets just to stay afloat. And don’t expect themto get anywhere near the market value in a distress sale. And, evenworse, in bankruptcy these assets go for only 20 cents on the dollar.After a bankruptcy, typically all common shareholders receivenothing and ownership of the company goes to the debt holders.The debt holders can decide either to sell off assets to repay debt orto take the company public again.If you can add 1+2=3 then you should be able to read a balancesheet. 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 gonebankrupt.The general rule we like to use is to buy stocks that have theirinterest expense to income ratio at less than 25%.Rule #2 Margin Trading is a Fools GameThe key to successful investing is having available cash to choosethe next best investing opportunity that comes along. When you getinto debt, you begin to lose your options and get trapped into youroriginal investments. Remember that all stocks can crash, and theodds are, if you are high in margin, you will soon have a margin callin which you could lose 75% of your money. As a general rule, @Tom DeGrace Page 17 of 22
  18. 18. buying stock on margin is bad money management. The fact is that90% of margins players get margined out. The more leveraged youare, the greater chance you have of ruin.Rule #3 Money ManagementOne of the important things to learn about investing is how tomanage risk. Anyone who has no respect for risk is on the road tocomplete financial disaster. You often hear these great stories aboutthe 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 samepeople are often wiped out as a result of not respecting the risksthat go with investing. Learning how to pick investments that canappreciate in both good and bad times is the key to successfulinvesting. Keep your reward-to-risk ratio at a minimum of 2:1, andpreferably 3:1 or higher. In other words, if you are risking 1 pointon each trade, you should be making, on average, at least 2 points.Rule #4 Select High Quality CompaniesThis means no OTC stocks, no IPOs and small cap stocks. I wantcompanies that are proven market leaders. I exclusively only pickcompanies that are trading in either the S&P 500 or S&P 400. Theonly exception is that I will sometimes pick an international largecap 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 areSony, Nokia and HSBC. @Tom DeGrace Page 18 of 22
  19. 19. Rule #5 Don’t try to hit the home run on every pickEveryone 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 thiswithout taking on severe risk. Have you ever heard of “The Tortoiseand the Hare”? The rabbit has more speed, but the turtle has moredetermination, stamina, and consistency. The rabbit may get a faststart, but the turtle wins the race.The Nifty 50Back some time ago someone came with the original Nifty 50. It wasa group of stocks that were market leaders as well as brand leadersfor their sector. These stocks did outperform the general market forlong period of time. The principle is if you pick you good companiesto begin with, then you will have an advantage over everyone else.The Original Nifty 50American Express J.C. PenneyAmerican Home Products Johnson & JohnsonAMP Inc. Louisiana Land and ExplorationAnheuser-Busch LubrizolAvon Products Minnesota Mining andBaxter International Manufacturing (3M)Black & Decker McDonald’sBristol-Myers Merck & Co.Burroughs Corporation MGIC Investment CorporationAmerican Hospital Supply Corp. PepsiCoChesebrough-Ponds Pfizer @Tom DeGrace Page 19 of 22
  20. 20. The Coca-Cola Company Philip Morris Cos.Digital Equipment Corporation PolaroidDow Chemical Procter & GambleEastman Kodak RevlonEli Lilly and Company Schering PloughEmery Air Freight Joe Schlitz BrewingFirst National City Bank SchlumbergerGeneral Electric Sears, Roebuck and CompanyGillette Simplicity PatternHalliburton SquibbHeublein Brewing Company S.S. KresgeIBM Texas InstrumentsInternational Flavors and UpjohnFragrances The Walt Disney CompanyInternational Telephone and XeroxTelegraphTrading Secrets & CluesThe stock market is made up of trillions of dollars of money. Whatmakes the stock market go or down is simple supply vs demand.There is a constant battle going on between cash vs assets. Whenthere is fear in the markets the money moves into cash. When thereis optimism, money goes into assets. Over time inflation takes holdso there is always a push in the long-run for asset values to climbhigher. @Tom DeGrace Page 20 of 22
  21. 21. When you look at a stocks chart pattern, you can see these patternsof peaks and valleys in a stocks price. Often if you buy at the lowpoint at say the 90 day moving average, you can then make a profitin short period of time as the rises.Book value bottom fishing can be very profitable as long you buystocks that dont have crushing debt or negative earnings. A privatecompanys value is anywhere between 4-5 times earnings. A pubiccompanys bottom valuation is around 7-10 times earnings. Buyingstocks that a large portion of their current stocks value in bookvalue can give you some cushion during a market decline. Applecomputer at one point was trading at $12 which was almost theircash on their books. Had you had bought low, you would have madea fortune as the stock climbed up.Often when the stock market is rising or falling, all the newsreporters look for the top story that is behind the move. Its notalways the case that daily news drives the markets. Often its a trendin which the markets is trending down or up regardless of whatnews is about to break. One big clue to which way the markets isgoing to move is to look at the 10yr bond yield. When bonds are atthe low end of their moving average, it may signal that the stockmarket is about to turn up. When bonds are high, it could mean thata sell-off is coming soon. @Tom DeGrace Page 21 of 22
  22. 22. A Little Info About My BlogThe blog I run at offers many freearticles on a variety of topics. I also have a membership section thatis based on running an active trading portfolio of 20-30 stocks.There is special formula that I use help maximize returns on everysingle stock pick that is made. I urge you to check it out.Follow me on Twitter me on Facebook @Tom DeGrace Page 22 of 22