Become the Next Warren Buffett

BECOME THE NEXT WARREN BUFFETT        

          I believe that stocks should be traded as an investment, but there are many ways to capture a profit. I must say for all investors and for every trader, you can start your own mutual fund. It requires discipline not only to open a stock account but also to fund it and add to it every month. If you are a new investor, just reading this book to see if trading for a living is for you, it is imperative that you start somewhere and start with a select stock account first. The discipline is that you should add money in the account every month, like you are paying a bill. If you are under 30, consider it your retirement. You are paying your bills in the future now. That is some of the best advice anyone gave me, and I think it is worthy of passing on to you. Once you gain more experience, you can separate long-term investing from short-term speculative trading, which is one form of diversification. After all, you may see a long period of flat performance in one of your core holdings. Short-term day trading, if you have the time and resources, can be a rewarding experience. Imagine owning Wal-Mart and for literally seven years experiencing a loss to a flat performance. Figure 1.10 illustrates the market’s sideways move in one of the world’s biggest retail stores.

If you are considering supplementing your investment techniques, one of the many drawbacks of trading stocks for a short-term day trader with a small trading account is that you are limited to how many trades you can make, especially if your account is less than $25,000 and you are not signed up for a margin account. In that case, you are limited to five round-trip buy- and-sell trades per week due to SEC rules. So short-term trading would not be a good consideration for stocks. That is where trading stock index futures and forex markets takes over, as I will explain in the following pages.

There is one high-risk, high-reward method of trading stocks that I have not covered yet: getting in on an initial public offering (IPO) stock. Those investors lucky enough to get in on an IPO like Google (goog), the Chicago Mercantile Exchange (CME), or even the Chicago Board of Trade (CBOT— stock, BOT) were able to double, triple, quadruple, or even better, their initial investment dollars.

The Chicago Board of Trade has been around for over 155 years, and I imagine it will likely continue to be around for another 155 years, with little competition in products traded on its exchange and with the increase in popularity on the electronics metals products, such as gold and silver, plus the huge volume of trades generated in the grain markets.

And with the action in the U.S. Treasury notes and bonds and Federal (Fed) funds contracts, the CBOT certainly has a positive longer-term outlook for profitable revenue growth. Figure 1.11 shows that the price exploded to nearly as high as 134 but has managed to trade back as low as 86 as of this writing. The BOT stock illustrates that not all IPOs are guaranteed money makers; in fact, depending on your entry, these offerings can be hazardous to your financial well-being. The phrase “invest wisely” means “not putting all your eggs in one basket.” Find out which is the sector leader, and go with that stock, unless you like the underdog. In this case, the underdog would be BOT compared to CME.

As you can see in Figure 1.11, BOT stock initially shot up from the 80s to a little over 130. At the time I was preparing to write this book, it had not managed to get back over 130 but traded as high as 119. I do feel that once the Treasury reinstates issuing the 30-year Treasury bond, volume will increase, which will translate into more revenue for the exchange. Therefore, the profitability should improve through the next few years. If a drought scare causes the grain complex to go through the roof, you will see this stock price move like a rocket.

Many see the Chicago Board of Trade mimicking the Chicago Mercantile Exchange success story. As Figure 1.12 shows, in just three short years, CME stock went from under 40 to close to 400 by late November 2005.

The biggest surprise of the three had to be the gains by Google, as Figure 1.13 shows. After the dot-com implosion in 2001, not many were willing to experiment with any Internet stock. That mentality may be the one reason why this stock had such a move, from a contrarian point of view, that is.