Wall Street Craps – 2012 Global Ebook Finance Award-Winner

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.

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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.

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“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.

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“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.

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“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.

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“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.

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“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.

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“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.

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“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.)

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

Walter Schloss ~ Value Investor Who Learned From Benjamin Graham

FIND THE IDEAL METAPHOR: Whenever you hear someone casually say the phrase, “I like to play the stock market,” they are in essence talking in terms of a metaphor or analogy. That’s because the word “play” implies that the individual’s approach to the stock market is similar to playing, as in “playing a game or sport.”

The idea of a “metaphor” may sound like an esoteric concept but in reality metaphors are a normal ingredient of our everyday language. They are nothing more than “figures of speech” that we commonly use to make complex concepts like “investing” more concrete and, therefore, easier to understand.

The value and use of effective metaphors has been recognized for centuries. The ancient Greek philosopher, Aristotle, wrote, “The greatest thing by far is to be a master of metaphor. It is the one thing that cannot be learned from others; it is also a sign of genius, since a good metaphor implies an eye for resemblance.”

In the mid-1800s, while contemplating the values of life on Walden Pond, famed American writer and philosopher, Henry David Thoreau, observed, “All perception of truth is the detection of an analogy.”

And more recently, university professors George Lakoff and Mark Johnson, in their book titled Metaphors We Live By, wrote, “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”

My own personal background in the use of metaphors started when I was part of the training team for a two-week personal development seminar in 1990 hosted by peak performance and motivational expert Tony Robbins. It was during his introductory speech to our group of seminar trainers that Mr. Robbins said, “I’ve made a lot more distinctions about global metaphors. You all remember what those are? Yes? No? Global metaphors are symbols that we use to represent large areas of our lives.”

In the year 2000, I used the lessons that I learned from Tony Robbins about effective metaphors to write a Writer’s Digest award-winning relationship book titled Men Are Like Fish: What Every Woman Needs To Know About Catching A Man. In this book, I used the metaphor of “fishing” to help women understand men and “land” the love that they desired. In Men Are Like Fish, I equated the well-established fundamentals of successful romantic love relationships with the sport of fishing by linking the concepts of such things as “attraction” to the “bait,” “attachment” to the “hook,” “commitment” to the “net,” and the man that a woman wants to catch to the “big fish,” to name a few.

For nearly a decade, I appeared on over 230 radio and television talk shows sharing my insights on dating and romantic love relationships using my Men Are Like Fish metaphor. In sharing my message over time, I realized that a good metaphor’s magic lies in its ability to take a difficult subject and link it by analogy to something that is simple, familiar, tangible, and easy to understand. As a result, this higher level of understanding naturally leads to better performance and less frustration, whether it is in the area of dating, love relationships, or even investing.

When it comes to the subject of investing, the metaphor of “playing a game” fits well on several levels. For one, games are competitive activities that separate winners from losers. In addition, investing incorporates the elements of risk, rewards, percentages, probabilities, strategy, and money, which makes an analogy to gambling and wagering even more appropriate.

For many traditionally-trained investors, the ideas of “gambling” and “wagering” may not be something that they would be willing to embrace initially. That is perfectly understandable because historically investing wasn’t seen as a short-term gamble but more like a long-term sure thing. But as you probably realize by now, the game of investing has changed dramatically with our recent turbulent times.

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“To the rash and impetuous stock player, my advice is: Forget Wall Street and take your mad money to Hialeah, Monte Carlo, Saratoga, Nassau, Santa Anita, or Baden Baden. At least in those places… surroundings when you lose, you’ll be able to say you had a great time doing it.”

Peter Lynch ~ Author of One Up On Wall Street

CHOOSE A PLAYER-FRIENDLY TABLE: Do your stock trading with a reputable online discount brokerage firm for low commissions, minimum distractions, and maximum privacy.

Why waste your time and money doing business with full-service brokers whose main incentive is to generate sales commissions for themselves? If you’re going to make your own decisions in the stock market, then play it smart by trading with established low-commission firms such as Charles Schwab, Fidelity, E*Trade, Scottrade, TD Ameritrade, TradeKing, and Vanguard. All of these firms charge commission fees below $12 for most online transactions. But, more importantly, for those independent investors who play a unique approach to the stock market like Wall Street Craps is that you won’t have to deal with unexpected sales calls cleverly disguised as “unique timely opportunities” from full-service, high-commissioned brokers.

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“Broker: the end-result of turning a large fortune into a small one.”

Kurt Brouwer ~ Author of Unusual Investment Definitions (1987)