3SOF

Good morning !

On this thread I plan to write strategic considerations about the long term goal of every investor: to get rich !

If this isn't your goal you're probably confused and not psychologically ready to trade the markets.

What do you need to get rich trading the markets?

1. Starting capital

At least $10,000, but you can start your learning process with less.

2. Sound and simple money management rules

a) You can't put more than 10% of your capital in just one stock, so to be full invested you need to own at least 10 different stocks.

b) Your maximum pain level on every holding should not exceed 30%. Look at the list of all 3 Stocks on Fire transactions, I've never lost more than 30% in one single stock.

(but I'm prepared for this to happen, an enormous gap down or a sudden delisting could take more than this - but if possible, always take your loss before the maximum pain level is reached. Mine is -30% on a single holding).

3. Knowledge


You need to know technical analysis, fundamental analysis and very important, stock market history.

One doesn't need to have more winning trades than losing trades, that doesn't matter all that much for the long term performance. On the majority of trades you really don't know, have no way of knowing, if that trade will be profitable or not. You judge the probabilities, go with them and then face results.

Let's say you want to be rich and have $10,000 to trade. The first thing you want to realize is it's almost impossible to do it quick, almost everytime you'll lose a lot if you try to do it rapidly. This happens because to do it quick you need to take a lot of risk, and risk will put you aside of the game.

You got your $10,000 and plan to invest for the next 20 years, so you can be rich at 50, 60 or 70 years old, and get a lot of fun along the way. You can't count on stock market profits to live your normal life with high quality. For that you need a job or somekind of real world business.

Starting with just $10,000 and investing for 20 years, say you get 30% a year you'll end up with $1,900,496 and you're rich by all means. But for 20 years of work and wait this doesn't seem really a lot.

This is where knowledge comes to play. If instead of 30% a year you could get 100% a year (at 3 SOF I'm up 138% in just 3 months with a diversified portfolio), the all picture changes a lot, and you'll end up with $10,485,760,000. You're right, that's 10 billion dollars.

Anyway, this is just to show you the percentage of return is the most important thing for long term success of getting rich over the long term. Not the capital you start with. Money management makes this possible, if you try to do it without sound money management principles your capital won't survive. You see, to make money you need to have money, so you can't lose it along the way.

So, money management is a pre-condition to success. If you're trading without it you're doing nothing. A high percentage of annual return is the second thing you need to grow and thrive.

I'll be here to help you achieve this, since this is my personal financial life goal too. I want to do it not just for the money, but for the fun too, and I can't think of any other more entertaining way of passing the next 20 years 

Thats great post david.

Just want to know if someone want to mix and match your 3SF and Pennies portfolio then what mix do you suggest. I mean what %age allocation to each of the total portfolio?

Quote from: David Randolph on August 08, 2005, 05:12:59 AM
Good morning !


b) Your maximum pain level on every holding should not exceed 30%. Look at the list of all 3 Stocks on Fire transactions, I've never lost more than 30% in one single stock.

(but I'm prepared for this to happen, an enormous gap down or a sudden delisting could take more than this - but if possible, always take your loss before the maximum pain level is reached. Mine is -30% on a single holding).

When everywhere I read (IBD, etc) it is suggested never to exceed 8% losss. What have you found, over the years, which allows you to consider such losses as 30%? Fantastic chart reading capabilities?   TIA!!

QuoteThats great post david.

Just want to know if someone want to mix and match your 3SF and Pennies portfolio then what mix do you suggest. I mean what %age allocation to each of the total portfolio?

It depends on your starting capital, but say 80% in 3 Stocks on Fire Portfolio and 20% on the 3 Pennies on Fire Portfolio sounds fine.

The 3 Pennies on Fire Portfolio will be reset at the end of every year, to start over with $10,000. I believe one will learn more and profit more over the long term following picks and updates on the Stocks portfolio.

We've launched the Pennies portfolio just because if so many of our users trade and enjoy penny stocks, why not try to help them to find good picks and strategies?

But it hasn't been easy to find good pennies lately, not for me ... I hope this changes in the near future.

QuoteWhen everywhere I read (IBD, etc) it is suggested never to exceed 8% losss. What have you found, over the years, which allows you to consider such losses as 30%? Fantastic chart reading capabilities? Shocked  TIA!!

Thanks for the questions Tirebldr ! It depends on what type of stocks are you trading. 8% for a GE or IBM trade can be a lot, and 20% can be too small to trade an OTCBB or Pink Sheet stock.

Whatever books you'll read will tell you something like that, 8, 10 or 15% should be one's maximum pain level. But I don't think the writers of those books spent years trading penny stocks 

It's impossible to setup a sound trading plan for a penny stock trade with that kind of stop loss level. The support is probably far away from that ... sometimes 8% is just a little more than the bid/ask spread. For example, look at HYRF. I bought at $0.185 and the stock went down to $0.165. Doesn't look much, but I was losing 10.8% on that position. I have not sold and the stock now is trading at $0.42, I have a 127% profit.

But don't forget diversification, you see, on the 3 Pennies on Fire Portfolio we can't put more than 10% of capital in just one stock, so that maximum pain level of 30% represents only 3% loss for total capital.

Hi, David.

Good idea posting advice on strategy. Thank you.

Now: I find that buying stock is VERY easy  it's the selling them again that has been the problem.

When I follow your trades I'm normally doing fine - it's when I think I have learned something and venture off on my own that the trouble starts 
I tend to be an "emotional trader" and fall in love with a stock...cheering the stock when it goes up, and biting my nails as it falls...and falls...and I finally sell it - expensive lesson

Your advise about diversification is very good.

But here is a question:
I don't think I have ever seen you take profit by selling SOME of the stock after a good run, to "lock in profits"?
When I buy a stock for 10% of my capital, and this stock goes up...and suddenly it's 15% og my holdings  would it then not be a good idea to sell off some of it, (the gained 5%) to bring it back to the original 10% ?
That would also free up funds for the next stock to buy.

EliteG gave me that advice once, and with a very fine result.

Thanks for your help - I have learned so much here. Still not rich, but working on it! 

Cheers.