Why a small stock market gain is much better than a big one
What the (bleep)? Have I lost my mind? On the
surface, the subject of this month's wealth-building article makes no
sense. How can a small stock market gain be better than a big one?
First, the short answer. If you chase after big
gains you're more likely to lose your money than increase it. But if
you focus on small gains, you'll be following a proven professional
methodology that practically guarantees your success. Now, for the
longer version...
It's true. Everybody wants to make a "killing in the
market." We'd all like to hit that proverbial home run and rake in a
big score. I can remember back in early 1999 I bought 100 shares of
Qualcomm and watched it multiply 26 times over the next year. I felt
like a genius until I watched it decline 70% the following year!
And yet, today, we still see things like...Get in
on the ground floor of this fledgling but soon-to-be-mammoth company
whose stock is dirt cheap today but destined for the stars tomorrow!
In these "pull the wool over your eyes" promotions
they usually point to companies like Intel, Microsoft, Cisco Systems,
eBay, AOL, and lately even Google and say, Look at the huge money you could've made had you just gotten in early.
And of course they always have "the next Microsoft or Cisco" waiting
for you at some bargain basement price (just send them $1,200 and
you'll get the stock symbol).
Don't fall for it. This is February 2006, not
February 1999. We're just not going to repeat the tech bubble anytime
soon. Still, it's very tempting. Wouldn't it be nice to get what these
"mirage stocks" seem to offer: fortune-making gains. Sure. And there is
a way to do it, but it's not chasing the long shot.
Have you ever wondered why professional traders
aren't interested in "getting in on the ground floor"? Because they
know that fortune-making stocks are few and far between, and that
chasing them is a suckers game. You see, for every stock you buy at $25
that goes to $450, you'll have fifty that go to $15. Do the math. It's
not pretty.
Pros also know that chasing home runs is a big waste
of time because you can't have any certainty about your results. Pros
hate uncertainty. After all, this is their livelihood and they need to
know that they can pay for the three B's — Blondes, Bentleys, and
Beachfront property.
Only the amateur is impressed with the idea of the
big score. The professional is so much smarter about that. Yes, he
wants the big gain, and yes, he's going to get it, but he has an
easier--and much safer--way to accomplish that. He simply takes what
the market will readily give him, and that's the small gain.
You see, while the market is very stingy about
giving up big gains, it is very generous in dishing out small gains.
Pros know this. So, they take all the small gains the market will give
them.
Okay, time for a pop quiz. What happens when you
pile up many small gains over 12 months? That's right, you get a big
gain for the year. Next question: What happens when you get a big gain
every year? The miracle of compounding turns your investment into a
fortune (if you missed this one, click here).
Next question: What easy-to-use professional trading plan piles up many
small gains over the months, so that it can get a big gain for the
year? Yep! Dow Double Diamond.
Since we've been tracking and trading DDD
with the very accurate 10-minute data (7/10/02 thru 2/01/06) the plan
has made 108 trades. About half of these were winners and about half
were losers. That's normal for a professional trading plan, but here's
the important part: the DDD winning trades averaged +2.28%, while the DDD losing trades averaged -1.11%
You don't have to be an Einstein to see that you've got a money machine here!
While the winners and losers for this period were
near equal in number, the winners were more than double the size of the
losers. In other words, every time you threw away 50 cents you pulled
in a dollar. There isn't a trading pro in this great land who wouldn't
do that all day long and be giddy about it. And that's exactly what you
have in Dow Double Diamond.
Okay, but isn't it frustrating to sit by and watch a
pretty good gain shrink to a very small gain, or even a small loss?
We've seen that happen a few times in recent months. Yes, it is. But
that's entirely normal for the DDD plan.
Don't let it bother you. The last thing you want to
do is to start "second guessing" the plan, sometimes choosing your own
entry and exit points. If you do that, you'll lose the excellent
long-term results of the plan. Remember, Jim spent literally hundreds
of hours researching, building, testing, and refining the DDD
plan so that it would work well under the most common market
conditions. And, frankly, if he could get it to work better, he would.
Think of the DDD plan as a sophisticated race
car that Jim built from the ground up. Prior to building this racing
machine, he had to decide on a strategy for winning. He knew he could
build a car that would corner really well, but then it wouldn't go as
fast on the straightaways, making it impossible to win. He also knew he
could build a spitfire, but then it would careen out of control on the
turns, a sure recipe for disaster.
What did Jim do? He chose to build a balanced
machine, capable of cornering pretty well and going fairly fast, too.
That's Dow Double Diamond, the fastest car on the track that can safely
get around the turns.
Remember, this is about winning. It's about getting
the wealth you want on the date you need it. Every little gain counts.
And every little loss does, too. You've got to take the whole package
as one. Yes, you can win with Jim's race car, but not if you're going
to get under the hood and start tinkering. I say this because it can be
frustrating to watch a nice gain turn into a small gain, and you might
be tempted to pick up a wrench. If so, consider this...
For every trade you can point out that shows a nice
gain shrinking to a small gain, Jim can show you many more examples of
nice gains shrinking to small gains, then turning around and scoring
even bigger gains. In other words, you've got to give the DDD machine room to run. Look at these trades, for example...
In September of 2002, the DDD plan racked up
a 3.3% gain, then in the following days it fell back to a 1.2% gain.
Would you have been tempted to grab that 3% gain? Bad idea. The DDD plan soon turned around and went on to score a 5.7% gain, or 28.5% profit with the 5x leverage.
In November of 2002, it happened again. The DDD
plan racked up a 3.5% gain, fell to a 1.3% gain, but then went on to
score a 5.5% gain, and that's 27.7% profit with the 5x leverage.
Also, in May of 2003, the DDD plan racked up
a whopping 4.6% gain and then slid back to a 2.2% gain. Can you guess
what happened next? That's right. It turned around and went on to
capture a 5.4% gain, for a very nice 27% profit with the 5x leverage.
Incidentally, as we review these trades, what stands
out? These are all small gains. And, as any pro will tell you, this is
what is easy to get. And you can get a lot of them every year. Of
course, they don't stay small gains when you use leverage, and also
when you pile them up and compound them. That's the professional way,
and that's the Dow Double Diamond way.
But...if you want the excellent long-term results of the DDD
plan, you've got to follow the rules and make all the trades. Some of
the trades will be good, some will be so-so, and some will be
disappointing. But none of that matters because you've got a car in the
race that can win. A vehicle that can carry you safely to your wealth
goal. A pro trading plan that can give you the wealth-building
certainty you need.
And yet, it's easy in the daily battle, when your
emotions are in play, to lose sight of the big picture. It can seem at
times the plan isn't working, and that can be troubling. So, if you're
having difficulty making all of the trades on time, or if you sometimes
find yourself being tentative about them, or are in disagreement with
some of the trade signals, seriously consider using the execution service.
Think about it. You don't have to drive the car.
That's just an ego thing. What's your objective? To prove how smart you
are? Or to get the $millions you want on time?
Until next month...good wealth building!
Sincerely,
Dick Sanders
Dick Sanders was the publisher of Dow Double
Diamond from November 2004 through January 2006. He wrote this article during
that time. Mr. Sanders is no longer affiliated with Dow Double Diamond, Tame
Trading, or affiliate companies.
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