Stock Selection is THE MOST IMPORTANT part of
the Smartstock strategy. If you are investing for the long term, you
must choose a high-quality stock. While the Smartstock technique will
work with any stock, the risk to your capital is dependent on the quality
of your choice. The higher the stock's quality, the lower the risk.
Of course if you are aware of the risks, you can use Smartstock to manage
second tier stocks, or even speculative penny stocks. Smartstock is
a portfolio management tool. What you put into it is entirely up to
you.
We do, however, recommend you use high-quality
selections - because we feel that capital preservation is paramount.
That said, let's look at some key points for selecting a good stock.
The Two Major Investment Styles: When looking
for solid stocks, investors tend to use one of two basic styles - value
investing or growth investing.
Value investors look for stocks that are priced
at less than what they are actually worth, whether it's because they're
out of favor, had a bad quarter, or whatever. The value investor will
search for companies that have assets valued higher than the total value
of the company's stock, look at fundamentals that suggest the company's
stock price is temporarily under-valued, or buy companies whose stock
price has been driven down by outside factors.
This style requires absolute logic and a willingness
to go against the crowd. It also requires a fair amount of research
and basic accounting skills. In general prices have already fallen,
so value investors minimize their downside risk. If you can't stand
the thought of paying a high premium for a company's future growth potential,
this is probably the route for you.
Growth investors, on the other hand, look for
companies where earnings are growing, markets are expanding, and the
stock has momentum. They like companies that have a faster growth rate
than the market as a whole, a leading position in a fast growing sector,
or a new technology that will provide a distinct advantage.
This style of investing usually carries a higher
level of downside risk, because growth stocks tend to get all the media
attention, be in hot sectors, and draw the speculators to them. They
also tend to be more volatile, than value stocks, and are thus better
suited for use with Smartstock.
However either style will work with Smartstock.
The key point to remember is that there are good value stocks and bad
value stocks. Similarly there are good growth stocks and bad growth
stocks. Choose the good ones.
Once you've found some good stocks, what do you
look for next?
Volatile Stocks: The key ingredient is volatility.
A stock that fluctuates notably in a short time period will work extremely
well with Smartstock. There are stock screening tools available on the
Internet that can find volatile stocks for you. If you look at a chart,
U and V patterns (and their upside down counterparts) visually signal
volatile stocks. You can also look at the percentage gain or loss each
day. High percentages indicate good candidates.
Cyclical Stocks: A cyclical stock usually operates
in an industry that runs on cycles. In good times, the price rises,
in bad times, the price falls. If you can find a stock with a reasonable
period, it should be a good choice for Smartstock. Be aware, however,
that these stocks generally accumulate returns over a longer period
of time - compared with their volatile cousins.
Rolling Stocks: Some stocks trade in a very noticeable
range. They rise until they meet a certain price, then fall until they
reach a lower bound. Then they rise again. These stocks are ideal Smartstock
candidates because they fluctuate in a very precise manner. This allows
you to time your price updates accordingly.
Smartstock will use these price fluctuations to
generate a profit. The more fluctuations that occur, and the greater
the price change, the larger the returns will be. And therein lies the
beauty of the technique. You don't have to choose a stock that will
continually rise (such as in the buy and hold system), nor do you have
to choose one that will go down (as with short selling strategies).
Rather you choose a high quality stock and reap rewards whether it goes
up or down.
In addition to fluctuating share prices, here are some other points
to consider.
Buy, don't be sold. Do your own due diligence and
don't listen to others unless they can back up what they say with
facts.
Be a realist. Let your priorities be the
sole reason for an investment. If you know you will need your money
in 2 months, put it in a guaranteed investment vehicle.
Use margin sparingly. Margin can help you
take advantage of unique opportunities. But always remember you are
taking out a loan. One that will have to be paid back. In addition,
if your holdings go down, you may be required to deposit additional
funds - or risk being forced to sell your stocks at a poor price.
If you do decide to use margin , buy only high-quality stocks, and
pay it off as soon as possible.
Use knowledge. Purchase stocks based on facts,
not rumors or tips. Above all, don't try to predict the future, rather
concentrate on minimizing risk.
Don't try to get-rich-quick. It doesn't work.
Over time, the disciplined investor wins the race every time. Use
Smartstock and follow its recommendations unless you have a good reason
not to. You'll likely do much better and will definitely experience
less stress.
Take action. Review your portfolio regularly.
If the fundamentals change, and your stock choices need improving
or upgrading, do it right away. Delayed action translates into delayed
benefits.
Don't doubt. Once you're convinced Smartstock
is the superior system (and you should convince yourself before using
it to manage your money), stick with it through the ups and downs.
Don't second guess Smartstock recommendations.
The heart of Smartstock is the analysis engine. It's based on a time-tested
algorithm developed by Robert Lichello in the 1970s. Over the years
Lichello's algorithm has been significantly improved. Smartstock not
only implements the very latest improvements, but also harnesses the
power of your computer and the Internet to make managing your investments
a breeze.
Lichello came up with a simple system based on stock market volatility.
Unfortunately, the theory was too far ahead of its time. When first
developed, it was not feasible to perform the necessary calculations
frequently enough. The system still worked, but many buy and sell signals
were missed. The proliferation of the computer, and the Internet, has
changed that. Hundreds of calculations can now be performed in a second.
Furthermore stocks are much more volatile today, and the Internet brings
an unprecedented amount of financial information right to your desktop.
These key developments have combined with Lichello's algorithm to usher
in a system that can significantly increase your investment returns.
The analysis engine operates on the principle of letting the price
(and optionally volume) dictate the response. It does not try to predict
the future. In other words, all of the required information is in the
price (and volume).Combined with your portfolio's unique history, buy,
sell and hold recommendations are produced.
When starting your portfolio, Smartstock usually recommends you buy
some shares and keep some cash (however there are some models that have
you start without any cash reserves). You can configure the exact percentages
or simply use one of the built-in models.
When you update prices, Smartstock calculates your new portfolio value
and checks it against your portfolio's history. If it has gone down,
Smartstock will determine whether it is time to buy a small amount of
additional shares at the lower prices. Conversely, if your portfolio's
value rises, Smartstock may advise you to sell a portion of your holdings
to lock in a small profit.
In effect, you buy when prices are low and sell when they're high.
As share prices fluctuate, Smartstock will efficiently buy and sell
to purchase cheaper shares and lock in small profits. Your portfolio
benefits to a small degree with each iteration (whether because of obtaining
shares less expensively or locking in a profit). Over time, these small
benefits quickly add up, and your portfolio will experience a compounding
effect. You can see that the more volatile a stock, the better Smartstock
will perform.
Another benefit is that Smartstock will balance your cash and equity
positions based on the prevailing market conditions. You'll find that
when the market is relatively high, you'll be flush with cash - ready
to buy when prices start to fall. When the market is relatively low,
you'll be fully invested - ready for the upswing. And that's exactly
what you want. As prices fall, you want cash available to purchase shares
at lower prices. As prices rise, you want to be fully invested to take
advantage of the rising trend. Because of this, your risk is constantly
minimized. Smartstock ensures that's the case. Automatically.
You'll also notice that you don't have to watch the market. In fact
all you have to do is choose when to update your share prices. Smartstock
removes all the emotion from your decisions. As any professional investor
will tell you, "emotions are deadly."
Selecting
the Right Stock