最後更新日期：2023年09月08日
Having been in the investment market for fifteen years and having read many investment books, I find myself continually applauding “Trade Like a Stock Market Wizard” authored by Mark Minervini, the champion of the American Investment Competition. This book offers an extensive exploration of trading psychology, investing techniques, and fundamentals. It’s rare to encounter such a comprehensive and all-encompassing book on these subjects in the market!
What’s even more remarkable is that Trade Like a Stock Market Wizard doesn’t make readers feel impatient while reading. Each chapter is interconnected and captivating! If you like investing in growth stocks and prefer to base your investment decisions primarily on technical analysis and stock patterns, with fundamentals as a secondary consideration, then this book is perfect for you! Here’s a summary of the key points from the book:
The Indispensable Mental Qualities to Become the Best.
From the outset of this book, it instills inspiration within us: What mental attributes must we possess to become exceptional investors, and what sacrifices are we prepared to make to reach our objectives?
If we express our desire to achieve consistently profitable performance, skepticism may arise. People might argue that Warren Buffett, regarded as one of the most successful investors in history, has achieved an impressive annualized return of over 20%. How can we even contemplate surpassing such a revered figure and consistently attaining even better results?
Being doubted by others is inevitable, but does that mean it’s impossible?
“Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given than to explore the power they have to change it. Impossible is not a fact. It’s an opinion. Impossible is not a declaration. It’s a dare. Impossible is potential. Impossible is temporary. Impossible is nothing.”
― Muhammad Ali
Often, the word “Impossible” is just an excuse for us to live more comfortably. But upon deeper reflection, comparing ourselves to others doesn’t make sense, as the contextual backgrounds and environmental conditions are different, these comparisons are meaningless.
For example, consider the difference between the vast funds managed by experts like Buffett and the smaller amounts that regular individual investors like us have. Our advantage as retail investors is that we can easily buy and sell stocks without worrying about liquidity issues, something that professional fund managers might not have the luxury of doing.
Furthermore, the author emphasizes that we don’t need anyone’s permission to do something. If we truly want to achieve our goals, we should forge ahead resolutely, persist in our dreams, and believe in ourselves.
“You don’t have to be great to get started, but you have to get started to be great.
– Les Brown
To become a top investor, we need to make a firm determination and make a commitment. Yes, making a commitment is crucial! Merely saying we’re interested in investing isn’t a strong enough drive to push us to become the best in the field. When we truly make a commitment to something, we should understand that there is no other option but success. Only with this mindset will we be willing to make sacrifices and do everything in our power to reach our goals.
Specific Entry Point Analysis (SEPA)
The author has developed a system focused on the common characteristics of super-growth stocks, drawing from a vast amount of historical data. This system classifies the traits and attributes demonstrated by past exceptional growth stocks, termed Specific Entry Point Analysis or SEPA.
This strategy precisely defines the rules for entry and exit, encompassing five major elements:
- Trend : Strong growth stocks are almost always in a clear upward trend during their aggressive growth stages. The author believes that identifying the trend is crucial and it includes two steps: determining the stock is in which phase of the rise, and whether the stock price conforms to a trend pattern.
- Fundemental : The driving force behind the rise of strong growth stocks mostly comes from improvements and growth in the company’s fundamentals, such as earnings, revenues, and gross profit. Most of these improvements occur before the explosive growth in the stock price.
- Special Events: Stock prices need Special Events that excite investors. Stocks that experience significant rally always have underlying stories and events driving them. Such Special Events are what might attract interest from institutional investors.
- Entry Point: Most strong growth stocks will have at least one low-risk, high-reward entry opportunity, so it’s crucial to seize the right moment to enter.
- Exit Point: Even stocks that exhibit characteristics of strong growth stocks might not always develop as investors anticipate. The paramount principle is to protect trading capital; positions must have a set stop-loss to decisively cut losses when things go south. At the same time, we need to learn to recognize when super-growth stocks show signs of ending their run. For successful trades, ultimately, we need to sell the stock to realize profits.
Different Phases of Stock Price and Trend Pattern
To achieve high performance, do we need to buy at the lowest stock price? The author believes that guessing the bottom of a stock price is a waste of time! What we should aim for is not buying stocks at their lowest or cheapest price, but rather buying them at the “right” price. The “right” price refers to the price of the stock just before it’s about to surge significantly. So how do we determine when a stock price is about to take off? First and foremost, we need to wait for the stock price to enter its second phase of an upward trend.
As illustrated in the diagram below, the price development of strong growth stocks can be divided into four stages:
Stage 1 – Ignored Phase: Consolidation
In the first stage, the stock price will spend a lot of time consolidating, possibly for several months or even years. Therefore, this phase should be ignored to avoid inefficient use of capital.
Stage 2 – Surging Phase: Accumulation
The primary investment opportunity arises when the stock price conforms to the “Trend Template” defined by the author. This is characterized by continuously rising peaks and troughs, increasing volume on price rises, and decreasing volume on price declines. In both daily and weekly charts, there are more upward patterns than downward ones when viewed against the average volume line.
Stage 3 – Peak Phase: Distribution
The price experiences significant fluctuations, becoming unstable and is prone to the largest daily or weekly declines. Then, the 200-day moving average tends to lose momentum, gradually leveling off or reversing downwards.
Stage 4 – Declining Phase: Capitulation
The company’s earnings growth slows down. There’s a higher likelihood of unexpected negative financial news. The stock price is below the 200-day moving average, and the 200-day moving average is trending downwards. The price exhibits a stair-step decline, with both peaks and troughs continuously sliding lower.
| Trend Template | |
| 1. | The stock price is above the 50-day moving average, and the 50-day moving average is also above both the 150-day and 200-day moving averages. |
| 2. | The 150-day moving average is above the 200-day moving average. |
| 3. | The 200-day moving average has been in an upward trend for at least one month (ideally, in most cases, for four to five months or more). |
| 4. | The stock price is more than 30% above its 52-week low (sometimes even exceeding 100%, 300%, or more). |
| 5. | The stock price is within 25% of its 52-week high (the closer, the better). |
| 6. | The Relative Strength Ranking (RS Ranking, evaluating the price performance over the past 52 weeks) is not lower than 70, preferably in the 80s or 90s. This means that the stock’s performance ranks among the top-tier in the overall market. |
At the same time, we should regularly compile a “leading stocks” list. Typically, such stocks can be watched during market downturns by observing which individual stocks make new lows ahead of others, which stocks decline less than the overall market, and which ones lead the recovery when the market bottoms out.
Fundamentals of Strong Growth Stocks.
If a stock’s price plummets, there’s always a reason behind it. Most people might view a stock at its low point as cheap, but they overlook the fact that market prices are formed by supply and demand. When there’s a lot of selling pressure and little demand, leading to consistently new lows in the price, entering the market at such a point is genuinely risky.
The author emphasizes that the real driving force behind strong growth stocks is their Future Potential. And the most potent force propelling stocks with the highest growth potential is the genuine growth of Earnings and Sales. Below are the Key fundamental data points the author stresses to focus on:
| Key fundamental data points to observe | |
| Earnings per share (EPS) | During the Surging phase of strong growth stocks, their annual Earnings Per Share growth could be over 30-40%, with a trend of accelerating growth each quarter. |
| Earnings Surprise | If a company’s earnings significantly exceed analysts’ estimates, it’s considered a good Earnings Surprise. If a company’s earnings exceed analysts’ predictions for several consecutive quarters, it’s beneficial as analysts are likely to continue revising their earnings estimates upward, pushing the stock price higher. |
| Sales | In addition to a strong earnings performance and accelerated growth, we also hope to see if Sales has a similar growth trend. We need to observe whether the growth trend over consecutive quarters is equally strong. |
| Net Profit Margin | The Net Profit Margin represents the percentage of net profit divided by sales revenue, reflecting the company’s profitability. We need to observe whether the Net Profit Margin can grow quarter by quarter, which indicates whether the operations team is able to fully control the situation. |
The author proposes ‘Code 33’ to assess whether a company’s fundamentals meet the criteria for Strong Growth stocks. ‘Code 33’ refers to whether Earnings, Sales, and Net Profit Margin can achieve accelerated growth for three consecutive quarters.
The Art of Stock Entry
Human behavior is the force driving market trends, whether in 1900 or today, this is an eternal truth. Because human behavior has consistent patterns, such patterns are traceable and have not changed over a long period of time.
Therefore, stock price patterns have always been an effective tool for entry and exit decisions. As shown in the following chart, the author believes that he would only consider buying when the stock is in the upward trend of the Surging Phase.
When considering buying a stock, one should only buy when the potential returns of the stock significantly outweigh the risks. So how do you identify such specific situations? The author introduces the concept of the Volatility Contraction Pattern, abbreviated as VCP :
Volatility Contraction Pattern (VCP)
Let’s quickly review the conditions for the formation of the Volatility Contraction Pattern (VCP):
- As depicted in the chart below , when the left side of stock price movement exhibits higher price volatility, and the right side experiences a contraction in price volatility.
- Contraction patterns typically involve 2 to 4 contractions, occasionally extending to 5 to 6 contractions.
- The amplitude of wave retracements gradually decreases, for instance, when a certain wave retracement is half the size of the retracement in the preceding wave.
- The time intervals between wave fluctuations become progressively shorter.
The formation of the Volatility Contraction Pattern (VCP) can be envisioned as a result of the interplay between the supply and demand of both novice and experienced investors. When novice investors hurriedly sell their stocks due to price rally, it leads to increased price volatility.
However, at each bottom of the price swing, experienced investors begin to accumulate positions, causing the stock price to rise rapidly, and this pattern repeats over and over again. This process, where stock shares move from weaker hands to stronger hands, generates multiple price swings, which the author refers to as stock price contractions. As the contractions’ amplitude diminishes, it signifies a weakening selling pressure from novice investors and a stabilization of stock price. At this stage, stock posted a good condition and ready to take off.
When the Volatility Contraction Pattern (VCP) reaches its final stages of contraction, a phenomenon of dwindling trading volume emerges. At this point, investors should be aware that if there is an increase in trading volume, and the price surpasses the previous high to establish a new high, it could present a favorable buying opportunity.
Of course, when the stock price is in the process of forming a Volatility Contraction Pattern (VCP), if there appear some bullish technical patterns, they all further support the subsequent development of super growth stocks. Such as the cup and handle pattern, bullish flag, rapid V-shaped reversal, and etc.
After we buy in at the Breakout of Consolidation point, though the stock price will fluctuate as it rises and there might be some retracements, a strong growth stock shouldn’t easily fall below its 20-day moving average. We should, strictly adhere to risk management, let the stock price grow as much as possible, proving how high it can go. At the same time, when we observe signs of the stock price entering its peak phase, we should decisively exit.
Risk Management
As the saying goes, making money swiftly might seem easy, but it can also foster an unjustified sense of confidence among investors, leading them to take unwarranted risks. Some might be tempted to allocate more capital to engage in high-risk gambling, ultimately resulting in detrimental consequences.
In the world of investing, it’s not about how much you make in a single month or a few months, but about how you can hold onto and grow your money over the years. And the secret to doing that successfully is all about managing risk wisely. So, let’s remember these down-to-earth principles when it comes to controlling risks:
- Never incur a loss that can damage your trading account. If we lose 50%, we need to earn 100% back to break even.
- When were we wrong? When our trade is at a loss, it means we were wrong.
- Accept losses. Losses are an inevitable part of trading. If you can’t properly accept this fact, it will inevitably lead to even greater losses.
- To succeed in the investment market, you need to make clear decisions. Personal feelings don’t matter at all; making money is what’s important.”
At the same time, before buying any stock, we need to establish a plan to guard against unforeseen events.
- Set a Stop-Loss Price: Before entering, pre-determine the maximum loss you’re willing to accept.
- Re-Enter the market: When things don’t go as expected (e.g., when a stock falls due to market conditions), take a decisive stop-loss and then re-evaluate. Remain objective. If the market conditions align with your criteria again, consider re-entering.
- Take Profits: Consider using a trailing stop-profit or stop-loss strategy. For positions that have already made a profit, adjust the stop-loss point upwards to the break-even position. Never let a profitable position turn into a loss.
- Plan for the Worst-Case Scenario: Always envision what the worst possible situation might be and how you should manage your positions. A disaster prevention plan allows us to make rational judgments and take action under immense pressure.
Conclusion
In the earlier section, we have summarized some key points from the book ‘Trade Like a Stock Market Wizard’. Of course, a thorough reading of this book will reveal many more details. Repeated reading will undoubtedly greatly benefit our investments. Then, after understanding the concepts of each step, how do we practically apply and integrate them into each of our investment plans?
In the next article, we will share how Growin team identifies strong growth stocks. We will go through actual trading experience and tools developed by the team.
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