, you could have bought
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FIGURE 9.1
The 200-Day Moving Average in Ford Motor Company
FIGURE 9.2
The 200-Day Moving Average in General Electric
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shares practically every month since July 2001. Your shareswould now show a loss based on your average entry price; however, this is a long-term strategy designed to give you profits overthe course of several years or more. If had you started your program in July 2001, your average cost would be about $31 pershare. If and when GE increases in price to $31 per share, youare even on your investment, with any price over $31 per sharebeing profitable. Presumably, if you had been consistent withyour program, you would own a large number of shares at a lowaverage price.
DRIP YOUR WAY TO SUCCESSDRIPs, or dividend reinvestment programs, offer a most fantastic opportunity to new investors. DRIPs are programs thatallow investors to buy shares in major U.S. companies withoutpaying commissions. If you have ever seen how much of youraccount goes to pay commissions, I know you’ll be interested inDRIPs. To learn more about DRIPs, see the Resources at theback of the book or read about DRIPs on the Internet. There isa wealth of material available. Furthermore, there are mutualfunds that invest only in DRIPs. This is an ideal situation for thesmaller investor, and I highly recommend it not only from thestandpoint of the DCA methods described previously, but alsofor the smaller investor who cannot afford a DCA approach.
LESS THAN $2,500 AVAILABLESTARTING CAPITALYou can begin with a small amount, but the investor with$500 or less is clearly at a disadvantage. Here is what I suggest:
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Begin a program of investing regularly in mutual funds.

Consider a DCA approach in lower-priced quality stocks.

Use DRIPs or DRIP mutual funds as your vehicle of choice.Add to your investments every month, even if only with asmall amount of money. Select the mutual funds using theMOM method described in Chapter 7 or use the DCA approach explained previously. If you do not want to investin mutual funds because they move too slowly for you,then you can invest in individual stocks.

If you invest in individual stocks, make your selectionsbased on the MOM method I taught you or use the DCAapproach.

If you begin with $500 or less, try to restrict your buying tostocks under $5 per share, so that you can trade 100 sharesat a time. Trading in less than 100 shares at a time will costyou more in commissions, eating into your profits.

Parlay your profits. By this I mean invest your profits bybuying more shares.

If you buy mutual funds, choose the automatic reinvestment plan for your dividends.
As you can see, you will need to begin at a relatively slow paceif you have a small amount of capital. The idea is simple. Think ofit the same way you would money in a savings account. At currentinterest rates, money in the bank will not grow rapidly. In fact, bythe time you factor in even the low rate of inflation, you are likelyjust marking time and not getting ahead. Therefore, it’s to youradvantage to put your money in a more promising “bank,” thestock market. Investing on a shoestring budget can be fun as wellas challenging, but you must remember a few important caveats:
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As a small investor, you do not have the money to makerisky investments based on tips or rumors. Avoid these atall costs or you will see your small amount of money disappear rather quickly.

Invest only in well-established companies that have had alengthy history of paying dividends and whose debt is low.

Avoid high-flying stocks that may have a great deal of promise or “sex appeal” but that do not meet the qualificationslisted in the first two points.

If and when you get dividends from your investments, putthem back into your investing account.

Do not be tempted by e-mail or postal solicitations to invest in new stock issues or in stocks that do not meet therequirements outlined here.

If and when your total investment portfolio has doubled,you can expand your investments to include more riskystocks and perhaps ventures outside the stock market—but do so with caution.

If and when you have doubled your investment, use a stoploss procedure to lock in at least 70 percent of the profityou have made. (Stop loss procedures are discussed in mybook Stock Market Strategies That Work, as well as in otherbooks on investing.)

A wealth of free information is available via the Internet.You should not have to pay for any of the information youneed in order to follow the procedures outlined in thischapter.

Remember that the approach I have suggested here is aconservative approach. You will need to take baby steps atfirst.
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A FEW PORTFOLIO SUGGESTIONSFOR BEGINNERS AND SMALL INVESTORSHere are a few suggestions for the three different levels ofstarting capital discussed in this chapter:1. $5,000 up to $20,000. If your initial capital is over $5,000but less than $20,000, you can follow the DCA approachas well as the momentum approaches discussed previously.Invest in the core conservative stocks that make up the 30Dow Jones stocks, mutual funds, and only a few higherrisk stocks, such as those in the biotechnology field. Donot get involved in things such as futures, single stock futures, futures options, or stock options. Do not day tradeor short-term trade. For amounts over $20,000, you canbe more aggressive. Look into single stock futures, covered options programs, LEAPS (long-term stock options),and even a small amount of futures trading. You can evenexplore some day trading in stocks. Read more booksabout technical analysis and higher risk investing.2. $2,500 to $5,000. Stick to conservative stocks, use the DCAmethods, do not use the momentum method until youhave more than $10,000, and use the DCA method inmutual funds.3. Less than $2,500. Be very conservative. Begin with DRIPsand other mutual funds. You can invest in a few individual stocks. Reinvest your profits. Add regularly to your investment account even if the amounts are small. You canbuy mutual funds in very small dollar increments.Finally, for all levels, I suggest that you avoid investingin “load” mutual funds. These are mutual funds that charge a
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fee for investing. There are many “no-load” funds that will dowell for you. You can find mutual funds on line at zacks.com ormorningstar.com. Attempt to buy only mutual funds that have afour-star rating or higher. You can use the DCA moving averageand/or momentum methods with mutual funds in order to timeyour entry.You can expand your base of operations when you have profits to show for your efforts. This will, of course, depend on howmuch money you have to start with and how much you can invest monthly. As a general rule, I suggest moving to a higherlevel of risk when you double your money or your available investment capital increases by at least 35 percent.In closing, I want to emphasize that investing is a dynamicprocess. Conditions in the investment markets are constantlychanging in the marketplace, and you must be adaptable. Youcan make money if you buy low and get out when the marketsare high, or you can buy while prices are rising and get out whenthey have risen sharply. Either way is acceptable. The keys to successful investing are consistency, self-discipline, a long-term perspective, and knowing when to get out. I have not given too muchattention to exit timing because stocks can, at times, exceed yourmost ambitious expectations. To set a price or a time target wouldnot be a good thing. Therefore, my rule for exit is simple: Continue to lock in a percentage of your profit as prices move inyour favor. Allow the market some leeway. Lock in 70 percent ofyour profits, and if you close out your investments because yourstocks or mutual funds have retraced their gains, then beginyour program again with your expanded base of capital.
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C H A P T E R
T E N
GETTING SERIOUSStrategies Beyond the Shoestring Budget
Now it gets interesting. Once you’ve graduated beyond theshoestring budget, or if you already have enough to begin at thislevel, the odds of making your money grow more rapidly aremuch better than if you had started with less than $5,000.
FROM $5,000 TO $20,000As I indicated in Chapter 9, there are a number of thingsyou can do immediately with from $5,000 to $20,000. Here aresome specific suggestions, all of which can be explored in detailif you have an interest:
Expand into the new single stock futures market. This marketoffers many opportunities for investors who are more aggressive. But before you do this, make certain that you under157
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stand the futures market. The major difference betweenstocks and single stock futures is that you will be investing20 percent of the amount of your purchase. For example,if you buy 100 shares of a $20 stock, it will cost you $2,000.If you have a margin account with your broker, it will costyou $1,000, and $1,000 will be borrowed from your broker.You will pay interest on the amount you borrowed. In single stock futures, you will pay 20 percent of the total valueand no interest charge. This is a more risky procedure, andyou will need to know about futures and the specifics ofsingle stock futures. I highly recommend two of my booksas a prerequisite to expanding into this area: Profit in theFutures Markets (Bloomberg Press, 2002) and How to Tradethe New Single Stock Futures (Dearborn Trade, 2003).
Another area you may want to look into is covered option writingin stocks. There is considerable information available onthis procedure, and most brokerage houses have well-runprograms for this approach.

Begin to investigate short-term trading using technical analysisin stocks. There are many books you can read in this areato learn the best procedures. Among these I recommendmy book, Momentum Stock Selection (McGraw-Hill, 2001).

Expand your base of mutual fund investing to include moreaggressive funds such as those that invest in foreign stocks, technology, and biotechnology.
MORE THAN $10,000 BUT LESS THAN $25,000Now we’re entering the serious stage. At this level, you canconsider all of the areas recommended in the previous section;
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however, you also can consider the futures markets, day tradingin stocks (if you have the time), or stock options trading.
MORE THAN $25,000 BUT LESS THAN $50,000Consider all of the areas outlined above and add futures toyour portfolio. Studies have shown that a balanced portfolio including stocks and futures performs better than a portfolio consisting of stocks exclusively. Do not put more than 15 percent ofyour funds into traditional futures trading, and do not put morethan 20 percent of your funds into single stock futures or outright stock options (as opposed to covered options programs).As before, there are many excellent educational resources youcan consult to expand your base of knowledge in these areas.
MORE THAN $50,000This level, once attained, requires more attention and moreserious input, including that of a financial advisor. I have previously recommended that you either hire a financial advisor orbecome your own financial advisor. The key is to be conservativewith 70 percent of your investments and more aggressive withthe remaining 30 percent. Keep your eye on the long term andexpand into real estate, coins, art, and other collectibles. Youmay also venture into other areas such as franchises.
INVESTING IN PRECIOUS METALS AND COINSSome of you may want to invest in coins or precious metalsonce you have reached the $25,000 level or higher. Investing in
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precious metals and/or coins is a special procedure to help protect your money in times of inflation or economic stress. Investing in these markets is not the panacea some people would haveyou believe. It is merely a protective strategy designed to keepyour profits from deteriorating. I highly recommend the fivepart investment strategy I outlined in my books, Beat the Millennium Crash (New York Institute of Finance, 1999) or Investing inMetals (Wiley, 1998).If you have decided to expand into metals, consider the following advice:
Understand the general aspects of each of the metals markets. Mymain task here is to provide you with a working knowledgeabout the basics of each major metals market. Althoughsuch information is generally known to many investors,there are important facts about the metals that are not generally known. These will assist you in planning your protective portfolio.

Learn if, how, and when to invest in each market. Althoughsome metals are ideal investment vehicles, others are not,because they are not in short supply or heavy demand.Still other metals prices are tightly controlled by a smallgroup of producers or suppliers. These metals may or maynot be suitable for investors. And still other metals maynever be liquid enough to be suitable for any investor atany time. Not only will you need to know which marketsto buy, but also how to buy them and how they react during periods of extreme volatility and emotion.

Learn about the various investment vehicles available to you, including stocks, futures, options, coins, mutual funds, and others.Although you may know a little about each of these areas,you may wish to know more, and in particular you may
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want to know when each of these choices is best for you.Clearly, you will want to have some degree of diversificationwhen an economic crisis develops. This information willhelp you develop a balanced portfolio of holdings.
Help plan a strategy for future moves in the metals markets. Although this book will answer many questions, it cannotpossibly answer all of them. There are numerous sourcesto which you can turn for assistance, some of which are inbook form. Still other questions can be answered by yourinvestment advisor, financial planner, broker, or tax consultant. But remember that opinions about the directionor expected direction of the metals markets are only opinions. If you have understood what I have explained in thisbook, and if you share my concerns, then you will have avery good idea of how to protect yourself from what, I feel,is inevitable.
Any opinion stands a good chance of being right. If you havedone your homework, if you have done your research, and if youhave studied hard to anticipate the direction of the next majormarket shift, then do not allow your opinion to be swayed by others. Although it may be reasonable to solicit input regarding howmuch money to commit, how much risk you can take, or what thetax consequences of your investments might be, you might wantto ignore advice about the anticipated direction of the markets.Someone else’s knowledge and studies may not be as intense or ascomplete as yours. Don’t forget to use the STF and GIM methods.Finally, remember that investing in metals is, as I have statedpreviously, a highly emotional thing. The psychology of investingis a field unto itself. (I have two books on this subject to which Iwill refer at various points.) And though you may have done athorough job of researching and preparing your plan, you mayfail if you lack the discipline to implement your program thor-
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oughly, consistently, and without the fear or greed that are oftenthe undoing of otherwise successful programs. Keep your emotions in check and be aware of your motivation for taking specific actions at given times.Although I have attempted to provide as much pertinent information as possible about each of the metals, I realize that conditions are changing rapidly in our modem world. Technologyis growing at an exponential pace, and with it, new applicationsfor metals are found virtually every day. For example, researchersrecently introduced a powerful new drug for cancer treatmentthat uses platinum as its base. While the use of certain metals isdeclining, applications for other metals are on the rise. By the timeyou read this book, some of my comments may be out-of-date;however, the core elements presented here will likely never be outof-date. As long as human beings continue to advance technology, metals will continue to play an essential role in their efforts.And finally, as long as you keep in mind the fact that metalsare responsive to extremes in emotion, and that extremes inemotion are a function of market conditions, you will do well.When emotions reign supreme, when traders and investors arein a frenzy, and when markets appear to be out of control, precious metals will be the preferred investments. Emotional markets are difficult to control or predict; however, these marketshave established certain correlates over the years. One is the factthat metals will move as a result of emotional extremes. It is ourjob first to know this fact and then to use it to our advantage.
PROTECTING YOURSELF WITHINVESTMENTS IN RARE COINS (NUMISMATICS)Investors can participate in the metals markets through thepurchase and sale of coins. There are several ways to do this:
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Bullion coins can be bought and sold through thousands of dealers the world over. The value of these coins is determined bythe value of the metal (bullion) and a broker’s commissioncharge when bought and sold. Because commission chargescan vary considerably, no specific percentage markup forcommission can be given; however, 6 percent of the coinbullion value is common. In the case of special-issue coins,limited-production coins, or medals, there may be an additional premium above and beyond the bullion value ofthe coin itself. In such cases, the investor should take special considerations into account when making a decisionabout purchase. These will be discussed later on.

Numismatics, or rare coin collecting, is a highly specialized fieldwith literally thousands of coin issues. There are numerousconsiderations relating to the condition of coins that dramatically affect prices.

Since the mid-1980s, various firms have organized coin partnerships that manage investor funds in numismatic coins. Theinfluence of such partnerships has grown steadily as a function of the large amounts of money they control. Their effect on the market will continue to grow. Those who investin numismatics should carefully consider the role of suchlarge funds in affecting prices.
Now let’s examine each of these alternatives in detail.
Bullion CoinsThere are many different types of bullion coins to choosefrom. Although they are all essentially similar in terms of metalcontent, the differences among them are essentially aesthetic and
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price related. Coins such as South African Krugerrands, Canadian Maple Leafs, and Chinese Pandas are popular, but the primary reason for owning bullion coins is for their bullion value.Although you may see many advertisements touting the rarity ofcertain bullion coins, you must decide for yourself whether youare interested in numismatics or in bullion. If you are indeedinterested in bullion, then virtually any bullion coin will do thejob. Because there are so many different gold, silver, palladium,and platinum bullion coins, and so many more coming to market every year, it would be useless to discuss the various types ofbullion coins you could buy. By the time this information hasreached you, it will be outdated. I will give you some guidelineslater on how to purchase bullion coins. As always, use the GIMapproach described in Chapter 7.
Gold and Silver Bullion CoinsThese are among the most popular and plentiful of the bullion coins. Remember that when you buy these, you will be paying for the metal content and broker commission, as well as salestax in some cases. My advice is to shop around and compareprices before you buy, because commissions will vary considerably. You must also make certain that you are dealing with a reputable coin dealer. Be sure that you take possession of the coinsyou are buying. Through the years, many investors have beencheated by various schemes, all of which have involved delayeddelivery to the buyer and/or holding coins for the customer.Another factor to consider in buying gold bullion coins isliquidity. Eventually, there will come a time for you to sell yourcoins. You must be prepared to sell quickly, because market topsdevelop rapidly, and there can be substantial price swings whena top is reached. You should, therefore, accumulate the most
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popular issues, because these will be the ones in greatest demand when the top is at hand.It has been my experience that prices from one dealer to another can vary considerably during the time of a market top. Iurge you to compare prices when selling. You’ll be surprised atthe different prices you’ll be quoted. You may also be surprisedat the different prices you’ll get for different quantities of coins,often a better price for a larger quantity of coins.Furthermore, I suggest that you do some research before selecting a coin dealer. There have been instances of forged bullion coins, and you are better off dealing with larger firms thatwill stand behind the authenticity of the coins they sell. Don’t beafraid to ask questions about their policies; it’s the only wayyou’ll find out what you need to know.In buying silver bullion coins, remember that a much largerquantity of silver bullion will need to be purchased, because theprice of silver as compared to gold is considerably smaller. A bagof so-called junk silver, which consists of U.S.-circulated silvercoins, weighs about 45 pounds. For the same amount of money,you can have eight to ten one-troy-ounce gold coins. This, ofcourse, raises the issue of storage for bullion coins, which will bediscussed later in this chapter.
Platinum and Palladium Bullion CoinsThese coins are, in my opinion, the most interesting andoften the most attractive to collect. However, they are considerably less liquid and, therefore, more difficult to sell. There arenot too many platinum coin issues and even fewer palladiumissues. You can accumulate these, but make certain that therewill be a dealer who will buy them back from you when the timecomes. Prices could move dramatically higher, but the lack of a
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liquid market will result in your not getting a good price whenyou want to sell. This is an important consideration, if you planto profit from your investment.
Storing Bullion CoinsIf you plan to accumulate a sizable position in bullion coins,you should be concerned about storage. And though someinvestors may choose to keep coins at home—perhaps underfloorboards, in a mattress, in the freezer, or buried in the backyard—there are other ways to store your coins. The most common of these is to store your coins in bank safe-deposit boxesuntil you are ready to sell. Because these coins can be quite heavyand can take a large amount of space (particularly in the case ofsilver), you will need considerable space for a large quantityof bullion. It might be a good idea to keep boxes at a numberof different banks.Through the years, there has been much talk about the safetyof items stored in bank safe-deposit boxes. Some feel that in theevent of an emergency or banking crisis, you may not be givenaccess to a bank’s vault. If you are concerned about this, I suggest storing your bullion coins in a private vault not run by abank or other financial institution. There are many such firmsthroughout the country, primarily in larger urban centers.
When to Buy Bullion CoinsBecause bullion coins must be purchased for 100 percentcash (i.e., they cannot be bought on margin as with stocks andfutures), you will want to accumulate your position slowly over aperiod of time. The best way to do this is by dollar cost averaging.
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In other words, make regular purchases over an extended periodof time well before the bottom of the market has been reached.By buying at lower and lower prices, you will slowly but surely average your cost down, and when the market begins its upswing,you will have accumulated a substantial position at a relativelylow average cost. You could follow any of these strategies:
Buy bullion coins monthly or weekly regardless of price,but make sure you do so when prices are relatively low orfollowing a longer period of declines.

Buy bullion coins only when prices are below a predetermined level.

Buy coins on a scale-down basis only. Use the DCA strategydiscussed in Chapter 9. In other words, buy only if the priceis lower this time than it was the last time you bought.

Buy more when prices are lower than they were the lasttime you bought. In other words, assume you bought onegold bullion coin at $397 last month and that the pricethis month is $347. You might decide to buy two coins.You could also determine a scale for every $25 or $50 increment below your original purchase price.
How to Shop for the Best PriceAlthough bullion coin prices are tied closely to the value ofbullion, you’ll be able to save money if you shop for your coins.Not only will you find the lowest commissions, but you may alsofind lower base prices for the coins. I suggest that you have between four to six sources each month, and that you contactthem when you are ready to buy. Learn the price and then make
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your transactions. You can transact most of your business on theInternet, but follow all of the necessary precautions required inonline financial transactions.Selling your coins is a different matter. You will want to sellyour coins when prices are shooting ever higher. It is always easiest tosell on the way up, and it is always easiest to buy on the waydown. If you check with your dealers several times a day whenprices are rising sharply, you’ll see that prices can vary considerably. Accept the fact that you’re not going to get the very topof a move, nor will you get the very bottom of a move. Be prepared to sell out your holdings more quickly than you accumulated them. Market bottoms can take weeks, often months, todevelop, but market tops can happen in a matter of days. You willneed to adjust your buying and selling strategies accordingly.
NUMISMATICS AND NUMISMATIC COININVESTMENT PROGRAMSNumismatics offers tremendous potential to the skilled andpatient investor, but it is a subject entirely unto itself. Some feelthat this market offers the best of all worlds, because it combinesrarity with the value of bullion. A study of the performance history of numismatics confirms this opinion, but investing profitably in numismatic coins is not a simple matter. I feel that allinvestors should own some numismatic coins, but the best wayto do this is by enlisting the services of a professional dealer orexpert, unless, of course, you have the time and skill necessaryto make informed decisions.As an alternative to collecting rare coins, you may turn yourcapital over to professional managers who will buy coins for you.Although the returns from some of these programs have beengood, there are factors you should consider before you commit
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funds, such as the cost of commissions, management fees, experience of the managers, condition of the markets, and the detailsof the programs themselves.Here are a few questions to ask before putting your moneywith a professionally managed coin fund:
Are the commission charges reasonable?

What are the management fees and/or incentive fees? Arethey reasonable?

What are the credentials of the program managers? Arethey experienced numismatists?

Has the firm had previous coin programs, and if so, whathave been the results?

Can you sell your interest at any time? If so, what are thedetails and charges? Are you locked in for a certain minimum length of time?

How are the coins acquired? Are they bought at auction,or are they bought from the affiliated companies of thefirm or from its directors? It is preferable that they bebought from sources other than the firm’s managers or affiliated companies to avoid a conflict of interest.

How will the coins be sold? Will they be sold at auction or privately placed? Coins sold at auction usually get better prices.

Is there a loss-cutoff provision? In other words, will theprogram cease operations if net asset value drops below agiven amount?

Are there any other provisions for the protection of theinvestors?
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Is the fund registered properly with the appropriate stateand/or federal agencies?
Consider carefully the answers to the above points, and before you take any action, consult with your attorney. Always askfor referrals from the firm, and don’t do business with any individual or firm that you have not carefully checked first.
GUIDELINES FOR INVESTING IN COINSHere is a synopsis of my guidelines and considerations regarding coins:
Buying bullion coins is an excellent way for the new investor to get started in metals investing.

Locate several coin dealers in your area or on the Internetand check prices regularly. You will come to know whoseprices are the best, and whose commissions are the lowest.

Be sure to check the credentials of numismatists, shouldyou decide to enter this area of metals investing.

Before you send funds to anyone for any program, investment plan, coins, or coin-related plans, check with yourattorney or advisor.

When you buy coins, do so on a dollar-cost-averaging basis.It is the most reasonable and sensible way of buying coins,and it will often help you get the best average purchaseprice.

When you sell your bullion coins, be prepared to act muchmore quickly than when you bought the coins.
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Remember that market peaks come quickly, and that youwill need to respond much more quickly than you did whenyou accumulated your position.

Don’t forget that liquidity is very important. If you have accumulated, or plan to accumulate, a large position in bullion coins, you must do so in coins that are easily liquidated.

You can often save money by shopping for the best pricesand the best commissions. Don’t be afraid to negotiate withdealers, particularly if you are buying or selling larger quantities or if you have been a good customer.

There is no need for you to pay a premium for specialbullion-coin issues. If you want to collect coins, then do soas part of your numismatic portfolio; however, do not getthis mixed up with your bullion-coin strategy.

Such things as medals, commemoratives, proof coin sets,special issue coins, etc., are all items that will require you topay a premium—often a healthy one. Do not confuse thesewith your bullion-