The Three-Ingredient Recipe for Cooking Up Profits

Natalie's Three-Ingredient Investment Recipe for Cooking Up Profits

1. Start with what you know and love.

2. Pick the leader in the sector (in real estate, it's location, location, location).

3. Buy low; sell high (easy to say; hard to do).

Any time a potential investment seems too complicated and twists your mind into endless debates, go back to the simplicity of this formula. If it doesn't pass this test, just say, "Not now." You still need more information before you can make a well-informed decision.

Be disciplined about following the recipe. You need all of the ingredients, and if you take the steps out of order, you could end up with a brick that sinks your profits rather than a cake that rises light and fluffy to Cloud 9. Since we all want to vacation on Cloud 9 before we're ninety, let's sharpen your skills and start cooking.

Step One: Start With What You Know and Love

The first ingredient is easy enough. If you want to invest in infrastructure in India, and you've never been there, you have to commit to visiting India and doing a lot of research or be disciplined enough to just say no to the investment.

Warren Buffett, one of the most successful investors of all time, is notorious for not investing in NASDAQ. He didn't understand or care about technology enough to compete with his buddy Bill Gates (and conversely, Bill Gates is heavy in technology and lighter in insurance -- one of Buffett's fields of expertise). In the latter part of the 1990s, Warren was ridiculed for missing out on the rocket ship gains that the NASDAQ enjoyed. He missed the high and he missed the crash landing, and meanwhile, his returns chugged along for steady, reliable, strong gains.

What few people realize is that trading individual stocks is a tennis match. One person wins (buys low; sells high) and the other loses (buys high; sells low). A novice is a sitting pigeon for the master. Imagine stepping out on the tennis court with Roger Federer (who by the fall of 2008 had already won thirteen Grand Slam tennis titles) and expect to even see a ball coming at you. Very unlikely.

If you don't know the first thing about a company or its product and you're not excited enough to get savvy, why step on the court and humiliate yourself with a devastating loss to the pros? Instead, focus on long-term results and proper nest-egg diversification strategies, find the perfect broker (who is your second most important life partner), and tithe to the plan from every paycheck. The average returns of the stock market over the last twenty-five years have been over 11 percent (higher than real estate), so that discipline alone could make you a millionaire.

Over the years, I've come across a lot of people who say that they don't know anything about anything, which is completely untrue. My police officer cousin found Taser International, my 2003 Company of the Year, which went on to earn up to 9,000 percent gains over the next three years. Whatever you do for a living gives you an insider's view of something. Your cleaning lady or people on the janitorial crew where you work know why they like certain cleaning products over others. I use a carpet cleaner who has taken the trouble to become the expert on organic cleaning products. You have some passion and some expertise. I'm simply giving you a framework within which to use it.

Of course, just loving the product or the store doesn't prove the stock is a good deal or that the company will continue to beat out the competition. That's why there are two other steps.

Step Two: Pick the Leader in the Sector

The second ingredient is easy to come by when you line up the numbers in my Stock Report Card (see Chapter 6) and ask the Four Basic Questions for Picking Winning Stocks (Chapter 5).

For those of you who really have a taste for investing in individual stocks -- and who hasn't wanted to invest in some product that s/he loves! -- picking the leader in a sector is not overly complicated. Picking the leader means that you have to take a devil's advocate approach to the product that you know and love. There were people who were buying an interest in the leading maker of horse-drawn carriages just when Ford was releasing its first motor car. People were buying stock in Worldcom the year before Skype began giving away free long distance over the Internet. You have to determine whether or not the product, company or real estate will be valuable to buyers in the future.

Every month, I go through the exact same research and analysis on a different sector, employ this exact recipe, ask my four questions and inevitably there's one company that's leading the pack. And that company is usually pretty easy to identify because it shines in more than one category. Better yet: none of these strategies require earning a Ph.D. in economics or sitting at your computer watching the markets every day at the crack of dawn.

Interview your friends and neighbors on whether or not they like the product or service or prefer the competition. (Don't ask your friends about the stock; ask them about the product. It's their preferences as consumers/users of the good that you want to know, not their layman's opinion on Wall Street strategies.) Ask them the four questions if you really want to get them to deeply consider their love of the product.

Remember: the CEO is the soul of the company. Get to know the CEO of the company you love and the competition a little better by researching some of her speeches online and/ or reading the CEO's Note to Shareholders in the company's annual report. (The annual reports should be available on the SEC.gov web site, as well as the company's web site.)

Once you pick the leader in a sector, the final determination is simply whether or not you're buying for a good price or paying through the nose.

Step Three: Buy Low, Sell High

The third ingredient in the recipe is largely a game of mastering your emotions as much as employing strategies for identifying the low and high prices.

Buying low and selling high is completely against human nature. Buying low means that when everyone is crying Apocalypse, you're seeing Opportunity. Selling high means that you're leaving the party at midnight (sober), while all the punch drunks are screaming that the party is going till dawn, and you're going to "Miss out, man. If you just hang out a little while longer, imagine how much more fun you'll have."

No one has a crystal ball on when the low and high of an investment will occur, but there are a number of factors you need to consider before you make a buying or selling decision.

Calendar Trends
• Santa Rally
• Back-to-School Stock Sales
• Summer Doldrums
• Preelection Year Rally

Other Considerations
• Natural Disasters
• Small Caps for Performance
• Large Caps for Stability
• Exchange Traded Funds versus Mutual Funds
• Diversification and Asset Allocation
• Happy People Make Better Products Faster and Cheaper
• The Economics of Freedom
• Emerging Markets

Historical Performance

If you already have some market experience, you might be stunned to notice that I haven't included P/E -- price-to-earnings ratio -- on this list. Yes, price-to-earnings ratio counts, but the above factors can be as important to determining the optimum buy/sell time as P/E is. When you read the P/E discussion later in these pages, you'll start understanding why.

If you don't know price-to-earnings ratio from hieroglyphics, don't worry. It's not difficult to understand "Never Pay Retail" and "Buy Low, Sell High." It's pretty easy to find out what the 52-week high and low prices are or even what the five-and ten-year highs and lows are, to use as a gauge. Start now with what you understand and accept that you will continue to gain knowledge as you keep reading.

Mastering The Three-Part Recipe-Water Your Money Tree: Your Brain

Write out the Three-Ingredient Recipe on an index card and stick it up in your office -- or wherever you do your investments -- until thinking about investing this way becomes second nature. This recipe works every time -- except in an apocalypse . . . and if one of those comes, you'll have much bigger problems to worry about.

The Bottom Line

You already have the tools you need to become successful in investing. The reason you might have lost money in the past is that you didn't trust your wisdom (you placed blind faith in someone else's), or you didn't tithe regularly, or you didn't have a disciplined approach to profit-taking (like the recipe offers), or you didn't ask enough questions before jumping in (like the four questions force you to do), or you didn't have the fundamentals of a diversified, asset allocation plan in place that changes as you age.

Investments are like a mosaic. The more tiles you uncover, the clearer the picture. If you plunge your head in the sand and rely solely on the plan of a broker you hardly know, or on a single hot tip, or any other single piece of the puzzle, don't be surprised if your nest egg lies broken in pieces, never quite assembled into the life of your dreams.

Following the ups and downs of a stock price is not educating yourself. It's obsessing and may lead to an ulcer or, worse, a heart attack. Do your research and evaluation before you buy, and you'll be able to sleep soundly when the markets are unruly. Many investments treat you to a jittery period of volatility before they go on to great gains. Successful investors almost always go through a price roller-coaster before the stock soars. The roller-coaster ride can be totally worth it in the end, if you're not having a heart attack. (If you have confidence that your investment is a winner, the ups and downs of the market will seem more like a child having a temper tantrum than Apocalypse Now.)

If your potential investment passes all three criteria of the investment recipe, odds are in your favor to start getting rich the easy way -- by following your heart and adding your brain.

Natalie's Three Takeaway Tips

1. The path to investing wisdom is like learning a foreign language. The words sound like gobbledygook in the beginning, but as you keep talking, you start understanding more and more words, and soon enough you can master the language. There's no shortcut. Just start talking.

2. Investments are like a mosaic. The more tiles you turn over, the clearer picture you'll have of the health of the investment.

3. Picking the leader in the sector is the most difficult task. It pays to fill out a Stock Report Card and ask the four basic questions, which are outlined in Chapters 5 and 6.

The above excerpt is a digitally scanned reproduction of text from print. Although this excerpt has been proofread, occasional errors may appear due to the scanning process. Please refer to the finished book for accuracy.

The above is an excerpt from the book Put Your Money Where Your Heart Is
by Natalie Pace
Published by Vanguard Press; December 2008;$24.95US/$26.95CAN; 978-159315-491-2
Copyright © 2008 Natalie Pace

Author Bio
Natalie Pace, is adding a splash of green to Wall Street and transforming lives on Main Street. She is the founder and CEO of one of the most respected independently owned financial news organizations in the world. She has been ranked as a #1 stock picker from TipsTraders.com and has partnered with Forbes.com. She has repeat guest appearances on Fox News, Good Morning America, Time Magazine, More Magazine, USA Today, NPR and Kiplinger's Personal Finance. She currently lives in Southern California.

The first ingredient is easy enough. If you want to invest in infrastructure in India, and you've never been there, you have to commit to visiting India and doing a lot of research or be disciplined enough to just say no to the investment.

For more information please visit, http://www.nataliepace.com/

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