Part-1

Investing for Beginners

How Do Joshua Kennon Actually Make

Money From Buying Stock?
A Short Explanation of How to Begin Making Money
from Stocks
By Polin Hasan
August 19, 2017

If you listened to the financial media or investing press, you might get the
mistaken impression that making money from buying stocks is a matter of
"picking" the right stocks, trading rapidly, being glued to a computer screen or
television set, and spending your days obsessing about what the Dow Jones
Industrial Average or S&P 500 did recently. Nothing could be further from the
truth. It's certainly not how I run my own portfolio nor the portfolios that we
control at my family's asset management company.

In reality, the secret to making money from buying stocks and investing in
bonds was summed up by the late father of value investing Benjamin
Graham when he wrote, "The real money in investing will have to be made as
most of it has been in the past not out of buying and selling, but out of
owning and holding securities, receiving interest and dividends, and benefiting
from their long-term increase in value." To be more specific, as an investor in
common stocks you need to focus on total return and make a decision to invest
for the long-term, which means at an absolute minimum, expecting to hold
each new position for five years provided you've selected well-run companies
with strong finances and a history of shareholder-friendly management
practices.

That is the way real wealth is built in the stock market for outside, passive
investors. That is how:

Janitors earning near minimum wage, like Ronald Read, amass more
than $8,000,000 in their portfolio;

A man named Lewis David Zagor, living in a small apartment in New

York City, amassed $18,000,000;
Attorney Jack MacDonald accumulated $188,000,000;
Retired IRS agent Anne Schreiber built her $22,000,000 portfolio (That
was in 1995 when she died. Adjusted for inflation, it's the equivalent of
$63,250,000+ in early 2016);

Retired secretary Grace Groner built her $7,000,000 stock portfolio;

A dairy farmer near Kansas City accumulated millions upon millions of
dollars, which even his children didn't know existed.
Even successful, high-profile investors such as Warren Buffett and Charlie
Munger made the bulk of their money on stocks and businesses they held for
25+, even 50+, years.

Still, many new investors don't understand the actual mechanics behind making
money from stocks; where the wealth actually originates or how the entire
process works. If youve spent a lot of time on the site, you see that we
provide resources on some pretty advanced topics financial statement
analysis, financial ratios, capital gains tax strategies, just to name a few, but
this is an important thing to clear up so grab a hot cup of coffee, get
comfortable in your favorite reading chair, and let me walk you through a
simplified version of how the whole picture fits together.

Making Money from Stocks Begins By Purchasing Ownership in

a Real Operating Business

When you buy a share of stock, you are buying a piece of a company. Imagine
that Harrison Fudge Company, a fictional business, has sales of $10,000,000
and net income of $1,000,000.

To raise money for expansion, the companys founders approached

an investment bank had them sell stock to the public in an Initial Public
Offering, or IPO. They might have said, Okay, we dont think your growth
rate is great so we are going to price this so that future investors will earn 9%
on their investment plus whatever growth you generate that works out to
around $11,000,000+ value for the whole company ($11 million divided by $1
million net income = 9% return on initial investment.) Now, were going to
assume that the founders sold out completely instead of issuing stock to the
public (for an explanation of the difference, see Investing Lesson 1:
Introduction to Wall Street.)

The underwriters could have said, You know, we want the stock to sell for
$25 per share because that seems affordable so we are going to cut the
company into 440,000 pieces, or shares of stock (440,000 shares x $25 =
$11,000,000.) That means that each piece or share of stock is entitled to
$2.72 of the profit ($1,000,000 profit 440,000 shares outstanding = $2.72 per
share.) This figure is known as Basic EPS (short for earnings per share.) In
other words, when you buy a share of Harrison Fudge Company, you are
buying the right to your pro-rata profits.

Were you to acquire 100 shares for $2,500, you would be buying $272 in
annual profit plus whatever future growth (or losses) the company generated. If
you thought that a new management could cause fudge sales to explode so that
your pro-rata profits would be 5x higher in a few years, then this would be an
extremely attractive investment.

How Much Money You Make from Stocks Will Depend on How
Management and the Board of Directors Allocate Your Capital

What muddies up the situation is that you dont actually see that $2.72 in profit
that belongs to you. Instead, management and the Board of Directors have a
few options available to them, which will determine the success of your
holdings to a large degree:

1. It can send you a cash dividend for some portion or the entirety of your
profit. This is one way to return capital to shareholders. You could
either use this cash to buy more shares or go spend it any way you see
fit.
2. It can repurchase shares on the open market and destroy them. For a
great explanation of how this can make you very, very rich in the long-
run, read Stock Buy Backs: The Golden Egg of Shareholder Value.
3. It can reinvest the funds into future growth by building more factories,
stores, hiring more employees, increasing advertising, or any number of
additional capital expenditures that are expected to increase profits.
Sometimes, this may include seeking out acquisitions and mergers.
4. It can strengthen the balance sheet by reducing debt or building
up liquid assets.

Which is best for you as an owner? That depends entirely on the return
management can earn by reinvesting your money. If you have a phenomenal
business think Microsoft or Wal-Mart in the early days when they were both
a tiny fraction of their current size - paying out any cash dividend is likely to be
a mistake because those funds could be reinvested at a high rate. There were
actually times during the first decade after Wal-Mart went public that it earned
more than 60% on shareholder equity. Thats unbelievable. (Check out
the DuPont desegregation of ROE for a simple way to understand what this
means.) Those kinds of returns typically only exist in fairy tales yet, under the
direction of Sam Walton, the Bentonville-based retailer was able to pull it off
and make a lot of associates, truck drivers, and outside shareholders rich in the
process.

Berkshire Hathaway pays out no cash dividends while U.S. Bancorp has
resolved to return more 80% of capital to shareholders in the form of dividends
and stock buy backs each year. Despite these differences, they both have the
potential to be very attractive holdings at the right price (and particularly if you
pay attention to asset placement) provided they trade at the right price; e.g., a
reasonable dividend adjusted PEG ratio. Personally, I own both of these
companies as of the time this article was published and Id be upset if USB
started following the same capital allocation practices as Berkshire because it
doesnt have the same opportunities available to it as a result of the prohibition
in place for bank holding companies.

Ultimately, Any Money You Make from Your Stocks Comes

Down to a Hand of Components of Total Return, Including
Capital Gains and Dividends

Now that you see this, its easy to understand that your wealth is built primarily
from:

1. An increase in share price. Over the long-term, this is the result of the
market valuing the increased profits as a result of expansion in the
business or share repurchases, which make each share represent greater
ownership in the business. In other words, if a business with a $10 stock
price grew 20% for 10 years through a combination of expansion and
share repurchases, it should be nearly $620 per share within a decade as
a result of these forces assuming Wall Street maintains the same price-
to-earnings ratio.
 2. Dividends. When earnings are paid out to you in the form of dividends,
you actually receive cash via a check in the mail, a direct deposit into
your brokerage account, checking account, or savings account, or in the
form of additional shares reinvested on your behalf. Alternatively, you
can donate, spend, or pile these dividends up in cash.

Occasionally, during market bubbles, you may have the opportunity to make a
profit by selling to someone for more than the company is worth. In the long-
run, however, the investors returns are inextricably bound to the underlying
profits generated by the operations of the businesses which he or she owns.

To learn more about this topics, read The 3 Ways You Actually Make Money
Investing in Stock. You may also want to check out my Investing in
Stocks guide.

The Balance does not provide tax, investment, or financial services and advice.
The information is being presented without consideration of the investment
objectives, risk tolerance, or financial circumstances of any specific investor
and might not be suitable for all investors. Past performance is not indicative
of future results. Investing involves risk including the possible loss of principal.

10 golden rules of investing in stock

markets
The lure of big money has always thrown investors into the lap of stock
markets. However, making money in equities is not easy. It not only
requires oodles of patience and discipline, but also a great deal of
research and a sound understanding of the market, among others.

Added to this is the fact that stock market volatility in the last few years
has left investors in a state of confusion. They are in a dilemma whether
to invest, hold or sell in such a scenario.

Although no sure-shot formula has yet been discovered for success in

stock markets, here are some golden rules which, if followed prudently,
may increase your chances of getting a good return:
1. Avoid the herd mentality
The typical buyer's decision is usually heavily influenced by the actions of his
acquaintances, neighbours or relatives. Thus, if everybody around is investing
in a particular stock, the tendency for potential investors is to do the same. But
this strategy is bound to backfire in the long run.

No need to say that you should always avoid having the herd mentality if you
don't want to lose your hard-earned money in stock markets. The world's
greatest investor Warren Buffett was surely not wrong when he said, "Be
fearful when others are greedy, and be greedy when others are fearful!"

2. Take informed decision

Proper research should always be undertaken before investing in stocks. But
that is rarely done. Investors generally go by the name of a company or the
industry they belong to. This is, however, not the right way of putting one's
money into the stock market.

3. Invest in business you understand

Never invest in a stock. Invest in a business instead. And invest in a business
you understand. In other words, before investing in a company, you should
know what business the company is in.

4. Don't try to time the market

One thing that even Warren Buffett doesn't do is to try to time the stock
market, although he does have a very strong view on the price levels
appropriate to individual shares. A majority of investors, however, do just the
opposite, something that financial planners have always been warning them to
avoid, and thus lose their hard-earned money in the process.

"So, you should never try to time the market. In fact, nobody has ever done this
successfully and consistently over multiple business or stock market cycles.
Catching the tops and bottoms is a myth. It is so till today and will remain so in
the future. In fact, in doing so, more people have lost far more money than
people who have made money," says Anil Chopra, group CEO and director,
Bajaj Capital.
5. Follow a disciplined investment approach
Historically it has been witnessed that even great bull runs have shown bouts of
panic moments. The volatility witnessed in the markets has inevitably made
investors lose money despite the great bull runs.

However, the investors who put in money systematically, in the right shares
and held on to their investments patiently have been seen generating
outstanding returns. Hence, it is prudent to have patience and follow a
disciplined investment approach besides keeping a long-term broad picture in
mind.

6. Do not let emotions cloud your judgement

Many investors have been losing money in stock markets due to their inability
to control emotions, particularly fear and greed. In a bull market, the lure of
quick wealth is difficult to resist. Greed augments when investors hear stories
of fabulous returns being made in the stock market in a short period of time.
"This leads them to speculate, buy shares of unknown companies or create
heavy positions in the futures segment without really understanding the risks
involved," says Kapur.

Instead of creating wealth, these investors thus burn their fingers very badly the
moment the sentiment in the market reverses. In a bear market, on the other
hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and
greed are the worst emotions to feel when investing, and it is better not to be
guided by them.

7. Create a broad portfolio

Diversification of portfolio across asset classes and instruments is the key
factor to earn optimum returns on investments with minimum risk. Level of
diversification depends on each investor's risk taking capacity.

8. Have realistic expectations

There's nothing wrong with hoping for the 'best' from your investments, but
you could be heading for trouble if your financial goals are based on unrealistic
assumptions. For instance, lots of stocks have generated more than 50 per cent
returns during the great bull run of recent years.
However, it doesn't mean that you should always expect the same kind of
return from the stock markets. Therefore, when Warren Buffett says that
earning more than 12 per cent in stock is pure dumb luck and you laugh at it,
you're surely inviting trouble for yourself.

9. Invest only your surplus funds

If you want to take risk in a volatile market like this, then see whether you have
surplus funds which you can afford to lose. It is not necessary that you will lose
money in the present scenario. You investments can give you huge gains too in
the months to come
But no one can be hundred percent sure. That is why you will have to take risk.
No need to say that invest only if you are flush with surplus funds.

10. Monitor rigorously

We are living in a global village. Any important event happening in any part of
the world has an impact on our financial markets. Hence we need to constantly
monitor our portfolio and keep affecting the desired changes in it.

If you can't review your portfolio due to time constraint or lack of knowledge,
then you should take the help of a good financial planner or someone who is
capable of doing that. "If you can't even do that, then stock investing is not for
you. Better put your money in safe or less-risky instruments,"
 Part-2
The Easiest Way to Make $1 Million in
the Stock Market
BY DR. DAVID EIFRIG JR. |
Stansberry Research's 11 Steps to Maintaining and Building Wealth With Your Investments

In this essay, I'm going to show you the No. 1 strategy for retiring
wealthy.

By embracing this strategy, you'll be on the road to riches. Ignoring it

and getting lazy about using its power means you'll never have a chance
for the lifestyle you want.

But before I go on, let me warn you: You're probably not interested in
what I have to say. It's not some gold stock that's going to the moon. It's
not sexy. It's not a quick fix.

The secret is not hard to grasp. You just have to understand a few simple
principles. But as you might imagine, it does take some time and a little
effort on your part. And you have to start taking advantage of it right
now.

It starts with one simple idea... compound returns.

If you're not sure what compound returns are, don't worry. It's easy to
understand and a powerful tool when you put it to work.

Simply stated, compound returns are money you make off the money
you make. And the more money you make, the more money your money
makes off the money your money makes. I hope you're smiling, but
here's what happens...

Imagine you're 40 years old, have a $10,000 investment account, and

subscribe to my Retirement Millionaire letter. In one year, our portfolio's
conservative blend of assets returned a fantastic 18%. If you kept
reading year after year and kept making consistent 18% annual returns,
what would happen to your portfolio by the time you retire at the age of
68?

You'd have earned a million dollars.

The numbers are simple: If you start investing with $10,000 at the end
of the first year, you'll have about $11,800 (not including taxes or fees).
You made $1,800 on your initial investment.
But in your second year... you're not starting over at $10,000. The
$1,800 you earned in the first year will be making money for you, too.
So assuming gains of 18%, you'll have earned another $1,800 on your
original capital plus another $324 on the profits from the previous
year's $1,800.

You're not just multiplying $1,800 times 25 years. (That only gives you
$45,000.) Where does the other $903,000 come from? That's the
secret. The money starts making money on top of itself your money is
compounding.

The money you make in the first year, in this case $1,800, starts making
money in the second year, third year, and so on... It continues this way
for every stream of money you compound. So the $1,800 you make in
your second year also makes $324 in the third.

But there's more. The $324 you make in the second year generated by
your first $1,800 now makes $58.32 on itself in the third year. Take a
look at the diagram below and you'll see how by the end of your third
year, you'll have $16,430.

And the money just keeps building. Take a look at the chart below. You
can see how much money you'll have at the end of each year. By age 68
(28 years of compounding), it totals nearly $1 million. And if you wait
another couple years, until age 70, the compounding effect starts to
explode. At that point, you have almost $1.5 million.
You can see why this secret is so powerful. By plowing your earnings
back into your portfolio, you can get your money working for itself and
amass a fortune from your initial investments.

Part-3
How to Identify When a Stock is
Starting to Trend
In now my fourteenth year of trading, if I had to boil down one of the
key turning points in my ability to consistently make profits it would
be my ability to understand when a stock is starting to trend. This
concept earlier on in my career would baffle me because I could not
find a clear answer anywhere on the web or in books.
My search for when a stock is starting to trend led me down the path
of researching Elliott Wave analysis. Elliott Wave had strict rules
based on math that determined when a stock was becoming
impulsive, but these waves or counts would constantly change as the
stock moved.

Eventually I gave up on the idea of becoming an Elliott Wave expert,

not that it doesnt work, but because it didnt work for me. When
using Elliott Wave I found myself trying to anticipate or predict the
markets next move which made analyzing and profiting from the
market far too complicated.

In this article I am going to save you countless time and money by

providing you a clear cut strategy for how to identify when a stock is
starting to trend. Knowing when a stock is starting to trend is how
professional traders take the lion share of a stocks swing
move.While my strategy is specific to swing trading stocks, you can
apply the same principles to your trading methodology to increase
your gains.

First You Need a Trade Trigger

How do you know when a stock has just started trending? Do you
use a special indicator or trendlines? Do you apply the same method
to all timeframes?

These are the types of questions I would ask myself as I was trying
to determine when the party had officially started.

The first thing you need in determining the start of a sharp move is
a trade trigger. When I say trade trigger, this is basically a way for
you to know that the move has officially begun.

Why is finding a trade trigger important?

The majority of the time, there is absolutely nothing going on in the
market. Its all just noise. Stocks go up, they go down, they are flat
who can make sense of it all? The end game for the smart money
is to get you caught up in all of the nonsense, so you are not able to
hold on just long enough to book the real profits.

How to identify when a trend has started

To identify when a stock is trending, I use the following components:

1. P&F chart

2. 30-minute time scale

3. Trendline

4. 1-box reversal

5. Scaling method of Percentage

6. Box Size of 1 percent

Once you make all of these configuration changes, you will produce
a chart with an output that looks something like this:
Are you able to see anything in the chart that gives you a clue that
the stock just started an uptrend? You are probably focusing on the
sharp price move, but who wants to jump on a trade that late in the
game?

Look closer, back to when the trend began. Do you see it now?

Those blue lines represent the price trend based on a 45-degree

angle from a low. As the stock price backs into this line, if
penetrated a new line starts. Notice how the blue line in mid-
February had no breaks and carried the stock much higher.

Now how do we know that an impulsive move has just started? After
looking at literally thousands of price charts, I have concluded that
my trade trigger begins once a stock moves in one direction for 8
P&F boxes without violating the trend line.
A move of 8 boxes signifies that the bulls or bears are committed to
moving the stock in one direction regardless of the back-and-forth
gyrations. This controlling interest is also strong enough to maintain
the movement above a trend line.

Once the stock goes in one direction for 8 boxes, your trade is now
active. Until that point, everything and I mean everything is just
noise.

Let me repeat this statement before we move further in this article.

All of the price moves, head fakes, candlestick formations, are just
noise. Until the smart money shows their hand in terms of how far
they can push the stock, its all just games.

For you non-P&F practitioners out there, you will need to identify
when you believe the bulls or bears are ready to begin an impulsive
move. Without this level of certainty, you will constantly be in doubt
of when the money train has just left the station.

When do you enter the trade?

When you enter the trade will largely depend on your risk profile. For
me, I like to buy before the trade trigger is initiated. This means that
if I want to buy a stock long, I will buy the pullback in midst of all
the fear. This allows me to (1) get the stock at a discount and (2)
lower my risk if the trade trigger fails.

The other option, which I just did yesterday, is to buy the stock after
the trigger has been confirmed. While this increases your risk, you
have now confirmed
that

the uptrend has started.

If you buy the dip, the trend does not activate until the stock moves
8-P&F boxes. Until that point, you just sit tight.

If you take the more conservative route and buy after the trend is
confirmed, you will want to use the exit strategy to manage the trade,
which we will cover in the next section.
When to exit an Impulsive Stock

Now that you know the stock is impulsive, the next thing you need to
figure out is when to exit the trade. Stocks that are trending hard
have a shelf-life. Depending on the timeframe you are trading, this
shelf-life could be minutes, days or months.

For my swing trading system, I again use P&F charts to manage the
trade. I place a 15-period simple moving average on a 30-minute
chart to trail the price action. The thing I like most about placing a
simple moving average on a P&F chart is that it only moves when the
price moves. This is completely different from a standard price
chart where the moving average has to print due to the time factor. If
you think about it, just because a certain amount of time has
elapsed, this really has no bearing on whether the stock is still
trending or not.

Notice how the simple moving average is able to provide you clear
direction of when to exit the trade.
No matter what you use to exit the trade, the point I am trying to
convey to you is that it should be simple. The simpler you keep
things the greater chances of success you will have in the long run.

How Much Can you Expect to Make?

This article would not be complete without addressing the crystal ball
question of how much can you make on a trade. If you are asking
yourself this question, you are still very young in your trading
journey.
Please repeat after me, The market gives what it wants. I have no
control over how high or low a stock can move. Past successes and
failures are just that, past successes and failures.

The best you can do when attempting to gauge how far a stock can
run after an impulsive trend begins is to look at the volatility of the
stock. You can do this quite easily by using an indicator such as the
average true range.

For my swing trading system I like to find stocks on a weekly basis

that have an ATR range between 10% and 20% of the stock price.
For example, if a stock has a weekly closing price of $20, I like the
ATR to have a value between 2 and 3.

This ratio of the average true range to the stock price is my sweet
spot for risk/reward. It allows for just enough volatility that I can
capture large swing moves of 20% - 40%, without exposing myself to
extreme risk when I buy a stock on a pullback.

If you trade stocks that are more super volatile like biotechs or slow
clunkers like IBM, you will need to adjust the number of boxes to
gauge the beginning of an impulsive trend and you will also need to
adjust the length of the simple moving average for your exit strategy.

The tweaking of these two inputs will take some trial and error in
order to get it just right for your trading style, chosen timeframe and
risk profile.

How to know when you are wrong

Believe it or not, knowing when you are wrong is the most important
part of any trading strategy and is often the hardest thing to grasp.
For some traders they will try the 'cut your losses short strategy",
only to give their account the death by a thousand cuts.

So, how do you know when you are wrong? Well with my swing
trading system, after the trend trigger is active if the stock crosses
the simple moving average by 2 boxes or more, I know its time to
exit the trade.

The other way I know I have misjudged a trade is if the stock

develops another impulsive move in my desired direction. For
example, if i'm long the stock should pause, build cause and then
rally higher triggering an 8-box trade trigger. If the stock however,
builds a base only to move lowere again to form another 8-box trade
trigger, I know I am dead wrong. When this occurs, I will use the
next impulsive up move to exit the trade.

In Conclusion

You have to determine what it means for you to define a trend, ride it
effectively and then exit with a profit. There are a number of
methods, and studies on the matter, but you have to find the right
mix of ingredients that work for your trading style. If you utilize the
methods discussed in this article, you will start to see the market
through a new lens.

(Images Courtesy of Stockcharts.com)

Note:- At first Forgotten due to some unwanted mistakes.

You can let me know your comments about the writing and
what more can be written for you which will be beneficial for
you.
Email:-mahmudulhasan0650@gmail.com
The End