For most average investors, determining the right time to get into the market–or any investment–is the only thing that matters. Often times, however, the importance of knowing when to get out is just as critical to protecting profits. While excessive trading can be a major detriment to any portfolio, the ability to capitalize on the market’s normal ups and downs is key to harnessing a successful investment strategy.
In their latest book, Invest to Win: Earn & Keep Profits in Bull & Bear Markets with the GainsMaster Approach, financial educators Toni Turner and Gordon Scott combine their deep understanding and experience in the market to help everyday investors to build effective strategies to maximize returns. Whether the goal is for longer-term planning such as in a retirement account, or something with a shorter horizon, Turner and Scott have laid down key principles that can be incorporated to capitalize on the market’s natural cycles.
Equities.com spoke with the authors of Invest to Win to learn more.
EQ: Can you discuss your background in investment and financial education, and how that has shaped your approach to the market?
Turner: I started investing in 1991, and the first minute I stepped into the stock market, I was totally intrigued. I wanted to know everything there was to know. So I set out to learn as much as I could about the market, and I’ve been studying it ever since. I did well as an investor, but then in the late 1990s, I began day trading.. Initially, trading was a rough go. It was different than investing and I had to learn about the market in a whole new way. I covered that journey in my first book, Beginner’s Guide to Day Trading Online, which was published in 2000. Since then, I’ve written two other books, Beginner’s Guide to Short-Term Trading and Short-Term Trading in the New Stock Market. I believe that my experience in trading and investing has given me a very robust view of the market that can really benefit investors, and that view is what Gordon and I have chosen to implement in our new book, Invest to Win.
Scott: My background is similar to Toni’s in this way. I started investing like everybody else when I worked for International Business Machines Corp. (IBM) and began building my 401k. I was just putting away as much savings as I could and focused on increasing that over the years. Along the way, I began looking at the choices that I had within my 401k, which had the typical setup with a dozen different funds. One of the funds focused specifically in my company’s stock performance, essentially allowing me to invest in a single stock. I realized that by investing most of my money in IBM’s stock, and moving in and out of company stock back and forth between the two.
That gave me the ability to actually to invest in a single stock for periods of time, and move back and forth between cash though not at a high level of frequency. In addition to contributions, I was able to double my account by doing this over about seven years. I realized that was a lot better than just simply sitting on mutual funds for years and years and keeping my fingers crossed and hoping. Over the years, I realized that there were ways to recognize the conditions of the market and there were times when people would panic and other the times when people would be eager to buy in, which created opportunities as an investor. Most investors get caught up in the emotions. So when I came across Toni’s work, I realized that she knew what I knew: how to read the market. I could tell we both believed that this skill could be given to longer-term investors without them having to change their lifestyle to learn it.
EQ: Your book, Invest to Win: Earn & Keep Profits in Bull & Bear Markets with the GainsMaster Approach, was released in January. What can investors and traders expect to learn by reading it? Do you use your own personal experiences to relate to them?
Scott: In the book, the experiences I used were conversations that I’ve had as I’ve coached traders and investors one-on-one. I took the substance of many of those conversations and put them into a dialogue with a couple of characters. It’s kind of fun because I get to explain what some of these advantages are in the kinds of conversations that I typically have with people and use their typical concerns and explain it to them in just very simple, straight forward language. Traders work so actively to try to improve their gains in a short period of time, then they may or may not capitalize on the things they see. However, long-term investors have a serious advantage of not having to be super active. They’re typically working in a tax advantaged account used for retirement savings. They should be able to do very well because they have the patience. They have the tools at their disposal, but they may not know how to use them. If they don’t, then they’re kind of stuck in this buy-and-hold mode where they have to listen to everybody else tell them now is not the time to panic and to just stay the course. But if they don’t know the course then they don’t get any better performance in the market because they don’t know that there’s an alternative.
Turner: We explain in the beginning chapters of the book how the stock market works. We explain the benefits and the risks of investing in a reader friendly way. The readers get both of our insights. We give people the opportunity to create personalized plans for themselves for how to approach the stock market and how to manage their risk, which we both think is essential to investing success. We give them definite GO and STOP signs to determine when is a good time to be in the market and when it is not. We show them an easy way to ascertain whether we’re in a GO market or a STOP market, which essentially means safety trades only. Whether you have a short-term outlook or a longer horizon to their retirement years, whether you’re in the market for the long term or short term, we give you the tools to create your own plan to be a profitable investor. That’s what we think it’s all about: Identify opportunities and manage your risks.
EQ: Can you tell us more about the GainsMaster approach?
Scott: Toni and I wanted to develop an approach that someone could use in just a few minutes each month. Most people have some funds that they need to invest. They’ve built up their savings over many years doing something they love and they don’t want to become a trader or a professional investor, but they still do have a nest egg they need to guide. So they need something simple. That’s what we came up with through the GainsMaster approach. We do what most investing professionals would do, and that’s start with the investor. We make sure that people focus on a key detail: How much risk can they tolerate. The GainsMaster approach gives them a scale for determining how much fluctuation in their account they’re able to tolerate. Because the market fluctuates, it’s very important for investors to be prepared and to know how to respond to those fluctuations, both on the larger scale and on the smaller scale. The GainsMaster approach gives them four keys to understanding how much risk they can tolerate and then how to manage their risk.
Turner: As an example, I have quite a few friends outside of my professional life that will say the stock market is going down, and I’ll ask them what their plans are? Typically none of them have a plan. So that’s one reason we wrote Invest to Win. We want to make an easy methodology to develop plans that work. The four steps in the book include looking at your objectives, evaluating the market, pinpointing your opportunities, and managing your risks. We show our readers how to create or develop their own investing plan by looking at these important aspects.
EQ: The average investor has long been told that buy-and-hold investing is the best approach to the market. Is that no longer the case?
Scott: We don’t spend a lot of time talking about market dynamics, such as specifically why or how they change. I would like to say here, however, that the reason why buy-and-hold investing isn’t working right now is that the market participants are at kind of a crosswind. There are a lot of people in the workforce but there are also a lot of people leaving the workforce. So investor objectives are transforming over time. In the 1990s, everybody had the need to save money. Now, people are coming to a point where some of them need to actually start drawing money out, either because of hard economic times, retirement, or for whatever other reasons. So we have this demographic cross current going on and that’s not going to go away anytime soon. We’re likely to still be in this environment for at least another five years, maybe more. So buy-and-hold has to be modified to an approach that more resembles buy-and-hold when it’s right and then move to safety when the rest of the market is feeling very nervous.
Turner: On a simplistic level, I see no virtue of buying a stock and holding it for five years only to watch all of my profits dissolve in a violent bear market like the one we encountered in 2007-2008. I see no virtue or honor in giving back all of my profits (and then some) and then having to wait for goodness how long to get them back. It would be just the same as driving around in a car with two flat tires. Why would you do it? Gordon and I certainly do not advocate a trading methodology in this book, but we do advocate knowing simple and well-thought out strategies that help to keep your profits and perhaps even get out of the market and into certain other ETFs or fixed income instruments that are safer for bear markets. You can then come back into the market when it’s safe again. Another analogy would be that nobody goes on a picnic in a thunderstorm. .
EQ: How does the book teach investors how to benefit from a bear market? What are some ways to do so?
Turner: There are two basic kinds of analysis that people use to evaluate the stock market. There’s fundamental analysis, which most investors use, and there’s technical analysis, which many people shy away from. We teach investors and our readers how to look at very simple charts and that, of course, incorporates technical analysis to help identify points where the market goes from bullish to bearish. At that point, you can adjust your risk. Most investors don’t know how to look at basic charts, , but we teach our readers how to do it. Then they have a big overall view of the market and they can be comfortable.
Scott: As part of the simple method for analyzing the market, we point out that investors can look at Utilities stocks in general, for example. They can also look at a measure that we will introduce to most of our readers called volatility. We show them simple ways to look at these things because just those two characteristics alone, if you were to keep an eye on the relative performance of Utilities stocks and the market volatility, you could get some extremely useful signals about how to avoid a bear market and even profit during it. We give some ideas of things that people can do in a bear market in both their 401k and IRA accounts. There are so many wonderful ETFs available and more coming all the time. We actually divide up some of the more strategic ETFs into a table where we distinguish opportunities in both bear markets and bull markets. So we give readers a guide for what they can do for different environments.
EQ: Generally, traders and investors that are excessively active in the market tend to underperform. How does the book help to counter those pitfalls?
Scott: DALBAR, Inc. reports that the average investor holds positions for about two and a half years, which is an interesting timeframe. Nobody has any serious explanation for why it should be that way. Maybe the average investor just gets tired of what they’re trying and two and a half years is how much time it takes for them to get around to trying something else. We have created a way of reading and responding to market conditions that matches those timeframes. It helps people do what they want to do naturally, but with better information so that they can make better choices and smarter decisions by more accurately recognizing the conditions of the market. If people were to have used the GainsMaster approach with the STOP and GO signals that we describe in the book, they wouldn’t have had a losing year all through the decade of the 2000s.
Turner: I think people who panic in the stock market are those who do not understand the basics of how the market works. They feel as though they’re in a dark room and need to find the door out. We give people the tools to create a clear-cut plan where no panic is necessary, and at the same time, they don’t have to be excessively active in the market. The guide that we give them is intended to allow them to be participants in the market with confidence.
EQ: Can you elaborate further on how investors can use the signals covered in the book?
Scott: The STOP sign and GO sign market analysis that we do is so very simple, yet so very powerful. A lot of people feel like the reason they advocate buy-and-hold is that you cannot time the market. The problem is not whether people want to time the market or not; they just do. They have to because they might have to move their money from one place to another, or they might have life circumstances that require them to take money out. Even if they don’t have to, sometimes they do just because they read something that really makes them nervous in the markets. People are moving their money around, maybe not at a high degree of frequency, but they’re not just letting it sit forever. They’re actually doing something. So every time they make a change, they’re unwittingly making a timing decision. So it’s far better to have a knowledgeable timing decision, which we believe will hold in the years to come as well.
EQ: Do you have any closing thoughts on why and how readers should incorporate the concepts from Invest to Win into their financial decision making?
Scott: I would add that most of the advice that people get from retirement planners or investing professionals comes from models, which were academically developed. Now there’s nothing wrong with the models, and certainly the advice from a competent investor is worth its money. This book takes at least a slightly different approach for this reason. We didn’t build this from something that should work, we built it from talking to people and thousands of conversations over the years and developing a strategy that actually fits with what people do. So within that framework, we recognize how they can optimize their decision making.
Turner: I would say that Invest to Win is a very rich resource for those that want to learn about the stock market from two experts who talk to you like we’re talking over a cup of coffee. We give you the big picture of how the market works in an easy-to-understand manner. We give you actual guidelines using our GainsMaster approach, and show you how to be in the market and when to be out of the market, and more importantly, how to profit from it and keep those profits. We cover all kinds of subjects in the book that include investing styles, growth and value stocks, sector rotation, different kinds of funds, and strategies with the GainsMaster approach that gives you your own personal plan. It’s a great book for any investor.