Price Manipulation and Mass Hysteria
Fred left a job with John Deere in the agricultural industry to become a university business professor. The three cash flow centers of a university are the medical school, law school and MBA programs. For this reason, those of us accredited Ph.D. holding business professors are very highly paid. Fred did a number of smart things when he became a business professor. The first was to take full advantage of the university 403(b) plan. The second was to use his good credit and high income to purchase a home in the most desirable part of town.
As a friend, he approached me seeking advice because he wanted to get his savings earning more than just bank interest.
He had purchased a large piece of land for $75,000 in his home state and wanted to build and retire to a dream home. Throughout his working life, Fred had methodically saved and bought his way into a lot of net worth. He had $200,000 in home equity, $200,000 in his 403(b) and $50,000 in savings. He would also have $2,300 per month coming in from Social Security and a $400 pension from his employer prior to obtaining a Ph.D. and becoming a professor. His wife would also have Social Security coming in.
I told Fred to work the numbers backwards to figure out how much he should invest in the stock market. My first big concern was that, upon retirement, Fred would lose his health insurance plan from the university. Fred told me that he wasn’t worried, because both he and his wife had “good genes.” I explained that 87% of all bankruptcy cases are from only three reasons: job loss, divorce and illness. After listening to me, he realized that he could use the small pension to pay for a good health plan, and I congratulated him wholeheartedly on the decision.
Building Your Dreams!
The next step Fred had to take was to work out the budget for building his dream retirement house in his home state. I told him to ask the realtor who had helped him purchase the land to give him the range of costs per square foot for new home construction. I explained how important it was to take the high estimate and then add an additional 30% for unexpected costs and furnishings. When I explained how important it was for Fred to be completely debt free at the end of the process, he laughed and said, “It’s great to finally hear someone who speaks my language!” I told him to be most concerned about working out a building budget that would make sure he would be debt free after selling his current residence and moving to his dream home. He could then invest a fraction of what he had left over, putting the bulk into treasury bills for emergency savings.
The point of this story is that Fred thought that he didn’t know what he was doing with his finances yet when I gathered the facts
I decided that both he and his wife were very adept at managing their personal finances.
All he really needed was a solid strategy for investing in the stock market to get a little extra push from a small part of his net worth. These last two chapters are devoted to explaining just such a strategy based on everything I have been teaching you.
Bullet-Proof Stock Investing
Bulletproof Stock Investing is my stock investing method I developed around the tendency of stock shares to migrate from weak investors to strong investors — from stock investors who are not sure about what they are doing in the market to those that are. My trading system is also based on evidence of insiders dumping stock at historic high prices on inexperienced public investors who are attracted into the market hoping for a quick profit by hype at the top of a bull market.
In 1999 and 2000, the majority of insiders were dumping their stock holdings on the public. And the public was buying it up as fast as they could dump it. It’s vital to your financial health that you understand exactly what the forces and players are that drive the stock market’s prices up and down that can make you rich!
Once the market crashes, as it did from 2000 to 2003, inexperienced investors become discouraged and begin selling out at historic low prices. Investors buying stock at historic prices are of two classes. The first group of bottom buyers is composed of highly experienced investors who are astute as to the cyclic rise and fall of the general stock market and individual stocks. The second group consists of insiders who must report all of their stock purchases and sales to the SEC. If an individual owns 5% or more of the float of the stock or is a manager or director, then they are in this reporting class I call the visible insiders. Pay attention to the gifting and selling off of ESOs by the top inside executives — the CEO, CFO, COO, chairman of the board and president. There are also invisible insiders who are actively trying to buy up the float of stock from the discouraged public over a long period of time so that they can ride the backs of the visible insiders who use the media to pump up the price of a stock they hold employee stock options in. Anecdotal evidence from history and recent SEC prosecutions of smaller boiler room “pump and dump” schemes tells us that hidden insiders still manipulate penny stocks — watch the movie Boiler Room with Ben Affleck. There is no reason not to suppose that this same type of activity is occurring in companies with larger market capitalization — I just can’t prove it, because if they are doing it they have to hide their tracks.
I use long-term price charts to identify low price trading ranges where the public is not interested in a specific stock. These are times when the public may be influenced into not buying by astute stock investors who are hidden from public view and yet inside a group at- tempting to buy up enough of stock to exert control over the price. If you know when to buy, you simply sit and wait for the price to rise.
Here is a fascinating book regarding how susceptible the public is to emotional hysteria when prices run up.
Q: What happens when large groups of individuals in the public who know absolutely nothing about the stock market come and go en masse?
A: The answer is a public dog pile into and out of the market creating massive bull and bear markets. This has been happening since the dawn of time in one way or another..
Watching the Weekly and Monthly Price Charts
By combining long-term technical charts and looking for good companies, I have developed what I call long-term technical value investing. Long-term technical value (because you buy the stock cheap) investing involves studying long-term weekly and monthly price charts to look for price patterns that would discourage the in- experienced public into selling their shares of stock to experienced investors that buy and hold as a group for years. I call this group hidden insiders because they buy as teams so that they can avoid reporting their positions to the SEC. They are hidden because you can’t see their holdings at places like Yahoo Finance (http://finance. yahoo.com), like you can inside corporate executives. In addition, these special long-term price patterns create an environment where inside corporate directors are in a much stronger position to badger shareholders into large gifts of free employee stock options at obscenely low prices. Visible insiders put additional upward pressure on the company stock price any way they can, as managers and in collusion with other visible insiders behind the locked doors of the board rooms they control.
Inexperienced Public Investors
The worst thing you can do for your financial health is invest or work in an area that you know absolutely nothing about. Success in our modern economy relies on specialization of all of us as we work in our chosen craft.
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
SURVIVAL RULE: Focus on retiring debt free — you don’t want to be risking your assets in retirement in the markets except with money that, if you lose it, will not affect your lifestyle.
FACT: Wall Street works hard to make stock investing seem harder than it really is. The last thing the equities industry wants is public investors that think on their own, as I teach you to do!
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