ptg Praise for Invest by Knowing What Stocks to Buy and What Stocks to Sell “This is one of the best new investing books of the decade: succinct, practical, and timeless. Built on a foundation of 40 years of market wisdom, it combines technical analysis and portfolio construction that is supported by excellent research. It should be required read- ing for everyone from new investors to the most sophisticated hedge fund managers.” —Linda Raschke, President, LBRGroup, Inc. “The author is an award winning Technical Analyst. In this book, he covers the basic principles, definitions, safeguards, pitfalls, and risks of investing. Believing in active management, he recognizes the benefits of multiple tools (fundamental and technical) and disci- plines there-on, to construct a portfolio methodology with guide- lines for both buying and selling, for maximum gain. This is a ptg valuable book for any serious investor.” —Louise Yamada, Managing Director, Louise Yamada Technical Research Advisors, LLC. “In this book, Charles Kirkpatrick demonstrates just how powerful a tool relative strength is, deftly combining technical and funda- mental analysis to produce a superior long-term approach. This isn’t just theory, but the real-time work of a practitioner with an outstanding track record. For many years a small group of knowl- edgeable investors has known about this work, now you can too.” —John Bollinger, CFA, CMT, President, Bollinger Capital Management “The author presents a clearly written, time-tested formula for investor independence and success through applying relative price strength for stock selection and portfolio construction.” —Hank Pruden, Golden Gate University This page intentionally left blank ptg BEAT THE MARKET INVEST BY KNOWING WHAT STOCKS ptg TO BUY AND WHAT STOCKS TO SELL This page intentionally left blank ptg BEAT THE MARKET INVEST BY KNOWING WHAT STOCKS TO BUY AND WHAT ptg STOCKS TO SELL CHARLES D. KIRKPATRICK II, CMT Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistant: Heather Luciano Development Editor: Russ Hall Operations Manager: Gina Kanouse Digital Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Marketing Assistant: Brandon Smith Cover Designer: R&D&Co Managing Editor: Kristy Hart Project Editor: Chelsey Marti Copy Editor: Deadline Driven Publishing Proofreader: Paula Lowe Indexer: Erika Millen Compositor: Nonie Ratcliff Manufacturing Buyer: Dan Uhrig © 2009 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases ptg orspecial sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America First Printing August 2008 ISBN-10: 0-13-243978-6 ISBN-13: 978-0-13-243978-7 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educatión de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Kirkpatrick, Charles D. Beat the market / Charles D. Kirkpatrick, II. p. cm. Includes bibliographical references. ISBN 0-13-243978-6 (hardback : alk. paper) 1. Portfolio management. 2. Investment analysis. 3. Stocks. 4. Investments. I. Title. HG4529.5.K565 2009 332.6—dc22 2008014970 To Robert A. Levy, a relative pioneer ptg This page intentionally left blank ptg C ONTENTS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CHAPTER 1 Investing Today . . . . . . . . . . . . . . . . . . . . . . . . . 3 Investment Management . . . . . . . . . . . . . . . . . . . . . 4 Investment Management Incentive . . . . . . . . . . . . . . . 5 What Do You Do? . . . . . . . . . . . . . . . . . . . . . . . . . 15 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 CHAPTER 2 Beliefs and Biases . . . . . . . . . . . . . . . . . . . . . . . 19 The Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 My Emotional Experience . . . . . . . . . . . . . . . . . . . . 22 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ptg CHAPTER 3 Investment Risk . . . . . . . . . . . . . . . . . . . . . . . . . 27 Individual Stock Risk . . . . . . . . . . . . . . . . . . . . . . . 27 Randomness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Law of Percentages . . . . . . . . . . . . . . . . . . . . . . . . . 31 Drawdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 CHAPTER 4 Conventional Analysis . . . . . . . . . . . . . . . . . . . 39 Fundamental Versus Technical Methods . . . . . . . . . . 39 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ix