Wall Street Craps – 2012 Global Ebook Finance Award-Winner

HOW TO WIN AT THE BIGGER GAME: Like the traditional asset allocation model, I propose that the investor divide his or her capital into three parts. The difference is in how these parts are labeled. Instead of stocks, fixed income and cash equivalents, it may make more sense for investors to divide their financial assets into strategic categories that I call security assets, growth funds, and play money.

In this model, the category called security assets makes up the majority of investment capital – typically 50% or higher. The category of growth funds is the second largest component, followed to a much lesser degree by that which I call play money.

Here’s a more detailed description of this alternative asset allocation model. Using it, I believe that you can become more effective in managing your money in today’s volatile financial climate.

**********

Let’s begin with the category called security assets. The money that is set aside in this part of your asset allocation model is directed towards stable lower-risk investment vehicles designed to preserve capital and handle your basic needs. Investments that fit into this asset class would include:

• Treasury bills
• Treasury notes
• Corporate bonds
• Government bonds
• Municipal bonds
• Commercial paper
• Certificates of deposits
• Permanent life insurance
• Saving accounts
• Money market funds
• Individual retirement accounts
• Pensions/profit-sharing plans
• Total market stock index funds
• Conservative income-equity mutual funds
• Diversified portfolios of dividend-paying blue chip stocks

It is your security assets that will serve as your financial foundation, and they will bring you that all-important emotional benefit called peace of mind. Therefore, your security assets should wisely represent no less than 50% of your total allocation plan. In most cases, the prudent level of money that is designated for security assets should be aimed more towards the 80% range and beyond as an individual’s financial wealth grows.

**********

“The individual who acts and dares to make a decision now – not tomorrow – is the one who ends up with millions.”

Mark Oliver Haroldsen

DRAWBACKS TO TODAY’S ASSET ALLOCATION MODELS: The asset allocation model remains the most widely accepted method for helping people understand how to invest their money. Yet it also comes with some important drawbacks. Some of the often-overlooked flaws in the typical asset allocation model that are promoted in the financial services industry include:

• Savvy investing requires an investor to put his or her money in the right place, in the right amount, and at the right time. Unfortunately, the typical asset allocation model doesn’t allow much for the element of timing. Perhaps this is because timing the stock market, whether it’s buying at the bottom or selling at the top, is an area of investing that many people assume cannot be done either effectively or consistently.

• The financial products industry loves the “nobody knows what the markets will do” mindset because it gives them the convenient excuse to sell the public almost any well-packaged investment product in the name of diversification. The high-commissioned sellers of precious metals, real estate limited partnerships, private-placement fixed income plans, and assorted investment schemes will often employ the asset allocation model on unsophisticated investors. That way, they can conveniently carve out a seemingly small 2% to 5% piece of an investor’s investment capital without raising much concern. They also do this with the unspoken understanding that individual investors have a greater tolerance for allocating money in percentages than they do with actual dollar amounts.

• Fixed income returns are historically low, and cash equivalents s yield close to nothing. In addition, fixed income, in the form of bonds or bond funds, are subject to price fluctuations which may result in capital loss. So for many investors today, fixed income and cash equivalents are essentially the same unattractive choice.

More important than any single investment decision will be your philosophy towards investing. Because of the drawbacks stated above, a savvy investor should look beyond the standard asset allocation model presented by the financial services industry for developing their long-term investment planning. Instead, choose a more refined approach to investing that makes sense and works more precisely to fulfill your ever-changing financial objectives.

**********

“Wide diversification is only required when investors do not understand what they are doing.”

Warren Buffett ~ CEO of Berkshire Hathaway

Asset Allocation: 1. the process of intelligent decision-making regarding the placement of financial assets for investment purposes. 2. the ability to move financial assets from one investment class to another, based on prudent risk/reward evaluations and individual investor objectives. 3. the critical decisions that savvy independent investors must make regarding where to put their money and in their proper amounts in order to play Wall Street Craps successfully over time.

                                           **********

Effective money management is the process of maximizing after-tax earnings, spending money wisely, saving or budgeting for predetermined expenses, and investing funds for future needs and desires. In regards to the investing part, the financial industry commonly uses something called the “asset allocation model” to help investors understand the concept of where to distribute their money in regards to risk tolerance (how much uncertainty an investor can handle in regards to financial loss) and investment objectives.

Typically, asset allocation models start by dividing a person’s funds into three separate investment classes which are stocks, fixed income (bonds, notes, preferred stocks), and cash equivalents (saving accounts, money market funds, or Treasury bills). A simple example of asset allocation strategies based on an investor’s tolerance to risk would include the following:

• Conservative: 20% Stocks – 50% Fixed Income – 30% Cash Equivalents
• Moderate: 60% Stocks – 35% Fixed Income – 5% Cash Equivalents
• Aggressive: 95% Stocks – 0% Fixed Income – 5% Cash Equivalents

The stock portion can also be further divided into three sub-classes: large-cap equity (stocks of large companies), small-cap equity (stocks of small companies), and international equity (stocks of foreign-based companies).

Asset allocation models are often illustrated with pie diagrams. That way, investors can develop a clear visual image of where to put their money based on the risk level that best suits their own individual situation.

**********

“Avoid greed and fear. These are the investor’s Achilles heels. Keeping all your money in the bank earning 1% interest is just as foolish as dumping your entire savings into the market thinking you’ll make a quick buck.”

Nancy Dunnan

A Savvy Investing Take: While it’s important to know how to “play” the stock market correctly, it is even more critical to know how much money you should allocate to playing it.

A word to the wise: “Invest” the major portion of your money in a diversified mix of low-risk, high-value, and stable growth and income investments. “Play” with only a minor part of your assets in high-risk, leveraged, or aggressive growth speculations. Don’t make the fatal mistake of playing too loosely in high-risk speculations with the major part of your financial assets.

Managing money effectively requires your personal care and full attention. Don’t neglect or unwisely delegate this key wealth-building function. To casually do so will crack open the door that inevitably leads to disastrous financial results. Choose instead to follow the path of those who built great fortunes by consistently making wise decisions about their own money.

 **********

“True diversification is hard to achieve. The major portfolio building blocks tend to move in the same direction at the same time. That severely limits the protection that diversification affords. Recognize that the building and deployment of cash equivalent reserves is probably your best diversification tool.”

Robert Metz & George Stasen ~Authors of It’s A Sure Thing (1993)

MAINTAIN A SIMPLE APPROACH TO INVESTING: As you expand your knowledge of stock market investing, keep reminding yourself that it is not necessary for you to know everything. The fact is that there is a never-ending supply of information, opinions, theories, and stories regarding stock market investing.

You will find that the media is especially fixated on stories that explain why the market either goes up or down on a particular day. But while hindsight is 20/20, even the experts can never agree on what the markets will do in the future. Therefore, the savvy investor must not get distracted by what is simply “interesting” about the market; instead, they stay focused on what is most useful.

What you want do in terms of stock market investing is to find reliable information that leads to action. Dr. Wallace Wattles described a concept called “efficient action” in his 1903 classic book, The Science of Getting Rich. Efficient action is the habit of consistently doing the right thing on a person’s journey towards wealth. The point that Dr. Wattles was making is that financial wealth is created with certainty over time by simply adhering to the right daily habits of thinking, emotion, and action.

In terms of investing in the stock market, efficient action would include the following habits that are described in this book: (1) manage your money wisely through prudent asset allocation, (2) “invest” the major part and “play” with the minor part of your assets, (3) play the stock market game correctly on a consistent basis, (4) maintain your emotional balance, and (5) appreciate the entire experience. Reminder yourself that success in the stock market comes from acquiring the habits of efficient action, instead of wasting time trying to absorb the endless streams of financial news, information and opinions.

Remember that the confused mind does nothing. Keep your approach to stock market investing simple by resisting the urge to know everything. The way to success is by acquiring the clarity to take correct decisive action when opportunities periodically present themselves to you.

**********

“There is a secret to investing that cuts a path directly to the profits that you’re looking for. The secret is simplicity. The more elementary your investment style, the more confidence you can be of making money in the long run.”

Jane Bryant Quinn

DON’T PLAY TOO LONG: Spend significantly more time out of the market than in it. If it’s the thrill of action that you crave, then find other games of chance to fill this emotional need. Savvy players get their kicks out of anticipating the next big move in the market.

Shedding more light on this same idea comes from one of the most colorful speculators in Wall Street history, Jesse Livermore (1870-1940), who once stated, “There are only a few times a year, possibly four or five, when you should allow yourself to make any commitment at all. In the interims, you are letting the market shape itself for the next big move.”

Remember that being out of the market in a 100% cash position for your trading account allows you the break in time to rebalance your emotions and prepare yourself for the next trading opportunity. If you’re playing too long at any game of chance such as cards, dice, roulette, or stock market trading, there’s a natural tendency to get sloppy in your decision-making.

***********

“Gambling is taking a risk when the odds are against you, like playing the lottery or pumping silver dollars into a slot machine. Speculating is taking a risk when the odds are in your favor.”

Victor Sperandeo

NEVER PLAY WITH SCARED MONEY: When you gamble with money that you can’t afford to lose, you’re setting yourself up for automatic failure.

Success in the stock market requires patience, flexibility, resiliency, and decisiveness. These qualities are not present when you’re too afraid of losing money. If you find yourself investing in a fearful manner, either get out of the market or else sell down to the level of play that allows you to enjoy a good night’s sleep. Don’t let fear cloud your thinking and cause you to play the investing game poorly. In many instances, playing with scared money indicates that you haven’t allocated your assets properly. You will learn more about how to correct this mistake later in the next chapter on money management.

**********

“If I can’t afford to take losses, I have no business at the gambling table or at the Casino of Wall Street. Wall Street is not a philanthropic organization. I walk into the Casino with my eyes open as I would if I were walking into a Casino in Las Vegas. I ignore the chatter, I watch the action, and I try my luck.”

Nicolas Darvas

GAIN FIRST-HAND EMOTIONAL EXPERIENCE: Playing with small amounts of your capital allows you to gain valuable experience on a gut level. This is the only way to appreciate the actual emotions of fear, greed, worry, doubt, overconfidence, and indecision that get in the way of playing the stock market correctly.

The pressure of trading the stock market has an uncanny way of exposing one’s emotional weaknesses and true individual temperament. And, in most cases, an investor’s degree of success or failure in trading the stock market over time is predicated more on emotional control than it is on factual knowledge. It’s the quality of your investment decisions that will determine your success, regardless of the pressure that you feel individually. Therefore, it’s wise to prepare for inevitable emotional pressure by getting your feet wet with actual trading experience.

**********

“Wall Street is motivated primarily by emotions – fear and greed.”

Wall Street Adage

TRADE SHARES IN ANY QUANTITY YOU LIKE: If you’re buying and selling shares of actively traded stocks (like the ones that are recommended in the “Wall Street Craps” approach), you don’t have to be concerned about whether it is for 100 shares (round lot) or 47 shares (odd lot).

While there are certain limitations to buying odd lots (i.e., parcels of stocks that aren’t multiples of 100), it doesn’t affect the simple buying and selling of actively traded stocks that are listed on the major American stock exchanges. There was a time, in the past, when trading in odd lots would cost the average investor an additional one-eighth to one-quarter point. That was because the transaction was physically handled by an “odd lot broker,” who trekked over to the trading floor for that particular stock to find a buyer. But today, small stock trades, whether for 35 or 100 shares, are handled by computers rather than by people. That means you can buy shares in any quantity, without incurring any extra costs.

But for many people like me, the preferred way to buy stocks is in traditional round lots. Perhaps this is out of habit or because it feels like a simpler and cleaner way to keep track of my trading positions. On the other hand, I prefer to buy positions in regular mutual funds based on round dollar amounts and fractional shares. The point is that you are free to choose how you want to trade stocks and mutual funds in whatever share quantity or dollar amount that suits your tastes, without any regard for cost or quality of execution.

**********

“If you have never missed when investing, you haven’t been in there trying.”

Venita Van Caspel

PLAY SMALL WHILE YOU LEARN: Gladly pay the price of apprenticeship. Learn, experience, and practice in a safe environment so that your early mistakes can’t hurt you. Don’t play big until you’ve gained enough mental and emotional experience to trade confidently.

This is especially true when traders finds themselves “squeezed” in heavy short positions during violent stock market rallies. Beware of the reassurances of some investment advisors who claim that shorting the stock market can be a sensible way to invest your money. What’s not mentioned by such advisors is that successful short-selling requires more awareness, discipline, and experience than traditional trading on the long side. For the majority of non-professional investors, it’s wiser and safer to be on the sidelines planning your next move to the upside than it is to be emotionally involved trading the short side of the market. (Note: The act of “shorting” or to “go short” means to bet that a particular stock is going to go down in price instead of up.)

**********

“Timidity prompted by past failures causes investors to miss the most important bull markets.”

Walter Schloss ~ Value Investor Who Learned From Benjamin Graham