Chapter 1
What I am about to share with you has built a million dollar portfolio from scratch for at least three people I know personally who have followed these rules. I have the numbers from TDAmeritrade brokerage statements to prove it. This is an extremely simple system. How did I discover it? I have a huge advantage trading the markets with my PhD in finance because I can read academic research you cannot yet understand but will with my help.
I don’t know how to read an x-ray because I am not trained to do so. I am trained, however, to understand exceedingly complex financial research and I know how to apply it. I can break down this knowledge for you the same way I do for my university finance students at the graduate school of business at The University of Puerto Rico.
If you listen to major economists and finance professors. They will explain to you that you almost certainly cannot pick stocks that will rise fast because they have proven that so few people can. But the truth is that we can learn how to pick stocks if we dedicate ourselves to it. And anybody who can should invest in single stocks and call options on single stocks who can do it.
The Unconscious Mind
The part of the brain that is voicing the words in my mind that thinks of itself as me is stupid. The conscious mind is too weak to process the insanely complex information in the market and get it right so that you can sit tight on good stock investments. This took me a long time to learn. I don’t reason when I first look at stocks with price charts. Let me explain.
Psychologists have discovered that the conscious mind can only process 7 plus or minus 3 bits of information at a time. The unconscious mind can process tens of thousands of bits of information simultaneously. The retinal cortex receives visual information and distributes it to different parts of the brain including the frontal cortex. There are parts of the brain that assemble this information so that you can see it projected in the 3D world around you.
The conscious mind is seated in the frontal cortex. It allows you to see yourself as a separate person observing the world. Freud calls this the ego. The frontal lobe does not process data very well and can only work with a handful of pieces of information. This is the part of the brain you use when you do homework problems with math or words. It takes time for this part of the brain to figure things out.
The unconscious mind that assembles a price chart for the ego to look at can process tens of thousands of pieces of information. I became successful as a stock investor after reviewing ten of thousands of price charts. By looking at lots of charts I trained myself to spot consistent patterns in price trend and daily volume. When I see a bottom forming I know it when I see it. I will explain to you exactly which signals to look for but think of reading price charts as just as complex of an activity as reading an x-ray for a radiologist.
By the way, Warren Buffett trained his unconscious mind to process fundamental data by getting country guides such as a book listing all the companies in Korea with the financial information on one page. Then he thumbed through this very thick book. He says that he never bought one of the Korean stocks solely because of the book but the process trained his eye to process vast amounts of financial data. When Buffett looks at financial data of a company he “just sees it” too. But he sees it in different data than I do because he starts by looking at fundamental data from financial statements; income statements, balance sheets, and cash flow statements. I start by looking at technical data from price charts.
It took me years and thousands of charts but I eventually became good at picking bottoms by cueing on trend and volume. This is most difficult to do in extended bear markets. For this reason you want to be determined to trade bull markets to a level you could retire on and then index everything when the major uptrend looking back at least six months is broken.
You can see the stocks I am watching by getting a free trial to the stock market trading channel by clicking on the link in my TikTok profile or by going to stock market trading channel dot com. But this won’t help you much if you don’t understand my core and satellite system. Let me explain how that works to you…
Core and Satellite
Core and satellite are a hot topic among the largest investors on Wall Street. The idea is to invest in a lower risk asset in the majority of your account while investing in or trading a higher risk asset simultaneously. The core protects you from a total market meltdown while the satellite gives you a shot at high returns. You can adjust the risk in your core and satellite. I am going to explain the super safe way to do this first. Then I will go into the riskier way that offers much greater possible gains but also potential losses.
Professor Larry Kotlikoff and Zvi Bodie at Boston University use core and satellite investing in their Safety First Upside Investing system. In that system they use TIPS as the low risk asset and the SPDR ETF as the higher risk asset. The SPDR is indexed to the S&P 500 and has returned around 9% after inflation. This is a very safe portfolio. Larry has software that you can use to estimate this. For anybody who has a lot of money or earns and saves a lot this could be the best alternative for your age, attention you can dedicate to stocks, and risk tolerance. [#ad]
Again, this is a great strategy if you already have a lot of money like $5 million dollars that Professor Kotlikoff likes to use as an example. But what if you are just starting out? What if you don’t have a lot of money to start with? That is just the problem I found myself in when I was younger. I decided to ramp up the risk to try to ramp up my returns. Here’s how I did it.
I use the core and satellite concept too. But I use the SPDR as the core and shares or calls on single stocks. The single stocks I buy shares in or calls on have given off very special signals that they are about to rise fast. These signals have been confirmed by top research in finance to signal fast rising stocks I will share with you as we go along. These papers literally use rocket science math that you probably are not trained to understand. The fact that I can understand and apply the results of this “secret to the public” research gives me a huge edge over the public I am sharing with you now.
Before I started to trade single stocks and calls I had to protect myself against phantom tax and high tax brackets. I had to remember that any stocks, calls, or index ETFs I buy and sell owe taxes on any capital gains I profit from. I trade in special accounts. These special accounts are the employer sponsored 401k, the individual 401k, and the Roth IRA. An IRA is an investment retirement account. Let’s discuss each…
Employer Sponsored 401k
When you get a job at a big company it will often offer a retirement plan called the employer sponsored 401k. These plans usually offer matching of 2% to 6% of your salary. This means that if you make $100,000 a year you can save $2,000 to $6,000 of your salary and your employer will put up the rest. This is an automatic 100% return that you cannot pass up.
The disadvantage of these accounts is that your employer also gets to decide what you invest in. You cannot buy or sell equity calls or put options. The only single stock you can buy is company stock which is dangerous. If the company you work for goes bankrupt and you only bought company stock in your employer sponsored 401k you would be out of work and would lose all your 401k savings.
The smarter move is to buy a highly diversified stock mutual fund. Hopefully your employer sponsored 401k plan offers a mutual fund that tracks the S&P 500. How can you find it? The trick is to look for the broad equity index fund selection with the lowest expense ratio and turnover.
Create a spreadsheet with all of the selections in your employer sponsored 401k. In the first column put the symbol. The name of the fund goes into the second. In the third column put in the expense ratio. And in the fourth put in the turnover. Look at the selection with the lowest turnover and expense ratio. This is most likely the selection in your employer sponsored 401k that is an indexed mutual fund.
I did this for my wife and discovered that VFIAX was the S&P 500 indexed fund in her employer sponsored 401k. Fifteen years later she had $1.2 million in that account in 2021 before the drop in 2022. The market will come back as it always does and the account will meet or exceed the prior high according to finance professor Jeremy Siegel of The Wharton School of Business at the Ivy League University of Pennsylvania. Make sure you read his book Stocks For The Long Run on Amazon. [add to linkedtree]
Individual 401k
For single stock and equity call option traders who have a single member LLC or S Corp the individual 401k is a big key to success in the market. That is because the individual 401k plan can be self directed. This means that you can trade the account in single stocks and call options but you only pay taxes when you distribute funds after the age of 59.5.
Big online brokerages such as E*Trade, TDAmeritrade, and Schwab are the best places to open these accounts. Their people on staff will help you open your individual 401k plan. Another advantage to this plan in addition to self direction is that you get a tax deduction when you contribute to the plan.
Roth IRA
The Roth IRA is by far the best trading account for the tax advantaged investor. With this account you do not get a tax deduction when you contribute your savings but you don’t pay taxes when you distribute capital gains in retirement.
If you had the choice of which accounts you could turn into a million dollars you would pick your Roth IRA for sure. That is because you could live on it tax free in retirement. This is the second type of account that is ideally suited for trading single stocks and call options on single stocks.