The Gutman Group

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First thing’s first, you have to know how the stock market works. If you don’t know then it’s very likely you will end up living in your mom’s house when you’re 40, that’s why you should read this article first explaining how the stock market works and how you can make money from it.

Once you do that and you figure you are ready to invest: figure out how large your portfolio will be (how much money you will invest). I recommend investing as much as humanly possible, especially if you are young and don’t have as many responsibilities as someone who is older, such as a mortgage and utility bills. Why do I recommend so much so fast? The earlier you start, the more times your money can compound itself and the richer you will be (read more about compounded interest here). And for those of you who think you are ready to invest read this article about getting started by choosing an online brokerage.

Determining your risk profile…or not

At this point in time “professional” investors will tell you to consider how much risk you are able to withstand. If you are young then it is generally accepted that you are able to withstand a higher margin of risk, in which case the professionals will advise you to have a higher allocation of “high risk” equities, such as stocks. The older you are, the higher allocation of bonds and lower allocation of stocks is recommended since bonds are more “safe.”

At this point in time, I will tell these “professionals” to quit their jobs and to stop fornicating with their siblings. If you are satisfied making 2-3% a year then listen to these guys all you want, if not, then keep reading.

The fact of the matter is if you have half a brain and make use of the wonderful knowledge provided in the miracle known as this website you will obliterate any margin of risk. Risk comes from not knowing what you are doing, not from external market forces. Once you understand that crucial tidbit of reality, losses in the stock market will cease to exist. The only question that will remain after that is how many times over your investments will multiply. The stocks that grow many times over tend to be the safest while lower quality stocks are risky. You just have to know how to select the high quality, high return stocks (more on that later).

Divvying up the pie

Although I don’t condone the use of “risk profiles” I do support the use of asset allocation. When I say asset allocation I don’t mean sorting your sock drawer but I do mean sorting your stock drawer (hahahaha!). In my little alternate dimension full of pixies and mountains of cash, asset allocation refers to how you organize your stocks. Since I don’t believe in bonds or GICs or ETFs, or any of that other low yielding shenanigans, the only type of asset that exists in my world is stock.

If you are a new investor, the greatest way not to end up begging for change after losing your entire investment is by diversifying. The textbook definition of diversification is “spreading out investments to reduce risk.” But, before you do that, I highly recommend you divvy up your portfolio into sections, using industry or country as criteria.

For instance, you may decide to split your portfolio up into a few different sectors such as telecommunications, utilities, oil and retail. You may have a strong belief in the future of 3G cell phones, so you allocate the largest chunk of your portfolio into stocks pertaining to that sector, say 50%. You believe oil has a good chance of going back to its near $200 highs so you allocate 25% of your portfolio to oil stocks and then 12.5% to utility and retail stocks. The benefit of doing this is that when one industry falls another may rise, thus reducing your risk. Once you have a healthy number of sectors and know how much of your portfolio to allocate to each sector, you are ready to pump a healthy number of stocks into each category – hence diversification.

Say you have a portfolio consisting of only one stock, Vacuum Cleaners Inc (symbol: SUCK). You own $1000 worth of SUCK, 100 shares at $10 a share. Now, say SUCK’s price gets cut in half; since this one stock is the only asset you have in your entire portfolio, your entire portfolio drops 50% in value (meaning it has to grow 100% just to break even). That kind of sucks.

Now imagine you had a portfolio consisting of ten individual stocks, $100 worth of each, one of the stocks is SUCK. Now, when SUCK’s price falls 50%, your portfolio’s entire worth only drops 5% in value, not 50%.  Now that doesn’t suck so bad.

What does suck is the fact that in the first scenario, if SUCK doubles in price then your entire portfolio doubles in value. But in the second scenario, if SUCK doubles you only make a 10% gain. I’d say it’s still better than mowing lawns, but it definitely won’t let you afford diamonds for breakfast and rubies for brunch – that’s what The BAG Fund is for.

Question is: how many stocks are enough in order to consider your portfolio properly diversified? Some money managers say that upwards of fifty stocks is a healthy amount. I say if you have more than twelve stocks in your portfolio then you should probably seek another vocation (unless you have billions of dollars in your portfolio, then you are probably doing something right and please continue to do so).

Even though you are probably thinking you are too good for diversification, I assure you, chances are you are not. There’s a reason that 99% of the people you talk to will have more negative investment stories than positive – it’s because most people are irrational bags of dimwitted ignorance (in physical form). The reason that diversification and other forms of idiot-proofing exist is for the same reason that you have to walk before you can do long-distance sprinting. First you crawl, then you walk, then you get better at walking and eventually learn how to run and the more you run the better your endurance gets and the faster you can transgress distances. If you try to run without knowing how to walk you will probably end up bleeding in a ditch somewhere.

Know what you’re doing

The key to doing all this is to know what you are doing! NEVER invest in a stock or industry that you know little about – that’s how you lose money. For instance, the reason that The BAG Fund has such a tiny exposure to commodities is because I don’t understand them well enough to make a logical decision without doing some speculating – and a true investor never speculates, everything is certain.

The people that start off investing however their heart tells them are the people that will later tell you that you’re insane and will lose all your money if you invest in stocks. As I mentioned earlier, before you jump into the markets headfirst you have to develop certain skills and crush your emotions. On top of that, you have to know how to save your money in order to have more to invest – which is what our Your money section helps you with.

Once you’ve schemed up a deviously strategic diversification and allocation plan you are ready to start looking for some stocks. As mentioned earlier, a true investor never speculates.

That’s why I only invest in companies that I understand. For instance, I don’t understand the way financial companies operate as much as I would like, nor am I in a very comfortable position with commodities, therefore I stay away from these stocks (at least for funds that I manage for others). Granted, my understanding of these companies is vastly superior to that of most people, but I could never justify, to my investors, the purchasing of shares of any such stock in the event that I lose money on the investment. This is the reason that I have never lost money on a single investment in all of my investing experience – I don’t leave anything to chance; and neither should you.

When I find a company that intrigues me I study it. First I read its annual reports for the last three years, then I read its competitors’ annual reports for the last three years (each report tends to be over one hundred pages) then I read up on the company’s market and industry. If it is a retail company or one with a nearby office or headquarters, sometimes I would visit these locations and do some real world research, such as asking employees how they feel about the company or what works and what doesn’t. If there are things that I cannot figure out or some other inconsistencies I like to call up the head of Investor Relations of these companies and have a little chat.

Although everything I do to research one measly company may seem daunting and possibly out of your league, I assure you, it is not. When I just started investing at the age of 16 with a couple hundred dollars I managed to scrap together I was already doing all this, so there is absolutely no excuse for you not to…unless you enjoy being outwitted by a child.

Although I now have to hide from Green Peace for the many acres of forests that were cut down to print all those annual reports and spent more hours reading and researching than most people spend in their entire lives, I don’t regret a single minute…my bank account speaks for itself.

Finding companies

Before you can start spending countless hours researching your next investment that will start off large enough to purchase you a nice pair of pants and end up making you enough money to buy an Equestrian racing horse you will have to find it. The question is where can you find these stocks?

My absolute favourite place to find amazing stocks for cheap is by checking out the “Top Loser” stocks every day. These are the stocks that have fallen in price the most out of any other stocks for the day. As I have mentioned so many times before, investors tend to be stupidly emotional and thus overreact to bad news, often driving down the price of a stock for little-to-no reason. In such cases I tend to swoop in and gobble up the stock at a steep discount to its intrinsic value and then laugh maniacally while petting my pet hyena. You can find top losers of the day on most financial websites.

My most efficient means of finding amazing stocks? Screeners. My favourite screener is on www.finviz.com, where you can input so many different valuation metrics that your head might explode, ranging from insider transactions to every type of margin known to man, well, financial margin anyway.

I also keep my eyes and ears open. If I ever hear of some “revolutionary new idea” or some cool new company I research it. If I find an industry I really like I would find companies in that industry and further investigate.

Too bad it’s all useless

In the end, all of it is useless. There is no point of gathering up money for your portfolio or figuring out how much of your portfolio to allocate to each sector or diversifying or researching or even finding stocks if you don’t know what you’re looking for.

There is absolutely no way that you are going to know if the stock you found is the one without having set criteria so you might as well kill yourself now… or keep reading…which now leads us to the fundamental reason The BAG Fund’s returns make people so jealous that I have to have an entourage of ex-Israeli commando bodyguards following me at all times.

Whoever said discrimination is wrong should be shot

Honestly, making returns that rival The BAG Fund’s isn’t hard. As much as I would like to tell you that it’s extremely difficult to beat the markets and that the only way you are going to get the kind of returns we get is by investing your money with us, that is simply not true. In fact…making a fortune in the stock market is quite possibly the easiest means of making money that exists, you just have to be successful in what we call the Big Fat secret (Disclaimer: it’s not really a secret).

So, what is the secret? Discrimination. You have to be very, very selective in the companies you research. And how do you know which companies to keep and which to throw out? Well, that’s the beauty of a well developed system.

It’s not as easy as it looks

Even though it may not require a PhD or a degree in nuclear physics to make huge returns in the stock market, it’s not necessarily an ability you can develop overnight (to the dismay of many). To build a tried and true system that has the ability to transform the cost of your university tuition into an amount large enough to buy a small country (or a chunk of a slightly larger country) takes many years, and a few satchels of discipline wouldn’t hurt either.

Thankfully for you, we have already spent many years tinkering and trifling, dabbling and doodling, puttering and piddling with our system to turn it into the ultimate wealth generating machine. Is it fool-proof? No. But is it able to produce such returns on your investments that it will make your bank account feel as giddy as a schoolgirl who has just been told she is getting a pony for Christmas? Without a doubt.

The purpose of this website is to show you how to develop such a system.

Or you can just rip ours off (but then you won’t really understand what you’re doing and will probably fail miserably and join the anti-capitalism picket lines downtown after losing all hope of a worry free world).

Your choice.

Read up to see our (so far) foolproof system and how we developed it here.

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