Basics of Stock Trading

Robbie Burns on How to Make Money on the Stock Market

[UPDATE NOV. 2014 : The markets have had their 'correction' - not quite 10% but close enough it would appear, and they are now up and away again! The FED has stopped printing money, for the time being at least, and all is well in the world, well not quite, but in the stock market world maybe. Robbie Burns is still going strong and still making money - you gotta admire him, most of his picks end up going the right way, he picks very few clunkers and if he does he gets out in time before they turn into disasters. So this is a gratuitous unpaid plug for Robbie Burns - you can check out his site or buy his book to see the 'system' he uses - common sense mainly!]

[UPDATE NOV 2013 : Well what can we say! The stock market just keeps on going up, even though unemployment is still outrageously high, I don't believe the official figures by the way. All fuelled by debt of course, but hey why not? There will undoubtedly be a correction of course but probably no more than 7% (famous last words) - and then it will be onwards and upwards for stock markets! This basic advice on stock markets still holds good, as it is basic and is not dependent on current events].]

[UPDATE : Robbie Burns says he made $90K on the stock market while he was away on his hols ! He puts all the information of what he buys and sells on his website (see below) so I believe him - so far, as far as I can see he hasn't made any new buys yet on 2011, but I wll be keeping an eye on what he does.

Elsewhere, Jack Bouroudjian is now bullish on the markets for 2011. He was a long-time bear and has finally gone bullish, saying the S&P is going to soar in 2011, or words to that effect. So maybe the stock markets have indeed finally become safe again. It's worth point out that he markets have been rising steadily since they bottomed out in March 2009 at 666 on the S&P, and the Nasdaq is now back to where it was before the 'crash' !

If you think stock trading might be something you want to try your hand at, but are worried because you are a total beginner and don't know how to go about it, or even if you have been doing it for a while but without great success, then you might like to take the advice of someone who actually consistently makes money on the stock market.

Robbie Burns is one such person. He is not very well-known (at least not in the US) but he is well-known enough to have been interviewed by the foks at the Motley Fool website - you can listen to the podcast here Motley Fool - and in stock market terms he is not what you could call a big fish or a stock market guru. He does however have many years experience of trading for a living and he has a wesite The Naked Trader on which he updates his 'trading diary' to show you what he has traded and when (he updates his site two or three times a week). So you can see just how his trades work out. Generally speaking he does pretty well, he even did OK through the 'crash' of 2007 - 2008.

How to Pick Stocks for the Medium-Term

What is more interesting for someone trying to make money on the stock market is that he explains why he does what he does and has written a very good book showing the basics of his 'system' - called The Naked Trader : How Anyone Can Make Money Trading Shares. He also organizes seminars (not free!) for people in the UK.

He is basically a medium-term trader, he holds stocks for a few weeks or months, and picks companies that are making a profit and that have good prospects. He readers company reports to see if there are any problems on the horizon and has a very simple system for eliminating companies from his range of possible trades. If a company uses the word 'challenging' too often in its report then this is code for 'incoming s**t' so he steers clear. Also if the company has debts of more than 3 times profits he steers clear. His reasoning is that there are enough good companies around, there is no need to be trading companies that have problems (except as a possible short i.e. sell).

He also has an uncanny ability to pick winners ! I used to like and pick companies that were takeover targets, but invariably the takeovers fell through and the stock price crashed leaving me with an almost loss ! For some reason Robbie Burns does just the opposite. He sometimes picks companies rumored to be takeover targets 'on a hunch' and lo and behold a week later the stock price rockets 30% as his hunch turns out to be correct. Not a system anyone could recommend, but uncanny all the same.

His takeover picks are also not part of his system, they are just a bit of extra fun.

A Stock's Fundamentals are Important Too!

He does also take into account a company's price - earnings ratio but in his own simpified way. He looks at full year profits, multplies this by ten, chops off some net debt, and adds on any net cash. Then he checks the market capitalisation, and decides whether the share is cheap or not. I suspect this is not what accepted wisdom would have you do with the p.e. ratio but it seems to work.

He explains too the importance of being unemotional and likes to compare himself to Mr Spock. You shouldn't get emotionally involved with a share. If it is making you money then it is good, if it is losing you money then cut it loose.

He is not keen on penny stocks or bottom fishing, although he does do it now and again, for example he recently bought BP at 330p - it is now around 400p.

Once he has bought his shares, when does he sell them ? When he buys he always sets himself a target to the upside and always has stop loss price at which he sells if it turns out he made a mistake. If it turns out however that he was right and the stock starts heading up then he re-assesses the situation once his target is reached. If the outlook is still good then he holds onto the shares or buys more. If the company starts issuing reports with 'challenging' or 'debt' in them then he starts to sell and look for something else.

The reason that Robbie Burns is interesting is because a) he does have lot of experience b) he does pretty well out of stock trading c) his system is pretty straightforward d) he explains it all in a very easy-to-understand way e) he also seems to be blessed with the 'luck of the Irish' he seems to have an uncanny knack of sensing when a stock is ripe for takeover, he will often buy on a hunch that something is on the way, based on stock price activity and the volume of buys usually then lo and behold a few weeks later in comes a takeover offer! a nice gift to have, lots of good karma from a previous life no doubt! So if you are looking for a system to help you decide which stocks to buy, that you can apply again and again, then I recommend his book and also his website, where you can check his trades and see if they work or not. They are UK based but the method is equally valid for US stocks.