1. What do you mean by following the method?
The FAQ's refer to the stock investing method described in "A Way to Wealth: The Art of Investing in Common Stocks" as seen here.
Simply put, following the method means skimming the cream from financial television and reading interviews with highly rated investors and mutual fund managers in publications such as Forbes or Money Magazine.
Then, (i) make a list of the best money managers prime picks, (ii) follow the rules of the method (as explained in "A Way to Wealth") pertaining to the timing of stock purchases, (iii) scan Daily Graphs for the publically reported stock purchases of companies' directors and top officers (known as "insider" transactions) and (iv) make sure the insider purchases are "qualifying" (see #6 below).
This information is available in Daily Graphs, which was the research source that I used for more than two decades. Daily Graphs is now published by a successor company.
I experienced my most profitable results over time utilizing the method described in "A Way to Wealth" when I invested in select large-cap potential turnaround companies that were either mired in controversy or undergoing temporary business difficulties. Steeling your emotions and investing contrary to prevailing sentiments on Wall Street may help you be a more successful investor during times of company-specific stress, bear markets and economic recession.
Examples of such turnarounds that I invested in the past that worked out were Wells Fargo, MBIA and Johnson and Johnson. These special situations and the difficulties the companies and the general market faced are discussed and illustrated in my book for the reader to review.
I discuss in the blog on this website additional techniques of stock investing using indicators plotted on charts that have rendered excellent results over the long-term while requiring minimal effort on the part of the investor to implement.
2. Who should follow my method??
My method is a longer-term approach to profiting by investing in stocks and mutual funds. Investors who share a long-term approach to the stock market may be able to effectively utilize my simple technique. With as little as $1,000, one may invest in mutual funds and potentially do very well using my way. However, investors without enough capital to diversify their stock holdings into several stocks or more probably should not use my method to invest in individual equities. Ultimately, the investor may have to determine for themselves whether they feel comfortable with using the method.
3. How do you know which money managers have the right insight?
I consider a stock market “seer” or visionary to be someone who (either through education or years of investing experience) can “see” the likely future path of individual stock prices or the market in general. These individuals are often the managers of the better performing mutual funds with the best long-term records.
Warren Buffett is the best example of such a money manager. When Warren Buffett bets $10-$15 billion on a stock, investors should pay close attention.
Potential gains from an investing master's stock picks may not be instantaneous - and there is no such thing as perfect certainty in financial markets - but investors may be well-served by going where the money goes.
I would exclude hedge fund managers from the list of visionary investors. Eighty percent of new hedge funds fail in the first year. To top it off - investors may pay layers of fees for the privilege of having funds under management. Some high profile activist hedge fund managers may be more like opportunists: that isn't to say that some do not have good track records - but I do not follow any such investors or invest in the companies' stocks that they may buy.
Mass market personal finance magazines such as Money Magazine interview very fine mutual fund managers and investors - rating the funds in a hierarchy. You can consider the higher rated funds’ managers top tier. Look for superior performance over more than one market cycle. Often you’ll hear many such managers interviewed on TV or read their comments in newspapers, periodicals and online. Their picks are often well worth consideration in tandem with the other prong of the method described in my book.
4. What is an insider?
An insider is an officer or director of the company, or someone who owns at least 10% of the company’s shares. Insider buys and sells are electronically reported to the SEC within two days and are then public information.
5. What is the difference between legal and illegal insider trading?
The sort of insider trades I refer to in my book are reported electronically two days after they’re made to the SEC and are then public information. Those are what I call legal insider trades. Basically, illegal insider trading is when an insider or someone else buys or sells stock based on information that is not public.
6. What is the difference between a typical insider buy and a “qualifying” insider buy in your method?
An insider buy or sell in my method are specific patterns of open market purchases or sales which I have identified after research in Daily Graphs. The criteria for those buying patterns are explained in my book.
I have found that when the top officers of a given company make open market purchases of their own company stock ("insider purchases") in the manner and frequency illustrated in my book ("qualifying" buys); it may be construed that these buys are likely a vote of confidence in the near term prospects of the company and in the potential upward price performance of the security over a period of time. I have held positions that have worked out for me for as little as a year, several years, or one going on ten years. In many cases, I have made multiples of my original investment in the equities that I chose to invest in.
I cannot guarantee or promise that you will be successful in investing using this method. It would be illegal for me to offer such a guarantee. The price of a company's stock after investing may either rise, drop before it rises substantially, or the stock price may simply go down.
Yet over the extended time period in which I practiced my method, I experienced excellent results and I believe that the method remains quite relevant today. In fact, within the last year or so, after being on a long sabbatical from this website, I have opened new positions by applying the criteria and closed them for a gain.
8. When do you not follow your method?
In my book I admit that from time to time my investing may stray from what I describe as my method. Occasionally, I’ve experimented and modified my method to see if I would get good results. Experimenting like this with my own funds is how I developed my method. But the reader should stick to the two-pronged method described in the book for the highest probability of long-term success.
9. How long does it take to make money with your method?
I would say it takes a minimum of three years; but for the best results, five years or more probably would be a better time line. One can make multiples of one’s original investment over ten years or more. When investing in well-managed mutual funds, where your initial investment can be multiplied many times over, longer-term outlooks (10-15 years) are even better.
Too many investors today are really short term and ultra short-term “traders”. Sure, you may “get rich quick”, but the odds are against you. Eighty percent of "active traders" lose money in the first year - and there is a 99% failure rate for this class of investors over time - only one percent make money over the long term.
Yet, there are some professional investors who do trade frequently for a living and are successful at doing so, though it may take many years for them to become proficient in their craft.
True and substantial stock market wealth is built over a decade or more - sometimes over a working lifetime. Patience is required. Don't be your own worst enemy by engaging in frequent trading.
Just because you may choose to be a long term investor does not necessarily mean that you may not be able to potentially hedge your long portfolio against inevitable declines in the stock market (as portrayed in the "blog" on this site). However, no one, including me, can guarantee the success of such a venture and it is not part of the method described in my book.
Longer term investing, accompanied by position-sizing, asset allocation and periodic portfolio rebalancing as well as an exit strategy for each position (such as trailing stops or sale upon full valuation) may insulate one from debilitating drawdowns. The track record for longer term investing has been established since before the Great Depression, though clearly with dramatic peaks and valleys along the way.
10. Why does the method work?
The method is based on following the stock buying behavior of the best of the best money managers and investors. I have found that by imitating some of the buys of the best investors as well as those of company insiders, you can have your security analysis done for you. You do not have to be a graduate of a prestigious business school to make money, good money over many years. The average person may do quite well for himself or herself over time with this approach.
The long term trajectory of the stock market remains up as of this writing, though the ascent may be interrupted at times by corrections and bear markets. Keeping a shopping list of method qualifying stocks as the stock market begins to fall (insiders often may buy at market lows) may help you reenter positions and potentially profit going forward after the market has sold off.
Some would argue that the current valuation of the stock market as of September 2014 is excessive and has reached the heights of overvaluation seen at other major market tops dating back to the peak of 1929 and subsequent major market peaks. I tend to share this view and am increasing my cash position and am applying a hedge with put options. Hedging with put options is not part of my method, but I would just say that I have in place a strategy of objectively exiting my individual positions so I may not sustain major losses in a bear market emerging from a major peak in the market (see #9 above).
More information about buying portfolio protection with put options may be found in my blog here; but be warned that this course of action may be a risky venture.
If the investor believes that America will surmount its economic and financial challenges and may successfully reduce its debt burden, then stock investing may be the way to go for you. Former President Bill Clinton has stated that it has generally never paid to short sell America.