# How to make money on the stock market 101



## Mantat (Aug 22, 2003)

Ok, here it is… 

How to make millions on the stock market 101 

First of all, you need to know that there is no magic on the market and you shouldn’t expect to make huge amount of money in the short run. You have to look at the market in long term (over 5 years). In the history of finance, the yield of the major indexes ALWAYS beat Canadian or US bonds or any period of 20 years or more, and by a good amount. Also, the stock market is the best way to protect yourself against inflation, bonds don’t protect you. From this, we can conclude that the safest place to put your retirement money is on the stock market (at least when you aren’t planning to retire in the next 20 years). 

What to buy?
Mutual funds are very popular because financial company and banks promote them as much as they can. The fact is that less than 10% of these manage to beat the indexes and that’s even less when you factor in the management fees… 

What’s the solution?
You should invest in mutual funds that emulate one of the major indexes (TSX, SP500, DOW, etc). These funds are easy to get (most financial company offer them) and best of all the management fees are VERY low (as in 0,03% from TD Waterhouse). 

This is the easiest and safest way to invest. But beware! Don’t buy all the shares at the same time, fraction them so you would get them every month. This way you are protected against price variation in the short them. 

But how can I beat the market?
The advice I just gave would allow you to (almost) follow the market without beating it. Now the method to beat it… Its called Dogs of the Dow (do some googling on it). Since we are in Canada, it would be called Dogs of the TSX. I won’t explain here why this method works because it would be too long but you just have to do some research and you will find it. The trick is to take the 10 company from the TSX that have the best dividend yield at a fixed date and put 1/10th of your investment in each. One year later, you sell them all and do the exercise again. Since the transaction cost can be high if you have less than 10,000$ there is a short cut version of it: you only buy stocks from the company with the second, third and fourth best yield. You shouldn’t take the best yield because to reduce risk. This shortcut version is more risky but still gives good result. Another variation is to invest in the stocks from this list which have the lowest cost so you can get more shares (probably the best technique if you are starting your investment plan and don’t have much money). 

How does it work?
The idea behind this method is that big company never dare to reduce their dividends. So by buying them at a fixed price, you are sure of the rate you are going to get. Another point is that the reason these companies yields are so high is because they are undervalued by the market and eventually their value will increase (thus reducing the dividend yield). This is a quick and dirty explanation and I encourage you to dig for more. 

Finally
I am not a financial advisor and you shouldn’t take my advice as the holy truth! Markets fluctuate and I don’t want to be responsible if you lose all your retirement money… I just want to point out these two easy ways to make money on the stock market and you should dig the web for more information about them. Don’t trust your financial advisor, most of the time they will propose you mutual funds with high fees because they get better commission out of them. If you feel insecure and still want to meet one, ask him first who pays his salary, it’s a big indicator of his motivation. 

Oh.. Never follow the hype! It’s better to invest in unpopular sector than in the popular ones, unless they are in a crisis of course (à la Air Canada…). Any one remembers the hype of the late 90’s about technos?  

That’s about it for today, comments and questions are welcomed unless they are about my bad english spelling.


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## Dr.G. (Aug 4, 2001)

Mantat, you left out one point re dividends -- DRIPS, which are dividend reinvestment plans. I have one with Fortis and BCE and my dividends are automatically reinvested into more shares of Fortis and BCE each quarter, without any fees or commissions.


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## Mantat (Aug 22, 2003)

Good point but these plans aren’t as good as one can think because you are always putting your dividends in the same company. By doing so, you are preventing yourself from investing in other (possibly better) opportunities. 

But, as you said you aren’t paying any fees so it’s not that bad but it’s at the cost of diversification. One thing that can make these programs interesting is when the company sells you the additional shares at rebates from the market price.

Personally, I think that products like these are especially good when you offer a few shares to a kid as a gift. This would familiarize him with the stock market (eventually) and by the time he is 18, it should have increase in value by a factor of 3-4 times with some luck. 

BTW, I personnaly think that BCE is a great investment!


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## Dr.G. (Aug 4, 2001)

Mantat, true, but I have seen my investment in Fortis move from my initial investment of $35,000 to over $70,000 based on the capital gains in the stock itself and the constant dividend reinvestment, which accumulates more shares and more dividends at no cost. Still, I try to diversify my holdings, and do hold some of the mutual fund index funds in the major indicies, due to the low MER. I am not out to beat the market, but I don't want to be crushed by the market either. A person who is aware and knowledgeable is able to make money in a bull or bear market......buts pigs shall get slaughtered in any sort of market.


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## Mantat (Aug 22, 2003)

I totally agree with you! And you would be surprised to see how many people act by emotion when buying / selling shares. I am not talking about average Joe here but about mutual funds managers. 

Management fees are partially related to the number of transaction the fund makes. So when you see fees as high as 4% you have to wonder if the manager is a day trader or looking for the long term growth of your asset. Unfortunately most people don’t realize that. I really think financial planner should be paid on a consultation basis and not by the mutual fund they sell. It looks like a conflict of interest to me...

I also looked at a study recently (cant remember where) where they showed that the yield of a mutual fund is not at all related to the % fees and even worst, the fund with the lower fees were better performer! Yet, I haven’t seen anyone complaining... But if the government increase the taxes by 0.5%, you would see people going in the streets. Seems like they don’t realize how important it is to save for retirement! I am 26 and already I am paying my maximum RSP amount...


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## Dr.G. (Aug 4, 2001)

Mantat, my rule of thumb is that if a managed fund (e.g., TD Energy, Altamira Science and Technology Fund, etc) cannot earn me at least three times their MER after a full year of owning the fund, I go to another fund. So far, this has worked for me, since I avoided all of the massive downturns while the sold funds income sat in Canada Savings Bonds.


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## Viivis (Oct 10, 2003)

If you want to truely beat he S&P, or Dow or TSX or whatever index you choose. Then you emulate one of the best sources of investment information there is. William O'Neil.  Study his methods and techniques, and if you can get into one of their seminars, they are US only), you will learn how to 'select' the best performing stocks as well as those with the best potential to meet your expectations. 

This works. I use it everyday. Mutual Funds are places to put your money when you don't know what else to do with it, and you have no formal analyst or investment/trading education and experience. 

You most likely won't lose money in a Mutual Fund, but you certainly won't make any either. Not compared to what you could realy be making with it.

I'm not a broker/trader anymore so this isn't to be taken as investment advise or coaching. It's just a comment on a posted thread.

Jim Crammer was very good before he went and got all Hollywood on everyone.


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## TroutMaskReplica (Feb 28, 2003)

this 'dogs of the dow' strategy appears to have not done so well in recent years. i've never invested on the stock market before or even followed it, so perhaps my comment is naive. please explain.


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## Mantat (Aug 22, 2003)

Bloodyface: does this graphic take into account the management fees?

You also miss a very important element you cant take a strategy as the dogs of the dow for an horizon of less than 20 years. 

Also, I agree that the DoD is probably not the BEST investment possible. In fact, studies show that its better than 90% of the mutual funds which means that its worst than 10%. If you can put your money in these 10%, go for it! The only problem is to know who are these 10%. You see, these top 10% funds arent the same every years, in fact its very rare that a fund who was in the top 10 a year will be in it again the next year. So on the long run the DoD is a safer investment for someone who doesnt want to waste more than 10mins per year to select his placement.

As Mister O'Neil, I have no doubt that he is giving good advices but dont forget that not all strategy are reproductable for the small investor. Also, I dont trust any advices unless its based on scientific study (thats what my master thought me...). 

Finaly about the graph (again), the years in the range of 97-00 are probably the worst representative ou can get when doing stock research. Indexes upped to the roof (just think about the effect Nortel had on the TSE) and there was no ground to back this increase since productivity didnt match. 

Its snowing like hell (?) outside, going to take a walk, see ya!


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## Viivis (Oct 10, 2003)

William O'Neil isn't an advisor. And the CANSLIM techniques and methods for selecting stocks are far more scientific and proven than anything that most people are using. 

Selecting top performing stocks doesn't have anything to do with size. If the stock meets the criteria you buy it. Small investor, big investor, doesn't matter.

Do a little research on the man and his company, better yet pick up his newspaper. The Investors Daily. Buy his book, it's still one of the most respected books on the market as rated by the best traders in the world. I'm not saying he is the 'god' of investing, but his methods are used by some of the top traders in the world.


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## Mantat (Aug 22, 2003)

Viivis:
The reason I said that you cannot apply some investment method to every class of investor is that your investment portfolio must be in the same field as the capitalisation of the company you invest in. 

One exemple of mismatch: mutual fund and small entreprise. When your fund manage for eemple 200M, you have to invest this money in a zillion enterprise and its getting too time consuming to do a good analysis of them all. 

Another mismatch is personal investor who buy stock worthing 100$+. Unless you have a lot of money, its not the best investment since the transaction cost is too high for the number of shares you buy. Same thing for day trading. Small investor can only play with the small games while mutual funds can buy/sell anything.

As for O'neil, I havent had the time to check it out yet but I will. I am not saying his method is no good, its just that I am very skeptic of people who claim to do scientific analysis while they arent using a serious methodology. The first thing I do when I hear about any stats or article is to read the methodology, if its flawed there is no point to read the rest... I will keep you informed on my though about him in a few days...


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## gordguide (Jan 13, 2001)

Bloodyface:

If you look at your chart, you see that the only listed strategy that actually made money every year is Dogs Dow (large cap, black bar) while Dogs Dow (small cap, green bar) was quickest to recover.

If you consider that nearly all investors lost money the last 2~3 years, anyone who broke even after the downturn was considered a shrewd investor. (Your chart doesn't cover that period, ending in 2000).

Stocks that swing high attract the naive (they will also be the ones that swing low); steady as she goes is the way to make money over the long term.

The idea isn't to make money every day, month or even every year. The idea is to have a return, 20 years from now, that is better than average and much better than interest income would have been over the same period.

You need a return over relatively safe investments like Govermnemt Bonds because you are being compensated for risk, which is another way of saying you can lose your shirt if you're not careful or just plain unlucky.

Novice investors should probably play it safe, at least for a while, and especially if you don't want to spend any time learning what the market is all about.

The Business Press is notorious for being very upbeat and for concentrating on success stories over "reality". Make your own decisions after careful research, and don't listen to MSNBC, because they're just out to sell trading (which makes brokers money), not investing (looking after yourself first).

Amongst the strategies I'm familiar with, Dogs looks to be better than average, but you should do your own research, compare it to other sound strategies, and learn about market forces.

The stock market is a mob market; it's impossible for everyone to make money. If you're in with the majority, and that majority consists of "fair weather" investors trying to cash in on a rising trend, be very careful.

You can't win unless you still have some cash left when the smoke clears. No matter how strong the market or how long a bull market lasts, it's going to fall. Guaranteed. Never forget that.

Buy low, sell high. But don't forget that even in the worst of markets, some stocks do well even if the majority are down.

It's wrong to assume a good market only involves rising prices; most money is made when the returns are low and prices are down, which sets up future returns.

"Bull Market" fast, like a charging bull, ignores impedements (surging prices).
"Bear Market" stop, stand and fight, resistant, stubborn (slow or falling prices).

[ December 11, 2003, 11:13 AM: Message edited by: gordguide ]


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