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I have had a few people ask me for a quick tutorial on how to calculate the free shares using the GOPM method (Grow on Other People’s Money). I teach this system in my book, The Confident Investor. I describe the technique in that book but maybe a few more examples are helpful.

Since this tutorial is only interesting to the readers of my book, only those registered readers will see the rest of this article. If you haven’t read my book, The Confident Investor, then you may not understand how you can have free trades based on GOPM. In fact, if you haven’t purchased the book and registered here on this site as a book owner then you won’t be able to see these additional examples. If you have registered and cannot see the balance of this article, make sure you are logged in and refresh your browser.

Which brings me to the big set of questions. Shouldn’t you own this book? Does your investment strategy beat buy-and-hold? Do you even have an investment strategy? If your strategy beats buy-and-hold, does it beat GOPM – Grow on Other People’s Money?

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook,Kindle, and iPad. It may be available at your favorite bookstore as well but you may have to ask.

[s2If current_user_can(s2member_level1)] Profitability Example 1
The basic math is actually quite easy. Let us say that you bought 100 shares of Company XYZ for $30 per share. For this use case, assume that Company XYZ has increased in price to $34. Using the tools in the book, you feel that the stock is about to drop in price. You want your original investment to be pulled out of the stock but want to keep the free shares growing.

You originally invested $3,000 in the stock plus you paid your broker $10 for a total of $3,010. When you sell those shares, you will pay your broker an additional $10 for a total of $3,020. You now need to divide that total investment by the current selling stock price which is $34. $3,020/$34 = 88..82. This means that you need to only sell 88.82 shares to completely get your $3,020 back into your account. Since you cannot sell partial shares of a stock, you will sell 89 shares at $34 giving you a total of $3,026 in your account. You have an additional $26 to invest in your next company along with your original $3,000. The most important thing is that you have 11 shares of XYZ Company that are absolutely free.

Rather than the above word problem that reminds me too much of nightmares of elementary math class, let’s put this into a formula.

(Original investment + commission to buy + commission to sell) / current stock price = number of shares to sell

Profitability Example 2
Another word problem is now appropriate. You bought 140 shares of MNO Company for $52.18 and your broker charges you $8 per trade. MNO is now currently selling at $56.62. Plugging this into the equation above gives us:

((140 x $52.18) + $8 +8) / $56.62 = 129.30 shares. Therefore, you would sell 130 shares and have 10 shares to continue to grow.

Good luck with your investments!

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Many people need to focus on not spending money on things that they do not need. This desire to spend, in some cases, has severely affected the ability to develop an Emergency Fund as well as create an investment portfolio. Even if you read my book, The Confident Investor, I cannot help you if you are not setting aside money on a regular basis to invest in your financial well-being.

I recently read an article on The Simple Dollar that helps with this problem. If you find that you (or members of your family) feel like money is burning a hole in your pocket, jump over and read this article. The two points that I thought were most interesting:

  1. Don’t buy anything without coming up with 5 reasons to not buy it!
  2. Wait ten seconds before putting anything into your cart.

The article suggests 4 questions that you should ask yourself before every purchase:

  1. Can I find this exact item at a lower price elsewhere?
  2. Do I have something similar to this that’s unused or underused at home?
  3. Will I actually enjoy this?
  4. What’s wrong with this item?

It is a very good article. Jump over and learn how to control your spending urges.

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On a regular basis, a company will announce a quarterly earnings number that is less than the analysts expected. This usually causes a large drop in the share price the following day.

So how do you protect yourself from these sudden drops?

  1. You should know the date of the quarterly updates for your major holdings. If you see the stock moving up for a few days before the announcement, you may want to take some of your earnings off the table and lock in your profits. You can always jump back into the stock if the price continues to move up. The opposite of this is also true, if you start to see the stock price drop for several days before a quarterly announcement, assume that insiders are getting out early and join them in leaving the company.
  2. You should setup your account to automatically get you out of a stock if it has a major price move. This should be standard practice for all of your holdings as it will protect you in the event that news breaks that adversely affects your holding or the market in general. Your broker should have a way of allowing you to do a conditional trade. A conditional trade should be set up like this: Sell 100 shares of XXXX as a market order if the price of XXXX drops over 7% in a single day. This order is different than a trailing loss order as it is only looking for a rapid drop in a single day rather than just a gradual decline over the course of time. You could have a trailing loss order of 10% but the conditional order will get you out faster if the stock is moving very rapidly due to bad news.
  3. If you are watching the quarterly announcement of your holding, you can easily check what the after hours trading is doing based on the news. If you see the stock has dropped, then you can let your conditional order save you. If you think the reaction is incorrect and you want to weather the short-term loss, you can log into your account in the evening, cancel your conditional order, and then replace the conditional order at about noon the following day after the market has stabilized. Most bad news will change the stock price in the first hour or two of trading if it is just going to be a quick correction. If the price is still rapidly dropping at noon then you may want to exit the stock as well, as the news is probably worse than you thought.

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I don’t try to predict why a stock is going up based on market conditions. That strategy is simply fraught with danger that I try to avoid.

I frequently get emails, comments on my site, or Twitter questions regarding my opinion on a particular news story. The questioner is almost always asking for my opinion on the news’ affect on a certain stock.

I strongly urge investors to not worry about such details. I realize that Jim Cramer of Mad Money will often discuss the reaction of a stock to a news item. As a case in point, Mr. Cramer recently tweeted on news of gasoline prices potentially dropping and its influence on the retail segment. Jim is incredibly smart and immensely popular. I enjoy watching his television shows. However, I think that using this information to control your investment is unwise for the individual investor.

As I pointed out in an earlier article, the influence of the news on a particular stock is typically extremely short lived. There was a recent study by an analyst  firm that looked at the help wanted ads for Microsoft [stckqut]MSFT[/stckqut] in order to get an insight into Microsoft’s focus for development. I laughed when I saw that story. The recruitment process by a company has nothing to do with the immediate quarterly success of the company. The long-term success of the company obviously depends on its future investments (which I wrote about here) but to try to predict the success of the company based on who they are going to hire in the short-term is giving far too much omniscience to the analysts doing the study.

I honestly do not think that it is necessary to make such deep analysis to be successful. As I teach in my book, The Confident Investor, most of the analysis can be reduced to a 10-year analysis on 4 different metrics combined with a current analysis of two more metrics. This gives you the capability of finding truly exceptional companies. You should grow your investment in those Good Companies using technical trading tools that control your trades.

It is entertaining and educational to listen to Jim Cramer explain how the various macro factors affect a company or an industry. I am sure that he is often correct. However, I don’t suggest that the individual investor repeats this effort.

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

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Most of the stock that is traded on the market is bought and sold by large institutional investors. At some point in the future, I will explain those ominous institutional investors and why they exist and where they get their money. If you want get an update when that article is published, you can simply follow me on Twitter at @ConfidentInvest, subscribe to my RSS feed, or subscribe to my weekly aggregation newsletter.

These institutional investors are not immune from the herd mentality of the market. In fact, they often drive it! They tend to be very susceptible to market analysts that put a rating on a particular stock such as Buy, Hold, Sell (or one of the other less obvious ratings). They also tend to give a lot of credence to target market pricing that is published by analysts.

The biggest disadvantage of the large institutional investors is simply their size! Their second disadvantage is their report to their investors. A quick discussion of these two points is relevant:

  1. One of the largest investment funds (i.e. mutual fund) is The Growth Fund of America (AGTHX). This fund has approximately 115 BILLION dollars under management!  This is larger than the GDP of a small country like Bangladesh or Morocco! When the fund managers are working with a portfolio this large they have massive investments in any one stock. In fact, according to their 2012 Annual Report their largest holding was $4.8B in Apple [stckqut]AAPL[/stckqut] and now, according to their site, Apple doesn’t make the top ten. When the managers liquidated this stock, they didn’t do it in one order – they had to do it over time. In fact, it is possible that the liquidation of this stock actually drove the stock price down so as they sold more shares, they were selling at lower and lower prices.
  2. The second point that is a disadvantage to mutual fund operators is the focus they get on publishing their largest holdings. If you saw a fund that had 5% of its money in Apple over the last 3-4 months wouldn’t you question the manager’s logic? This means that they are constantly under scrutiny on their top investments. A potential investor may disqualify AGTHX if they see Apple at the top of the list. The manager may think that it is time to buy Apple but the risk of the holdings report means that the investment has to be considered wise within the reporting period of the fund.

The advantage to you, an individual investor, is that you can quickly and efficiently buy or sell stock in any company. You can also take advantage of the herd mentality of the entire investment community: you can buy stocks when they have irrationally been beaten down too low, and you can sell them when market exuberance has overpriced a company.

As a small investor, you will not move the market no matter what you do, so you can remain calm and analyze each company to determine the best price to sell and the best price to buy. Your personal moves will not be noticed and start a run on any company. You can quietly and efficiently make your profit.

The key thing to remember is that, when you buy a stock, you may pay too much or you may get an excellent deal. It is only through analysis and research that you can make that determination. It is also essential to remember that most stocks are appropriately priced and will not be a bargain. You will need to be patient to find companies that are bargains. The tools that I describe in my book, The Confident Investor, will help you with that analysis. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.