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Wall Street Guru's 1978 Methodology Helps Avoid Losses from Stock Market Bubble
Mann’s approach does not promise to be the quickest path to a million nor does it spot every winner, but it does identify stocks that have substantial profit potential along with very limited and clearly definable risk. Mann asserts that by using his simple step method, it’s possible to identify over 30 stocks today, which have a gain potential of more than 300%.
“Wall Street is like a fashion show. Analysts and the media focus attention on what is new and becoming very popular, however, my approach is the opposite,” said Mann. “This method looks for a value in the least popular. Much of the time these under-loved, low-priced stocks are completely ignored. It is hard for investors to locate them because until these stocks are rediscovered and something attractive becomes known, they do not keep up with the NASDAQ or the S&P 500.”
THE BASIC RULES
Specifically, Non Random Profits offers two basic rules:
• The 11 Quarter Rule- a stock becomes a candidate for purchase if and only if its price stops going down for at least eleven calendar quarters
• The 25% Rule- once a stock qualifies for purchase under the 11 Quarter Rule, it should be bought at a price not to exceed the 25 percentile of the range of the base
As such, the heart of Mann’s selection method deals with market cycles. He cites that the rise and fall of stock prices can mirror the life phases or life cycles of an entire economy. More specifically, the price of a single stock can mirror the life cycle of the corporation it represents.
“Every investor would benefit from understanding these cycles,” said Mann. “The length of time involved in a rising trend and a declining trend would be helpful to mutual fund investors. Using the logic of finding industries that are ready to have big rises is helpful.”
Mann advises the easiest method of selecting potentially big gain stocks is to use a computer-based chart service online. Some can be accessed for free like Bigcharts.com.
Under the principles of the book, if you buy a stock after eleven quarters, you expect action over the next few years. The length of time you need to invest in a stock is about four years. Since nine out of 10 stocks double and seven out of ten triple, you can take 50% of your capital out when a stock doubles and another 50% when it triples and hold the balance like a collector.
“The biggest mistake that people make is that they do not have patience and give up easily if the stocks decline when others are winning,” said Mann. “The other side of the coin is that as these stocks emerge and go to a higher price or become part of an index, a lot of institutions buy and the stocks are revalued higher.”
BORING LEADS TO EXCITING
Mann emphasizes that buying non-random vs. popular stocks is the difference between planting seeds and trees. Purchasing stocks that are popular is like planting a young tree. You pay more for it and you may notice some growth. Planting a seed, however, will not feel rewarding at first, but when it grows, your return on investment is more spectacular. The results speak for themselves as Mann has identified hundreds of stocks that demonstrate boring leads to exciting over time.
To be successful, Mann suggests that an investor study the material, use a chart service and look over hundreds of stocks over time to build his or her faith that the system works. Then he or she must build their own risk management system to diversify and have risk control on each stock owned. One of the keys to success is to not overinvest. An investor must invest in a way that is suitable to his or her age and risk capital available.
“The same principles outlined in the first edition of the book do still apply today,” said Mann.