ily.3. Third year—your investment program should be returning goodprofits to you, provided you have been able to maintain your discipline and investment approach. If you are not successfulafter the third year, odds are you have done somethingdreadfully wrong or do not understand the principles inthis book.4. Fourth year—once you have spent three years learning the methods suggested in this book, you will be able to go off on your own.In other words, you may have gotten enough experienceby now to have developed and tested your own ideas.When you make your financial plan, you must considerwhether you plan to have (or already have) children and estimatethe cost of raising them through graduate school. While you maythink it is unreasonable to see your children through graduateschool, this is a worst-case scenario. In other words, assume thatyour children will not be able to contribute anything to their education and that they will receive no scholarships or other assistance. The worst-case scenario is often the right thing for you to
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assume, because doing so will help you know what you’re upagainst.Five simple steps to help you set realistic and attainable financial goals. Here are five specific tips to help you set realisticfinancial goals:
1. Make a true and honest assessment of your assets and liabilities.Take a look at how much money you have in the bank, howmuch you’re worth in earning power, and how much youpay out monthly in living expenses. The bottom line figure is what is called your disposable income (DI). As anexample, consider the following:Annual income after taxes: $37,500Monthly rent, utilities: $785 × 12 months = $9,420Monthly food, gas, travel: $375 × 12 months = $4,500Monthly car and insurance: $385 × 12 months = $4,620Monthly miscellaneous expenses: $250 × 12 months =$3,000Total expenses: $21,540Disposable income: $15,9602. Take 15 percent of your bottom line disposable income as theamount that you can afford to invest. In the example above,you would have roughly $2,300 to invest, barring any unforeseen expenses. To be conservative, you would takeeven less, perhaps 10 percent or in this case about $1,500as the amount you would initially invest.3. Depending on the method you decide to use as your investmentapproach, you will commit about one-tenth the amount monthlyor the entire amount at once.
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4. Do not spend any of the profits you make. Put your profits backinto your investment program.5. As the income from your job increases, you will have more moneyto put into your investments. Make certain you monitor yourDI yearly, if not more often—every three months, forinstance.The dangers of setting unrealistic goals. Much has been saidabout the virtues of having lofty goals. Although it’s a good ideato have high expectations, the truth is that you can only attaingoals that are realistic. There’s a big difference between havingan optimistic objective and frustrating yourself with a goal that youcan’t possibly attain. Success at small goals is better than failureat large goals, and these will bolster your positive attitude. Asyou gain experience and confidence, you can set higher goals,but at first, your goal should be to make a profit. Be happy witha profit, even if that profit is small.The dangers of setting goals that are too easily achieved. Onthe other hand, once you have gained some experience, you willwant to set your goals a little higher. As an example, it is fairlyeasy to make a few dollars a day as a day trader in stocks, but thebottom line is that a few dollars a day is not worth your time andtrouble. You can probably do better working for $6 an hour atthe local hamburger stand. While setting small goals is good atfirst, it will not serve you well once you have learned how tomake money. Raise your goals considerably after you feel confident with the methods you have learned.What to do when you have reached your initial goals. Onceyou have reached your initial goals, you can think about diversification. If you have been successful in mutual funds, then consider
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trading individual stocks. If you have had success in individualstocks, then consider trading stock options, single stock futures,or futures. And, if you have done well with any or all of these vehicles, you can consider options strategies.Take baby steps at first. Obviously, taking small steps whenyou get started is better. I will provide you with specific instructions on how to do this when I introduce each of the investmentmethods to you in subsequent chapters. Following are somequestions to ponder:
Being a consistent base hitter is preferable to being aninconsistent home run hitter—what’s wrong with a .350batting average?

Being highly accurate or being highly profitable—whichis best for you?

Would you rather reach your goals with high odds of success or with erratic strokes of luck?

Investing versus gambling—where do you stand?

How do your attitudes affect your goals?

How do you shut out the brainwashing and lock in thesolid strategies that will take you to your goals?

What is your unconventional checklist for goal setting?
The next chapter will tear down many of the misconceptionsyou may have about investing, replacing them with ideas thathave not been polluted by the investment establishment and thesociety in which we live. Get ready for an exciting and profitableride!
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C H A P T E R
S I X
THE GENERALINVESTMENT MODEL
AN OVERVIEW OF THEGENERAL INVESTMENT MODEL (GIM)This chapter will serve as your introduction to an investmentapproach that has the potential to help you realize your goal offinancial independence. As you know from having read the preceding five chapters, I am a firm believer in the importance oforganization, discipline, effective investor psychology, and thorough planning. If you want to achieve success, you will follow myrules; however, if you want to gamble or “take a shot,” you don’tneed this book. If I have laid the groundwork correctly, this chapter will help bring things together for you. But don’t stop here!The investment model I will teach you in this chapter is oneof two important steps. Learning and internalizing this modelwill not guarantee success, however. The model can help you understand investing in general, but as you know, understanding81
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and knowing how to do something are two entirely different things.A good teacher is not necessarily a good practitioner, and conversely, a good practitioner may not necessarily be a good teacher.Regardless, make a commitment to learn and put into practicethe general investment approach discussed in this chapter.The General Investment Model (GIM) is an approach I havedeveloped based on my many years of experience. Don’t let thetitle of this model scare you; it’s a very easy model to follow. Infact, you may like it so much that you’ll want to follow it in otherareas of your life, because it’s very sensible and cuts throughmuch of the nonsense that hinders making decisions about investments. If you consider relationships to be investments, whichI believe they are, then you may find this model useful here, too.The GIM provides you with a framework or structure withinwhich to base your decisions. Without such a framework, you willsurely be lost and may make bad decisions. Consider the GIMyour first step in the investing process. Unless you are very lucky,you will not be able to make money or have a successful relationship with your investments without such a model. The GIMis only one of several investment approaches that can help youachieve success. I favor this method above all others, because itis simple to understand, easily applicable to all types of investments, simple to teach, and very logical.Although some people will disagree with my view, I can assure you that I have found it very helpful; it has opened the eyesof many thousands of people I have taught over the past 25years. In view of its major importance, I suggest that you study itcarefully and that you apply it as often as you can. In so doing,you will see that it is not only sensible but effective. As a matterof fact, you may want to view some of your previous investmentdecisions within the context of this approach. When you do, youwill be able to see where you went wrong and what you did thatwas right. The GIM will help you avoid errors, while at the same
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time maximizing your profits. Perhaps I am overstating my case,but I will remind you that unless you learn the GIM and the timing method presented in Chapter 7, you will likely fail in yourefforts to become financially independent.The GIM is divided into five parts:1. Historical pattern2. Expectation3. Confirmation4. Action5. ManagementWhile this model may not sound exciting to you at first, Ithink you’ll change your mind when you see the flowchart of theGIM in Figure 6.1 and a few examples.Each step in the GIM is dependent on the successful completion of the previous step. If any step in the model is skippedor incorrect, the entire model will fail and you will lose money.If you correctly follow each step, you may still lose money, butyour odds of making money are considerably higher than if youFIGURE 6.1
How the General Investment Method Flows
HistoricalPattern
HISTORY
➧
Leads toan Expectation
EXPECTATION
After WhichAction Is Taken
ACTION
➧
➧
That Must BeConfirmed
CONFIRMATION
and RisksAre Managed
MANAGEMENT
➧
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do not follow the model at all. Each step in the model is fully explained below.Now let’s take a look at the aspects of the GIM. Remember tokeep an open mind and focus on the logic of what I’m saying—not on the ultimate application. And while you are doing this, Isuggest that you clear your mind of what you may have learnedelsewhere, because it will only confuse you.
Historical PatternWhat do I mean when I talk about a historical pattern? Thesimple answer is that every investment, every stock, every market, real estate, and relationships all have patterns. What is a pattern? There are literally hundreds of patterns in our daily livesand in the financial markets. Such patterns consist of repetitiveprice cycles, seasonality, day-of-week relationships, and marketindicators. As an investor, you will want to follow the most basicpatterns; however, as a preliminary example, consider the cyclical pattern in the stock market as shown in Figure 6.2.The chart shows the four-year cycle pattern in the U.S. stockmarket. As you can see, this pattern has run about four years inlength from one price low to another. While the stock market doesnot follow the pattern perfectly, it does track quite closely. Theidea of using a pattern is to help you get close to a turning pointin the market. Patterns help you develop an expectation. It is entirely possible that your expectation will change as time passes.Remember that expectations are not realities and need to be confirmed. Don’t take any action until an expectation is confirmed.As long as you know what to do with the expectation, you willfare well; however, if you allow the expectation to overcome yourgood judgment, then you will lose money in your investments.This is a very important point! Please remember it in all you do.
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FIGURE 6.2 The Four-Year Cycle in S&P Futures. This cycle chart shows myevaluation of the ideal approximate lows and highs of this pattern. As you cansee, a cycle low was projected for late 2002 if the pattern is on time.
An expectation is NOT a reality. It merely points you in a direction, telling you what MIGHT happen. Never let your expectation of what MIGHT happen become transformed into thebelief that it WILL happen. The outcome of an investment isnever a certainty, and as long as you remember this, you will dowell. This brings me to the next major topic—expectation.
ExpectationAs I told you earlier, if you allow your expectation to influence you to the point of believing that it MUST become a reality, then you are surely headed for trouble. Here is an example
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of what I mean. Many investors believe that gold is a good thingto own in the event that there is political or economic instability, either at home or anywhere in the world. The idea that goldmight be a good protective investment in such cases is a goodone. Yet, the facts indicate that for many years gold has not beena good investment. Some people believe that whenever an international situation threatens to escalate or encourage instability,their best defense is to buy gold mining stocks or gold in theform of coins. Their expectation, based on history, may be agood one. Their reasoning is sound, but it is based on the beliefthat international conflict or domestic problems always (or mostoften) cause the price of gold to go up. In actuality, this is notthe case, because the situation is not that simple. The relationship between conflict, economic instability, inflation, or deflation and the price of gold is not 100 percent predictable.When investors buy gold in anticipation of a crisis escalating,and the price of gold fails to go up when the crisis actually develops, then the only reasonable action is to get out of gold becausethe expectation, based on a historical belief, failed to materialize. Yet, investors—especially in gold—often refuse to get outwhen their expectation fails to develop into a reality. They keeptheir gold as it declines for many days, months, and even years.They tie up their capital in a nonproductive investment, becausethey are convinced that their expectations will become a reality.And when the expectation fails to materialize, they refuse toabandon their ideas, failing to take their loss or break even.This is only one very small example of what happens whenyou allow an expectation to negatively affect your thinking andyour actions. Perhaps the most glaring example of such a situation was the recent Y2K bug and the “end of the world” hysteriathat surrounded the coming of the 21st century. If you thinkback to that situation, you will recall that supposedly knowledgeable individuals in the government, scientists, economists, finan-
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cial advisors, and the clergy all warned us of what might happen.While many individuals in positions of authority were moderateand acted sensibly so as not to alarm the public, others went onhighly visible campaigns that literally scared the stuffing out ofinvestors. These individuals advocated selling all stocks and thestockpiling of food, medical supplies, energy sources, and weapons. The predictions seem laughable, now that we look back onthem. Still, there are those who made major preparations, whosold their homes, stocked up on supplies, changed their investments, and closed their bank accounts. And when 2000 cameand went with virtually no problems at all, they stubbornly remained with their losing positions, because they allowed theirexpectations to rule their sensibilities and failed to admit totheir folly.
ConfirmationThis brings us to the cure for expectation—confirmation.Yes, once we have developed an expectation based on historicallyvalid patterns, we must have a method by which we confirm thatthe given expectations will become a reality. We need a methodby which to improve the odds of our expectation actually developing into the situation we had anticipated. There are a numberof ways in which this can be achieved, ranging from the very simple to the highly technical. I will discuss confirmation methodsin detail in Chapter 7.
ActionTaking action is the next step in the sequence. Without action,nothing will happen. Yes, it’s true that you can’t lose money if
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you don’t take action, but it’s also true that you won’t makemoney. This step in the sequence of the GIM is one of the mostcritically important, because it is in taking action or failing to doso that many investors blunder. Taking action sounds like a simple thing to do, but in reality it is very complex and calls intoplay a host of psychological factors. We know from our previousreadings here that investor psychology is a fragile thing. We knowthat, in fact, psychology is the weakest link in the chain. This iswhy I have devoted considerable space throughout this book tohelp you overcome the limitations of your own psychology.The process of taking action is, in fact, so intricate and subject to errors at every turn that an entire book could be writtenon the topic. Consider the following issues:
Why do we fail to take action when we have a very goodsense of what is likely to happen?

Why do we take action too soon or too late?

Why do we allow others to sway our decisions to take action?

Do we have trouble getting out of an investment after wehave followed through perfectly?

What causes the fear that prevents action?

What causes the greed that causes us to act too soon?

Why do we take actions that are too aggressive or too meek?

Why are we nervous when we take action?

Why are we overly confident when we take action?
As you can see, taking action is a very important part of theGeneral Investment Model, one that is rarely given attention inother books on investing. Far too many writers in this field believe
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that people will follow through as they should. Reality teaches usthat this is not the case, that people don’t follow through. Reality tells us that the best methods of investing will be rendered useless byinvestors who fail to take action, take incorrect actions in spite of the information they have at hand, or somehow alter the course of action, causing it to fail. Unless an investment book or course addresses thisvital topic, I believe the teaching is glaringly incomplete, perhaps even counterproductive.
ManagementI assume you have understood and effectively followed thefirst four parts of the GIM and that you have made a profit onyour investment. What do you do now? The answer is simple butspecific: You must manage the profit effectively—either by taking the money and turning the paper profit into an actual profitor by holding on to the investment and setting up new possibilities or alternatives based on how the investment continues toperform. If your investment now shows a loss, you need to manage the loss by not allowing it to become so large as to depleteall of your available capital or tie up your money indefinitelywhile you wait for the loss to become smaller or even turn intoa profit. Here are some of the issues we will address in this areaof the GIM:
When should you take your profit?

When should you take your loss and call it quits?

How much of a loss is acceptable?

How much profit should you anticipate?

When should you add to your investment positions?
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How can you prevent a profit from turning into a loss?

How long should you wait for a loss to turn into a profit?

When and how do you know when you made a wrongdecision?
These are all important issues that are rarely addressed inmost books on investing. I will attempt to give you specific answersto these questions in Chapters 7 through 10, so you can increasethe chances of your success and lessen your failures.Next, let’s see how the General Investment Model applies tothe major issues that this book addresses.
How to Plan for Your Future Using the GIMIn order to plan effectively for your future NOW, learn thedetails of my General Investment Model until you know thembackwards and forwards. Become totally familiar with the limitations of each step as well as the issues you will encounter in implementing each step. Don’t allow yourself to be dissuaded bythe fact that you don’t have enough money. To have more later,you have to begin with something now. I have outlined the foursteps you need to take, in order to get started on the road to financial independence:1. Get a firm grip on how much money you have to invest. Someof the things you will need to do in order to complete thisstep have already been discussed in Chapters 3, 4, and 5.If you don’t have the patience to follow through in detailwith my suggestions, then at the very least develop a general idea of how much money you plan to start with. I don’tcare if it’s $50 or $50,000, as long as you make a commit-
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ment. Learn the General Investment Model and examine a fewhypothetical investments within the context of the GIM.2. Decide on which area or areas of investment make the most senseto you within your budget. Clearly, someone who has $500cannot realistically make a commitment in the real estatemarket, regardless of the claims made by the “zero moneydown” people. Yes, you can become creative and makedeals, but this approach is beyond the scope of this book.If you want to become a wheeler-dealer, then I refer youto the excellent example of Donald Trump and his book,The Art of the Deal.3. Take the first step and make an investment. Although I advocate action, I do not mean that any action will be betterthan no action. The major portion of this book is devotedto taking action, but remember that you do not need tobecome obsessive in making a decision. Frequently, youwill have a number of choices, any of which will be goodas a starting point. Again, I want to emphasize that actionis one of the keys to success. While there are many thingsyou can do that are wrong and that will surely lead tolosses, the good news is that there are also many thingsyou can do that will be correct. Some may be more profitable than others, but you need to jump into the waterand begin swimming.4. And finally, you must change your perceptions. Now thatsounds like a tall order. How can you possibly do this? It’seasy, and it’s difficult. If you have allowed yourself to slipinto the perception of poverty, then you will continue tothink like a poor person. You will lack self-confidence andmotivation, and you will fail to see opportunities whenthey present themselves. You will see yourself in a nega-
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tive light, and this will clearly affect your motivation. Thereare many things you can do to overcome negative perception. I could easily recommend a dozen books that willhelp you, but the best way to change your perception is totake a chance and to succeed. Nothing changes attitudesand perceptions like good old profits!
THE SETUP, TRIGGER, ANDFOLLOW-THROUGH METHOD (STF)I have already discussed the importance of following a definitive investment model such as the GIM, which is an importanttool because it provides a structure for making decisions andevaluating potential investments. The GIM applies to all investments, whether stocks, mutual funds, options, or real estate. Theconcept is simple but powerful. Learn it, and it will serve youwell. Ignore it, and eventually you will come back to it when yourealize that it would not only have saved you money but wouldhave made you money as well!While all aspects and phases of the GIM are important, theactual process of making an investment decision is the most important, because it is the action portion of the formula. Takingaction is vital to success, but taking action prematurely or toolate can spell disaster. Unfortunately, too many investors fail totake action when the time is right; this holds true for experiencedinvestors as well as newcomers. In order to assist you with thedecision-making process that leads to action, I have developedanother model that operates within the GIM. This submodel orset of rules will help you know when to “pull the trigger.” Inother words, it will help you know when the time is right to actually take action or when you must wait.
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You may recall that I emphasized the importance of avoidingthe pitfall of equating expectations with realities, that just becauseyou expect something to happen does not mean it will. This is asignificant distinction to be given serious consideration at all times. Donot make the mistake that so many investors make. Do not allowan expectation to take on the role of a reality, unless the expectation is confirmed or validated by actual events or other methods,which you will learn as you continue reading.At this time, I would like to show you a three-step process thatleads to action. Note that this approach is applicable to any formof investment. I call it the “setup, trigger, and follow-through”approach, or the STF method. Here are several examples of theSTF approach, which I believe will drive my point home fully. Ifyou don’t follow my logic at first, please go back and read theseexamples again. Once you understand the STF method, you willsee investing in a whole new light. I believe this new view promises to open doors in virtually all areas of your life, investmentand otherwise.
Example 1: Premature Action Based onFaulty Evaluation of RealityYour boss sends you an e-mail requesting to meet with you assoon as possible. You don’t like the tone of the message. Previous similar communications from your boss have all been indicative of problems for which you were reprimanded. You concludefrom the tone of the e-mail and the terseness of the message,that you are headed for trouble. You feel justified in being concerned, because the history of such communications has alwaysmeant trouble for you.I call this portion of the experience the setup. Based on yourexperience, you believe you are being set up or prepared for a
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bad experience. You believe that this is the first step to a badoutcome for you. And your conclusion is reasonable; however,you need more proof. What if this isn’t the setup you expected?What if this time the outcome is a positive one? What if yourboss normally has a negative attitude or tone, whether he or sheis angry or not? How would you know when your boss is pleasedwith your work if you have not yet experienced that behaviorunder such conditions? What if the boss used a form letter? Whatif he or she has an intimidating style simply to assert his or herposition of power? There are many other possibilities, but youwon’t even consider them because you have already gone beyondthe reality of the e-mail. And the conclusion you have reachedcould work against you.You agonize over the e-mail all weekend, and on Mondaymorning before the meeting your ego gets the best of you. Youdecide that you will resign before you are fired. You decide togive your boss a piece of your mind before you have solid information that you are indeed headed for trouble. You march intothe boss’s office at the appointed time with a negative attitude,not knowing that he or she is about to offer you a promotion.Before your boss has a chance to utter a word, you give him or hera piece of your mind. The boss listens quietly and then replies,“Well, it’s too bad you feel this way. I actually had a good promotion for you, but given your terrible attitude and insultingcomments, I have decided not to give you that job. Clean out yourdesk and leave now!” Well, my friend, you have really done itthis time! By acting on a setup instead of a confirmed situation(the trigger), you have cost yourself prestige, reputation, money,and pleasure. You acted too soon. You pulled the trigger in theabsence of confirmation, and you have paid for your error.Action must follow a logical sequence. The logical sequence ofevents that leads to action is first the setup, or the situation thatcreates the POSSIBILITY of an event. Second is the trigger that
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tells you the event is likely to happen and will lead to the followthrough or the action. Never act without a trigger or confirmation.
Example 2: The Hunter and the HuntedHundreds or even thousands of hunters are injured or worseevery year during hunting season, because many hunters aretrigger-happy. They will shoot at anything that moves. As long asit’s the color of a bear or a deer, they’ll shoot at it. Hunters havebeen known to shoot at large brown dogs, human beings dressedin brown, human beings wearing fur coats, decorative animalsin front yards and backyards, automobiles that may look like ananimal from a great distance, and so on. This is another simplecase of action prior to confirmation. The movement of an object is their setup. They shoot before they have confirmed thatthe movement is that of their prey. It’s a simple case of failure toconfirm that the setup should trigger action. And in the case ofthe hunter, failure to confirm results can be devastating.
Example 3: Rumors and RealitiesYour brother-in-law calls you with a hot stock tip. He knowsthe son of a high-ranking corporate officer in an electronics firmthat is about to announce a new discovery in the communications field. This revolutionary antenna will supposedly increasethe range of any handheld communications device by 50 percent. And, the cost of adding this new device to existing communications equipment is very low. The company estimates thatit can sell over 30 million units at $29 per unit in their first yearof operation. What’s more, a major manufacturer of communications equipment has expressed interest in buying the company.
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Your brother-in-law tells you that the stock of this small companyis selling at $3 per share, but that when news of its discovery becomes public the stock will soar to over $40 per share in a matter of weeks, if not days. He has already positioned himself with5,000 shares. If the stock goes to $40, as he expects it will, his$15,000 investment will be worth $200,000.Naturally, you’re excited by the prospects of such a move,and you buy the stock. Then you hear that the news is false orexaggerated, the stock declines, and you either take your lossesor you keep the stock indefinitely, expecting it will eventually goup. At some point, you may even be tempted to buy more if therumors persist. You have hope and greed rather than reality andgood sense.Where did you go wrong? You allowed a setup to prompt youinto action in the absence of confirmation. What would youneed by way of confirmation? In this case, there could have beenmany things. You could have done your own research to confirmor negate the rumors. You could have studied the finances ofthe company. You could have asked more questions. You couldhave done a thorough search on the Internet for more information. You could have looked into the backgrounds of the officers and technical experts at the company. You could haveasked your brother-in-law how successful his tips have been inthe past. You could have studied the stock charts and indicators.You could even have looked into whether insider-buying activityhad been going on in that stock. But you didn’t do any of theseand instead acted without a trigger—and you paid for it.
THE STF IN DETAILHopefully, these three examples have prepared you for whatI am about to formalize. But why formalize this process? The
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answer is simple. Without a formal set of procedures that control thedecision-making process, you will be like every other aspiring investor, aship at sea without a captain or a course. By following the GIM andthe STF methods, you’ll have won more than 75 percent of thebattle for investment success.Now let’s examine the STF in detail. The STF model I wouldlike you to visualize and memorize is shown in Figure 6.3.If you take the time to study this model and apply it to everyinvestment decision you make, it will serve you well. Now let’stake a look at a few real-life examples of how the STF modeltranslates into investment action and success.
STF and GoldFor many years, the price of gold moved lower. As the chartin Figure 6.4 shows, the price of gold reached a major peak in
FIGURE 6.3
The STF Model
Setup
Trigger
Any investmentopportunitybased on arecommendation,research, a tip,an analysis, anewspaper article,news, rumor,historical patterns,chart analyses,computer signals,etc.
Any indicationor confirmationthat validatesthe setup as arealistic possibility.The trigger can benews, additionalresearch, computersignals, and chartpatterns.
Follow-ThroughACTION BYTHEINVESTOR
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FIGURE 6.4
The Price of Gold, 1984–2003
late 1987 and moved lower until mid-2000, when it started to climbagain. All the way down, investors who were hopeful of a turnaround and expected international conflict and turmoil to turnprices higher bought gold without a trigger. In other words, theybought gold merely because the market was set up to go higher.However, it failed to trigger action and declined.In early 2002, however, the market finally gave indications ofits intention to go higher. The indications I am referring to