, sellhigh’’ is not easy. It is compelling to listen to the majority and fallinto the greed trap as prices rise or into the fear trap as prices fall.Taking a calmer, more rational approach makes perfect sense but itdemands discipline.It is that one attribute—discipline—that deﬁnes successful investors and traders. The timing of decisions can be made in severalways:1. Emotional and reactive. The most common form of timingis a train wreck in your portfolio. It causes great harm to your portfolio’s net worth to act emotionally as both greed and fear lead topoor decisions. If you react to what everyone else is doing, you willbe wrong most of the time. This is why shooting from the hip in themarket, which may occasionally result in fast and easy proﬁts, is alosing battle. Eventually, the poorly timed decisions will outpace thelucky, well-timed decisions.2. Short term and exploitive. An equally damaging policy is tothink short term and violate your own investing goals. For example,if you sell stock any time a small proﬁt appears in the price, you willmiss opportunities. If you picked a good company for all of thefundamentally right reasons, taking proﬁts does not make sense.Short-term prices swing up and down and you might be able to getback into the stock at a lower price. But if the price continues moving upward, you lose that opportunity forever. Even more of a problem is that when you sell only those stocks that become slightlyproﬁtable, you end up with a portfolio of underperforming stocks.By attrition, you end up selling the winners and holding the losers.It is also short-term thinking to panic and sell stock if its market
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value falls a few points. Remember, if you picked a company for theright reasons, a short-term price decline is not permanent.3. Contrarian and analytical. The sensible timing approach isto act as a contrarian and rely on sound analysis. Contrarian investing is most commonly thought of as simply doing the opposite ofthe majority, but that is only part of the bigger picture. A contrarianalso applies discipline to resist the all-too-easy emotions that rulemarket thinking. Everyone feels the emotions. When the marketfalls in triple digits in a matter of hours, you wonder whether youhave picked the wrong stocks. When the market rises in triple digits,you wish you had bought more. These greed and fear reactions arehuman. But acting on these emotions is a mistake and leads to poortiming.
Market Emotions and Their EffectIt is worth exploring the nature of greed and fear a little bit furtherto better understand how to develop a smart timing policy. If youreally want to ‘‘buy low, sell high,’’ you need to recognize when yourinstincts are right and when they are wrong.Instincts are actually informed opinions. Your timing aboutwhen to buy or sell shares might be based on your instincts, and aslong as your fundamental and technical analysis support that opinion you will do well to follow them. Question why you are thinkingof buying or selling. Do you have a sound reason? For example, ifa company’s latest earnings are higher than everyone thought andthe fundamentals (such as debt ratio, net income, and dividends)are strong, those are all good signs. But what if the stock’s price hasfallen along with the rest of the market? If the price today is lowerthan you believe the stock is worth, then it is a bargain. If yourinstincts—accompanied by the signs you ﬁnd in your analysis—tellyou to buy, then you should buy. But if your instincts are emotionaland without any good reason, then buying is probably a mistake.The same rationale applies to selling. Before selling, considerthe nature of fear as part of your analysis. For example, if youbought shares of stock because all of the fundamentals were what
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you expected from a company, then you probably made a good decision. If dividend yield is high and P/E is low, while revenues andproﬁts grow each year and the company is exceptionally well managed, all of the signs support your decision to buy and hold thatstock. But what if the price falls? In fact, if your original reasons forbuying continue to apply, you should not sell out of fear. As long asthe numbers still look right, hang tough and do nothing, or buymore shares at the current bargain price.The rational, analytical approach also has limits, of course. People tend to rationalize, even when their decisions turn out to bepoor ones. And everyone makes timing mistakes, even with the mostthorough analysis. For example, what if you bought shares in a company based on good fundamentals, but the picture has recentlychanged?For example, in mid-2007, a lot of ﬁnancial stocks looked goodeven as the credit crunch and housing subprime problems were accelerating. Shares of Citigroup, Bank of America, and WashingtonMutual were considered by most analysts to be sound investments.The dividend yields were exceptional, proﬁts high, and prospectspositive. But by autumn, those same companies had been downgraded, stock prices fell to as much as one-half their summer levels,and the likelihood of recovery seemed remote at best. Anyone whobought shares in these companies in summer 2007 had made a mistake.Does this mean those people should have sold their shares atone-half the purchase value? Even though buying these companiesat their market value in the summer turned out to be poor timing,the decision to sell should be based on fundamentals and not onthe basis of fear. Most ﬁnancial companies faced the prospect ofsubstantial losses based on subprime problems, but in the long termwere they ‘‘bad’’ investments? No one can read the future, but youcan make decisions based on strong fundamentals and the prospects of cyclical turnarounds.The ﬁnancial stocks, like all sectors, go through cyclical changesand history shows that even with bad timing and poor decisions, itis not always wise to ‘‘cut your losses.’’ In some cases, you simplyhave to hold on and ride through the downturns and wait until the
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sector begins to move in a positive direction. The bottom line isthis: If you buy stock for the right reasons, a downturn is always atemporary problem and eventually the stock price will rebound. Youonly lose permanently when you buy inﬂated-value stocks at exceptionally high prices, and the decline in value is a return to a morerealistic level.This distinction is a critical one. There is a tendency in the market to believe that all price movement is the same, and that it alwaysoccurs for the same reasons. But in fact, there are many differentreasons for stock prices to change. An overpriced stock (recognizedby extremely high P/E and a rapid, irrational increase in price levels,for example) is likely to fall rapidly when market-wide prices decline. A well-priced stock may also follow broader trends in price,and a decline to bargain price levels is typically followed by a returnto a reasonable price.
Relying on the Fundamentals: Growth Versus ValueJust as price movement cannot be assumed to occur for the samereasons in all cases, not every stock reacts to market conditions inthe same manner. Volatility is often determined by sector, overallmarket conditions, the way a company is managed, its competitiveposition, or the long-term cyclical conditions for a speciﬁc sector.Reliance on fundamentals is the best way to avoid big mistakes.This reality has been proven over and over. If you look back at history, you quickly realize that exceptionally strong companies (interms of fundamentals) perform well in all kinds of markets andany decline in price tends to be temporary. By the same argument,companies with weak fundamentals may rise in some markets, butthey tend to perform poorly over the long term. Strong fundamentals in the volatile year 2007 created a lot of price chaos. Even so,strong value companies like Altria, Coca-Cola, Exxon-Mobil, McDonald’s, and Merck had strong price rises in 2007. Even while theDJIA fell from 14,000 to the high 12,000s level, the fundamentallystrong companies simply continued to rise in price throughout theyear. It was as though these stocks were immune to the chaotic
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price swings that affected the brokerages, banks, and big mortgagelenders. What did these companies have in common?It is really quite simple. In fact, it is so simple that even beforethe volatility of 2007, a short list of value stocks would have led toa strong, proﬁtable portfolio. The value investing approach is alwayswise, and timing of purchases of these stocks should be based onfundamental strength in the company versus technical volatility inthe market as a whole. In other words, the more you see triple-digitmovement in the indices, the more you should retreat to the safer,stronger companies. Their common attributes include exceptionalmanagement, strong proﬁtability, dominance in their sectors, andlow core earnings adjustments. The core earnings observation isbased on a reality about the way the fundamentals work. You willﬁnd that the lower the annual core earnings adjustments, the morestable the stock price tends to be. This is not a blanket truth, but thetendency does hold. In fact, companies with little or no core earnings adjustments also tend to report gradually rising stock price values over time. They are immune to short-term volatility in the sensethat their value simply continues to grow each year.In addition to the basic fundamental tests, you will ﬁnd thatthese value companies tend to report consistent or increasing dividends each year, and maintain low debt ratios and low P/E ratios inall kinds of market conditions. A value approach to investing maybe accurately described as ﬁnding well-managed companies that areimmune to the short-term chaos of markets, as seen in index pointchanges.Many analysts make a distinction between value and growth,and you may often hear the odd description of market activity as a‘‘retreat to value.’’ This description is odd because value should bein season in all conditions. But some investors ﬁnd value companiesboring and too slow moving compared to the faster action in‘‘growth’’ stocks. The deﬁnition of growth is elusive, however. Themost popular deﬁnition is that a ‘‘growth’’ stock is one for a company whose earnings are outpacing the average of its industry. Theytend to pay little or no dividends, based on the argument that proﬁtsare better used to fund future growth. Many investors are enamoredwith stocks like Google, whose market value has been impressive.
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But when you look at Google’s fundamentals, questions have to beraised concerning market risk and safety.Some of the fundamentals are very positive. Debt ratio is closeto zero and core earnings adjustments are quite small. However,some other indicators are troubling. For example, the market priceof Google as of early December 2007 was $684 per share (with a52-week range of $437–$747), but tangible book value per sharewas only $49 as of the latest ﬁscal year end. No dividends were paidand the most disturbing ratio was the P/E, at 53.Even with many strong fundamentals, the zero dividend and exceptionally high P/E make Google a classic growth stock. But withsuch a high P/E and volatile price movement, the stock also contains exceptional market risk. The potential for strong growth isalways accompanied by equally strong market risk, and that is thepoint. So a ‘‘retreat to value,’’ which often is expressed as a negativesign in the market, is actually quite prudent. Price action in theﬁnancial markets in 2007 (previously considered to be solid stockswithout exception) demonstrates that the retreat often representssimple, prudent investing and smart timing.
Studying Stocks in Terms of Value and GrowthThe selection criteria for stocks can and should include a study ofboth fundamental and technical indicators. Limiting selection tocompanies with exceptionally strong fundamentals is an importantstarting point, because these tend to report lower price volatility,faster recovery from price declines, and long-term value andgrowth. The alternative of picking stocks solely for the purpose ofgrowth, without consideration of fundamental strength or sectorposition, is highly speculative.Even so, growth can and does occur among value stocks, as thevolatile history of the 2007 stock market demonstrated. Criteria forselection may include many important attributes combining bothfundamental and technical indicators. A limited number of important indicators should provide enough information to determine
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which stocks offer the most suitable and promising market performance with minimal risk. These criteria may include:• Steadily growing revenues and net proﬁt with low fundamentalvolatility• Little or no core earnings adjustments• Annual growth in dividends for at least 10 years• P/E ratio between limited ranges, such as 10 to 25• Steady or declining debt ratio, preferably on the low side• Exceptional management reputation over many years• Leading competitive position within a sector• Moderate to low trading range over the past year• Ten-year trend of rising stock prices, not falling pricesCertainly, additional criteria can be included. However, usingall of these indicators helps narrow down a list to a few exceptionallystrong investment candidates. Are they, by deﬁnition, value stocks?They probably are, but this deﬁnition must also include price considerations. The ideal growth stock also has to be priced at a bargain, and this is where market timing is so important. You can easilybuy a stock at an inﬂated price, even if it is a value stock. This onlymeans that it will take longer to realize a proﬁt. But even the beststocks are likely to follow market trends. In volatile markets characterized by many triple-digit moves, you will see stock values declineby 4 or 5 percent in a single day, and sometimes by more. Assumingall of the other selection criteria are in place, it makes sense to buyshares of exceptional value companies at times when prices havefallen. This pattern represents a dip in the price wave and not anemerging negative trend. When a company reports strong fundamentals over a decade and the price action follows suit, it is a valuecompany.Some will point to the negative experience with companies likeEnron, claiming that it is possible for unethical management to‘‘cook the books’’ and report positive fundamentals even when thewhole thing is falling apart. This is true, but only over a period of
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two or three years. Cooking the books eventually gets found out,and it is impossible for any company to fool investors for a completedecade. So if you look only at the current indicators and do notinclude a full 10-year study of the important trends, then it is possible to be deceived. Cases like Enron make this point quite well. Enron’s price and reporting history was extremely short term.Management fooled most people, including the prestigious DowJones Company, which had added Enron to its utility averages in1997, before its book-cooking ways were revealed. Four years later,in 2001, Enron was removed from the index. The whole Enronmess took place over only a few short years; in fact, the bigger thescale of deception, the more difﬁcult it is to continue it for anylength of time.It is certain that future ﬁnancial scandals will erupt, even amongcompanies with long-standing ﬁnancial reports. But it is easy to spotemerging or questionable trends. Whenever the ﬁnancial picturelooks unusually good after a period of relatively low volatility, question it. When a company reports a single year with a spike in earnings, you should be dubious. Well-managed companies tend toreport fairly consistent outcomes unless extraordinary events (likemergers and acquisitions, class action lawsuits, or labor strikes)occur. These aberrations are easily explained. It is the unexplainedand odd variation away from a trend that should raise suspicion.It is ironic that in the greed- and fear-dominated market someinvestors do not raise questions even when they should. Many thousands of people put too much money into Enron stock and did notask questions, simply accepting the huge paper proﬁts derived fromgrowing stock prices. It would have been wise to ask questions, butin a market where proﬁts continue occurring month after month,the common tendency is to not question the trend and justassume—unrealistically—that it will continue forever. The sad outcome is that eventually those cooked books catch up and the wholeprice structure evaporates, usually overnight. You would think thatinvestors would learn from the Enron experience, especially thosewho lost their life savings, but unfortunately, these self-delusionaltendencies are repeated time and again.To avoid making these kinds of mistakes, avoid the temptation
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to let your timing and stock selection be based on greed and fear.Thorough, careful analysis is much less interesting—and somewould even call it boring—but ultimately, you will end up with lessrisk and more proﬁts than those willing to speculate in pursuit offast and easy proﬁts. They often discover, too late, that fast and easylosses are more likely.
The Short-Term TemptationBesides the advice to ‘‘buy low, sell high,’’ another bit of marketwisdom informs you that ‘‘the market rewards patience.’’ No matterhow much experience you accumulate as an investor, you can neverremind yourself too often about how true this is.The impatience of many investors leads to ill timing and even tothe selection of the wrong stocks. Short-term thinking comes withmany self-destructive attributes, including:1. The tendency to sell too quickly. When investors think interms of today, this week, and this month they lose sight of the longterm. Even if their stated investment goals include a ‘‘buy and hold’’strategy involving value stocks, once prices rise slightly the tendencyis to take proﬁts. This is self-destructive. It turns investors with conservative risk proﬁles into speculators with high-risk proﬁles; inother words, short-term thinking can and does destroy an investor’sobjectives. Stating the objective is only the ﬁrst step; following yourown rules demands consistency and discipline, and this is where thetask is much more difﬁcult.2. Moving in and out of stocks when price action is not fastenough. Another attribute of short-term thinking is seen in the addiction to action. Traders like to be players and to move in and outof positions and watch their values change by the hour, or even bythe minute. It is very exciting to double your money in a single, ﬁveminute trade. Even though this does happen, it is as easy to lose halfof your money just as quickly. The addiction to the action can beself-defeating.
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3. Failure to recognize or appreciate long-term value. Shortterm traders have no interest in holding onto stocks for many years,or even for a few months. Their impatience tells them that if theydon’t make a double-digit return in a matter of weeks, their moneyis sitting idle. But in many sound investments, it is necessary to waitout the market. In conditions of great volatility, growth stocks maygain or lose double-digit percentages of value, compared to valuestocks that tend to rise slowly and steadily over time. Even in a downmarket, well-selected stocks outperform the averages simply byholding their value. As long as stocks inch upward, even in a sideways market you may beat the average by reinvesting dividends andwaiting for the beneﬁts over time.The point to remember is this: Market timing requires intelligent analysis to be effective. Anyone who relies on unsupported instinct and who acts based on greed and fear is going to buy high andsell low. This is self-defeating. When you pick solid, well-managed,competitive, strong companies, the day-to-day price movementdoes not matter; you are more interested in the long term.In volatile markets, you serve your interest well by holding ontowell-picked value stocks and using options to take proﬁts or to buyat advantageously low price levels. By leaving most of your capitalinvested in exceptionally good companies, you ultimately prove that‘‘timing’’ is often a matter of waiting over a period of months oryears. As long as your overall proﬁts beneﬁt from this strategy, anyshort-term opportunities you might lose will be found in a sea ofpotential losses of equal potential.The next chapter concludes the discussion of stock investing bysummarizing the major points that determine the health and safetyof your portfolio. A wise investor knows that continually evaluating,thinking into the future, and pondering risk are the keys to buildingwealth and to protecting yourself. Remember, all losses are unexpected, whereas consistent proﬁts are planned. As the next chapterexplains, setting your risk proﬁle and investment policy deﬁne thekind of investments you should make.
C H A P T E R
1 2
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Y
ou will beneﬁt by applying all of the information presented in thisbook, which is designed to help you make informed market decisions. All of the factors and tools for analysis, tempered by anawareness of how they commonly are misapplied, show the investorhow to make valid comparisons in order to arrive at sensible decisions.A common problem in the market is to use the wrong information, or to apply the right information in the wrong way. For example, an investor might buy a stock because it has a high P/E ratioand because the DJIA is on the rise. Neither of these factors actuallyreveal whether the company represents a timely investment, and thedecision does not address the issues that should be at the heart ofthe decision.The recent past is quite revealing. Thousands of investorsbought shares of Amazon.com over many years and the values keptrising. However, the company only recently began earning a proﬁt.209
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So what was the basis for the decision? Shake-out in dot.com companies overall have made the following point: The majority of investment decisions are made with a lack of information after lookingat the wrong indicators, or are based on the desire to make quickand easy proﬁts without foundation in the company itself.This chapter demonstrates how the short list of ideas introducedin the preceding chapters are used together to develop a powerful,well-based program that will improve proﬁts and protect investorsagainst common mistakes.
Seven Market MythsThe stock market is a place where magical thinking rules, wheresuperstition and easily disproved beliefs rule, and where luck is considered as valid a guiding force as earnings per share (EPS); perhaps luck is even the stronger force.The market feeds itself on rumor, myth, gossip, and odd beliefsabout money itself. For example, many people believe that there is aﬁnite amount of value in the world. If this is true, anyone whomakes money from buying a stock is taking that money away fromsomeone else. This is clearly untrue. In a free market economy,wealth is created out of proﬁts. As a corporation earns proﬁts, itpays taxes that fund governments on federal and state levels; it creates jobs and ensures a healthy economy for families, leading towealth accumulation through savings, home ownership, and investment; and it fuels innovation and invention to keep the economycompetitive on a global level.The proﬁt motive is a positive force. Every invention has beendriven by a proﬁt motive and successful invention has been rewarded well in the market. Computers, the Internet, digital cameras, cell phones, ever-smaller communication devices, saferconsumer products, and fuel-efﬁcient appliances and automobiles—the list of improvements in technology is endless. Quality oflife and longevity itself continue to improve as the proﬁt motivedrives the economy forward. The average life expectancy in theUnited States has nearly doubled in the past 150 years. The increase
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in life expectancy reﬂects improved healthcare, diet, and environmental conditions:Life Expectancy in the United States:1Caucasian Only
Non-Caucasian Only
Year
Men
Women
Men
1850190019502000
38486675
41517280
Women
Not Available333559636875
This does not mean that proﬁts in the stock market is solelyresponsible for the higher life expectancy in the United States today.However, the proﬁt motive has fueled innovation and it is the intrinsic uniting feature in the free market economy. In fact, the twentiethcentury experiment with Communism in many parts of the worldmakes the same point in the negative. Life expectancy in the previous USSR and more recently, in Russia, has been consistently lowerthan in the United States. There may be many reasons, includingwell-known chronic heart disease and cancer rates, but this alsoraises the question about better health in free market economiesversus poorer health in state-controlled economies.As an investor, dealing with the myths about how markets workis a wise step in mastering stock market theories and practice. In afree economy, the proﬁt motive is a driving force that increases taxrevenues and creates jobs and ultimately leads to better health andsafe environments. As a stockholder, you participate in this vibranteconomic growth. As the market itself grows into a global force forchange, the entire world economy is likely to beneﬁt from the historical forward-moving themes so consistently seen in the UnitedStates.However, myths continue to dominate the market. Part of thestock market culture is based on a few common threads. Seven ofthe most persistent market myths are:1. The only way to invest is to buy and hold for the long term.The well-known ‘‘value investor’’ is a very conservative individual
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who believes that you cannot make money by moving in and out ofpositions. The idea is to ﬁnd a good company, buy its stock, andthen literally forget about it for many years, or even for decades.The extreme devotee of value investing believes that you should buyand hold for decades rather than for years, but this is questionableas a hard-and-fast policy in a quickly changing world. For example,10 or 20 years ago, most people would have agreed that companieslike Eastman Kodak, General Motors, and Polariod were premiumvalue companies that conservative investors should hold for the longterm. But even over a 10-year period, the fortunes of these companies declined. Changing technology and new forms of competitionhave made many past beliefs about these companies obsolete today.The ‘‘right’’ holding period of a company must be based on a continual review of the overall market and of each market sector. Thisdoes not mean you need to spend many hours per day studying themarket, but you need to be aware of a reality: Today’s ‘‘excellentstock’’ is likely to go through changes in the future, and some ofthose changes will create obsolescence of product or of management beliefs.2. You should have done something different in the past. Investors have been known to beat themselves up over missed opportunities or poorly timed decisions. Regret is popular but nonproductive.It tends to destroy your self-conﬁdence and leads you to questionyour own good ideas. Overthinking past mistakes is destructive andmakes too many people excessively risk-adverse, so that (ironically)they miss future opportunities as a result. A more sensible approachis to learn from mistakes and then move beyond them. If the strategies you employ and the analysis you apply make sense in mostsituations, don’t waver. You are going to make mistakes and sufferlosses; everyone who invests money in stocks will experience downward price movement at some time. But that does not mean yourstrategies are ﬂawed. Truly successful investors experience a reduced rate of losses because their analytical approach is intelligent.Don’t allow yourself to suffer from the myth that ‘‘good’’ investorsdo not make mistakes. The truth is that good investors are thosewho learn from their mistakes.
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3. Tips point the way to exceptional value. The insidious beliefin the reliable rumor has caused more mischief in the market’s history than any other force. It is the basis of greed and fear and itoverrules all rational, analytical thought. Many investors are fast toreact to a well-placed tip, even without ﬁrst asking whether it is true.There is an ever-present sense that decisions must be made rightnow or the chance will be lost forever. For example, if the tip is thata stock’s value is going to rise in the next few days, the tendency isto buy without applying sensible tests. If the rumors say that a stockis about to lose value, the tendency is to sell or to get out beforethose losses occur.It is a smart approach to try and ignore all rumors. Even goingonto investment chat lines can be a problem, because you have noway of knowing who the people are that are making claims. Thetruth is, those who really know what is going on in a company arenot going onto chat lines to share information with the world. Infact, there really are no good tips. Even if there were good ways toget the inside scoop, it is against the law to act on that information.People go to prison for making trades based on information notknown to the general public. A favorite online pastime is the pumpand dump. Someone owns shares in a company and they chat upthe stock on chat lines by spreading rumors about takeover announcements about to be made, new products, and as yet unannounced good news. The purpose is to drive up the price of thestock, with the idea of selling it when the price goes up. The pumpand dump is illegal, but this practice continues to occur.4. Big institutions have special knowledge individuals do nothave. Mutual funds, insurance companies, pension plan administrators—in other words, ‘‘professional’’ managers—are believed tohave exceptional skills in picking stocks and in timing their marketdecisions. But history contradicts this belief. Only about 10 percentof all mutual funds outperform the S&P 500, for example. Theoverall record of mutual fund performance is quite dismal, and theonly way to ‘‘beat the averages’’ is to reinvest earnings. The longterm effect of compounding is quite amazing, even at a dismal rateof return. For example, what does it mean when you read that ‘‘if
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you had invested $10,000 only 20 years ago in this fund, your account would be worth $26,500 today’’? In fact, it means the averagereturn was only 5 percent per year, and that all earnings were reinvested. But there are ﬂaws in this assumption. First, no allowance isincluded for taxes so the after-tax compounded rate would be muchlower. Second, the mutual fund picks its date for making this claim.If you put a lump sum of money into a fund when prices were highand they later fell, you would not enjoy the average return. Thisillustration also fails to discount the overall return for the numerousfees charged by the fund.Realistically, institutional performance in the market has beenvery poor, proving that even the most skilled professional managersreally do not have an inside track on picking stocks. Furthermore,the incentives for timing are often not in the best interests of stockholders. Fund management has been known to time buy and selldecisions to reﬂect the best possible quarter-end report of their performance. It is possible a fund will sell a company’s stock to bolsterits overall return, even if the indications are that the stock should bekept in the portfolio longer. You can reinvest dividends in individualstocks, or make other market decisions on your own; compared tomany of the mega-funds with billions of dollars under management,individuals have much greater ﬂexibility and can buy or sell withinmoments. A big fund with broadly diversiﬁed holdings cannot makeportfolio-wide decisions quickly, because their holdings in individual stocks may be too large. In addition, because a fund has to limitits percentage of ownership in any one company, it may be necessary to diversify so broadly that overall returns will suffer. Mutualfund investing can be quite proﬁtable, but a realistic conclusion hasto be that ‘‘exceptional management knowledge’’ should not be aprimary reason to choose them.5. Diversiﬁcation is boring; you should go for proﬁts instead.The speculative approach—seeking fast proﬁts by placing money insingle stocks—is appealing. The ‘‘greed factor’’ dominates speculative thinking and some speculators may experience one dazzlingsuccess after another, for a while. But greed also mandates thatproﬁts be churned back into positions for even higher proﬁts. It
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takes only one badly timed decision to wipe out all of the proﬁtsaccumulated over many months. Sadly, many speculators act solelyon the basis of greed and they do not understand risk