Chapter 7
The Good, the Better, the Best

The system will help you with all kinds of stocks. I've picked three different types of stocks to show you how the system gives you the opportunity to make money while protecting your nest egg.

The Good

Allis Chalmers is the classic example of a stock that goes down, down, down and never comes up for air. The price started at $ 10.37 a share in November 1984 and in March 1987 was wallowing at $ 3.12 a share for a 70% drop since it was charted. This stock has done so poorly that an additional $21,000 in cash had to be pumped in to buy when the system said to buy. You're definitely taking a chance with a stock like this. No method of investing, even the system can save you if the stock dies.

If Allis Chalmers or any stock, or mutual fund bounces back at all, then you really stand to profit. Let me show you why. Since under the system you are always buying shares at lower and lower prices; if a stock really goes in the tank, you'll pick up lots of shares very cheap. As a result with Allis Chalmers, you have grown from 643 shares to 8,313 shares, almost a 1293% increase in shares.

All these shares were purchased at cheaper and cheaper prices and this cheaper stock averaged with your original shares has constantly lowered your break-even point. Now with 8,313 shares, the stock only has to go to $ 3.65 a share for you to be even. Figured this way - $31,000 now invested, original $10,000 + an additional $21,000 in cash. So $31,000 - $ 590 in cash = $30,410 divided by 8,313 shares now owned, gives you a break-even point of $ 3.65 a share.

Remember you originally purchased the stock at $ 10.37 a share. Under the system the stock can still drop 65% in value and you still break even. If the stock should go back to its original purchase price, your investment would be worth $86,837. It could happen. Maybe not with this stock but when a company's stock goes very low, the stock could become appealing to somebody.

Maybe some Japanese industrialist wants a way into the American market. Look what Japanese are paying for art work and Hawaii real estate. It's a remote chance but still gives you hope that even if the stock looks like a real dog, it might bark yet. Besides a stock like this will only be a small part, 1 of 10 stocks, and the other nine will keep you way ahead as you'll see later.

Thanks to the system you're still only down 40%. Your investment is still worth 60% of your total money invested. Now check the graph for Allis Chalmers at the end of this text and you'll see from the yellow highlighted area how the system is constantly trying to get you ahead. Compare the percentages for each month. The line in black at the bottom represents that months' price as a percent of the original price. The line at the top represents the percent of your investment from the system. This represents column 11, portfolio value divided by the total amount of money invested. Thus for March 1987 the stock percent is $ 3.12/$10.37 =30% and the system is $18,338/$25,000 = 73%.

Look carefully at the spreadsheet and the graph until you understand. See how much stock you've been buying and at what price and it'll make sense. At times this method of investing appears too good to be true. It is true and you've proved it.

The Better

The system will help you with all types of stocks. It will not always give you the highest profit on your investment. If a stock always goes up, up, up, then the system will not give you as high a return as if you put all your money into the stock (the lump sum approach). As many books, articles, and magazines show, most lump sum investors never know when or how to sell. They think the stock will go up forever.

Remember the saddest words in investing are: "paper profits." If you ever hear somebody say: "Why that Amalgamated Widget stock I bought went from $ 5 a share to $ 60 a share. Why I made over $50,000 in profits." Ask this lump sum investor where he stands a year later when Amalgamated Widget is selling at $ 3 a share. Usually the lump sum investor still owns the same number of shares, is in a state of shock, and is bemoaning how could this wonderful stock go down so far but assuring you that it will return to its lofty heights. So what?, He still won't make any profits. Try paying your bills, sending your kids to college on paper profits. You need real profits and that is what I'm going to give you.

Korea Fund - Up, Up, and Away

The Korea Fund is a closed-end mutual fund that trades like a stock. Since we all know every time we go into a store that half of all the stuff in the store says Made in Korea, we have a vague idea that Korea is doing well economically. And we're right. As I write this, I'm living and working in Seoul, Korea for the U.S. Government. I can see prosperity everywhere I look. New construction, the 1988 Olympics, the hard work ethic, all have caused a remarkable turnaround in a country destroyed by a war less than 40 years ago.

Investors have figured it out too. The stock has gone from $ 14.37 a share in October 1984 to $ 70.37 a share in July 1987 for an increase of 489%. Now look at the graph for the Korea Fund a page or so ahead. As you can see, the stock lay dormant from Nov. 84 to Nov. 85. Remember, nobody will tap you on the shoulder and give you guaranteed winners. Starting in Dec. 85, the Korea Fund took off and hasn't stopped yet as of July 87.

Now looking at the graph, you can see that the system didn't make you as much profit as the price of the stock gained. The green highlight is the difference between the system's profits and the percent increase in the stock price. That's because the system was selling shares and giving you real profits, take the vacation profits, do any darn thing you want profits.

Now look at the blue highlights and you see your system profits (amount over your initial $10,000 investment). The system hasn't done too badly. Your initial $10,000 is now worth $29,288 or 192% increase. You have made good profits in less than three years and still have the potential for more profits. Unlike the lump sum investor, you have steadily reduced the number of shares you own. Your shares owned has declined from 348 to 78 shares. You've taken your profits in cold cash. You've won this round. A downturn won't hurt you. I can tell you that by 1993 Korea Fund did have a downturn into the $ 15 range. Again study the graph and the spreadsheet. Understand how they work and why they work and then they can work for you. Learning this system will beat the financial odds and provide the money to live your future the way you want to. Work for yourself and you'll always have a good boss.

Also I put in the added profit feature I told you about. I readjusted cash to the 2/3 stock - 1/3 cash ratio I showed you. I recommend you do it at least once a year. I took the extra cash and bought more shares - 140 more in Sep. 86. After the first year in Sep. 85 there was no excess cash.

The Best

Why do I call this the best? As you can see from the graph and the spreadsheet, Dome did not make you as much profit as the Korea Fund although it certainly did much better than Allis Chalmers. Why the best? Because Dome is much more like a typical stock; going up and down and the type of stock that thrives on the system. These are the types of stocks I'm going to show you how to pick. As you can see from the graph, Dome spent much time at less than the original price. That's good under the system because while the stock is taking a nosedive, you're buying all sorts of cheap shares that the system will let you sell later at a much higher price.

Check the spreadsheet and you'll see that you were buying heavily in April, May, June, July, and August 1986 when the price took a dive from your original purchase price. You're loading up for the takeoff when all those shares head back up. And with most stocks they will. Most stocks will show highs and lows of at least 50% difference every year. Stocks that are volatile work best in the system. All your buying pays off starting around Nov. 86 as Dome's share price heads up.

Again as the yellow highlighted area shows, the system keeps you ahead of the share price. Your total investment value is higher. As with Allis Chalmers, the bottom line percent's represent the percent of your original share price, $ 10.12. The line on top represents the percent of your original investment under the system.

The bottom line is that in less than three years, your stock price has risen from $ 10.12 to $ 16 a share or about 58% higher. But under the system your $13,000 (original $10,000 + additional $3,000) is now worth $23,675 as of Aug. 87. Your investment is up 82% or 141% what the stock went up. The system has increased your original investment over 27% a year for three years. Our system worked to perfection. Your original $3,334 of cash required an additional $3,000 from your other stocks. Now in Aug. 87, your cash account is up to $11,323. That's another nice feature about the system; you'll find that some of your investment is in cash not stock, how much more conservative can you get? You can reinvest that extra cash over 1/3 in more stock and continue the profits.