Why do you invest your hard earned cash in the stock market? Ask yourself this question. Please think carefully and truthfully; now write down your answer before you continue reading.

Is it for retirement, for income, for real estate, your kid’s education, etc.?

Whatever the reason, I am sure most of you have developed a set of rules to follow before dumping thousands of dollars into the market.

If not, how do you know when to buy and sell without a documented set of rules based on a proven strategy? Under what circumstances do you buy and sell? What are the criteria that you use to make those final decisions that will affect you and your family? Do you even know what position sizing and expectancy are?

Anyway, according to the Stock Trader’s Almanac, the January Effect now takes place during mid-December. Many publications and stock market “gurus” will be talking about the January effect and how you may profit from the cyclical trends that supposedly exist.

From Wikipedia, the free encyclopedia:

The January effect (sometimes called “year-end effect”) is a calendar effect wherein stocks, especially small-cap stocks, have historically tended to rise markedly in price during the period starting on the last day of December and ending on the fifth trading day of January. This effect is owed to year-end selling to create tax losses, recognize capital gains, effect portfolio window dressing, or raise holiday cash. Because such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the January rally.

The point of this article is to remind my readers to steer clear of the hype behind so called special situations that don’t play into your developed trading system that was designed to fit with your personality and emotions. Some talking heads may try to convince you to buy beaten down shares in companies that will bounce in the first two weeks of the year based on historical cycles. I see too many people jump at the opportunity to change their investing beliefs because some guy on the other end of computer wrote an article claiming to make you lots of money over the final two weeks of this year and the first two weeks of the year.

Instead of wasting your time studying theoretical bounces that may or may not occur, take the time to review last year’s trades and document the positive and negative aspects of your portfolio.

• Exude your metal strength and trading conditioning while ignoring the noise coming from different directions.
• Study your best trades and understand why they were the best trades.
• Analyze your losing trades and understand where you made the mistake.
• Correct those mistakes in the coming year and understand if the losing trade was the right move.
• Sometimes losing trades were placed properly but the investment just didn’t work out as expected. That’s life in this game!
• Be honest with yourself and highlight the areas that need work and continue to polish your strengths.
• Don’t abandon what is working because a talking head on television tells you his system works in only 15 minutes per day, two days per month.

You could always forgo the hard work of developing your own screens each night so you can save time by buying and selling the red and green arrows on the systems of late night television.

Stick to one system that works and try to consolidate the strongest features of that system to your advantage and ignore the hundreds of other systems and indicators that can be found on every investing web site on the net. Understand that you will modify this system over time as the markets evolve. Certain indicators, patterns and setups will work differently at different times so you must understand how to compensate for these changes in nature. It is a possibility that these changes allow some to believe in the January Effect but I chose to ignore it and focus on what I am doing.

Stay focused in the New Year, start fresh and think positive! Instead of reading 100 books on 80 different trading systems, reread a few essential books that focus on the style of investing that best suits your trading.

Long Term Strategy on how to trade the US Dollar (it’s too simple for words):

Click here to open the US Dollar chart to a larger view (with more detail) of how accurate the 10-week/ 30-week moving average crossover signal (up or down) has been this decade.

Below is a chart of crude oil (the 10-week/ 30-week moving average crossover works just as well here):

Frugal Trader from Million Dollar Journey (Subscribe to the Feed) has an excellent education blog on personal finance and investing. He has been detailing strategies that he employees and explains what has helped him get to where he is today. Below are three of his recent posts that I recommend you take a look at:

• New Car Buying Tips from a Former Car Salesman
• 25 Ways to Save Money
• How Call Options Work - The Basics

Blain from Stock Trading To Go (Subscribe to the Feed) has been writing about stock market education by highlighting his thoughts, lessons and even his success running his own blog. Blain has also added multiple contributors to the site including a full time institutional investor (see Pro Trader Jack link for more). Below are three highlighted (stock education) posts from his site:

• 10 Great Ways to Learn Stock Trading as a New Investor
• Pro Trader Jack Makes $200,000 in One Hour
• Top 5 Guaranteed Ways To Lose Your Money Investing

I don’t know about you but I love books, especially books about the stock market. I frequently ride the train from New Jersey into Manhattan (New York) so I am always on the lookout for new and/or interesting material. Any of the books below would make excellent holiday gifts or stocking stuffers.

Enjoy!

Start with these books and then scroll down to view my Stock Market Library:

• Think and Grow Rich – Napoleon Hill
• The Richest Man in Babylon
• A few Recommended Business Books
• A few Recommended Self Help Books

An Excellent Stock Market Gift List:

Learning about Stocks (Fundamental and Technical Principles):

System Development and Market Psychology:

Great All-around Reads:

All Others:

Lower Priced Stocks Don’t Double Faster!

I cringe every time I hear a novice or even a long time investor tell me that they only purchase low priced stocks because they offer quicker potential gains. A common phase I hear is:

“I like to buy $1 and $2 stocks because they can double easily and I can afford them”

You can afford them? To start, a $1,000 account is a joke but to actually say the above statement and believe what you are saying after thinking about it is insane. A 50% gain is a 50% gain regardless of how many shares are in your portfolio. So, should you be buying 100 shares of SIRI because you love Howard Stern and can “afford it” or should you be buying Apple (AAPL) because you love it as it crosses $100, $150 and $200 per share? The novice says they can’t afford a $200 stock. Please smack yourself because you can afford it but in your mind, you can’t afford a nice round lot purchase of 100 shares (who cares, you’re trading small to begin with – making money is your only concern). One share or one hundred shares: a gain is a gain and a loss is a loss.

I rather own 15 shares of Apple than 100 shares of Sirius or a similar beaten down piece of garbage. I could care less about the number of shares in my account.

I care about making money – MY PERCENTAGE GAIN AT THE END OF THE YEAR!

Hell, I would’ve bought one share of Berkshire Hathaway at $100,000 before I would consider much of the hopeless crap treading along the bottom of the market’s ocean.

“Stocks are priced low for a reason, just as stocks priced high are there for a reason”.

Like anything in life, quality is never offered at a discount. In most cases, life offers its best material possessions at premiums.

A $1.00 stock is trading this low because it is only worth this much in investor’s eyes. A stock priced at $100 or $200 is trading at these levels because of a quality that the lower priced stock does not have (in most cases). Institutions, such as mutual funds, banks and insurance companies will not purchase a stock at $1 based on strict internal rules and fund guidelines.

Stocks such as First Solar (FSLR) move quicker than dirt cheap crap due to the vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.

• Apple (AAPL) is up almost 300% in eighteen months
• First Solar (FSLR) is up almost 900% over the past 13 months
• Baidu.com (BIDU) is up almost 400% over the past 18 months
• MasterCard (MA) is up almost 400% over the past 18 months
• Research in Motion (RIMM) was up almost 500% over the past 18 months
• Garmin (GRMN) is up almost 300% over the past two years
• Petrochina (PTR) was up more than 200% over the past 2 years
• Mcdermott (MDR) is up more than 300% over the past two years
• Google (GOOG) has doubled over the past year or so

The stocks above were trading at these prices June 1, 2006 (pre split adjusted):

• AAPL: $62.17
• FSLR: $27.89 (12/1/06)
• BIDU: $83.43
• MA: $47.51
• RIMM: $65.91
• GRMN: $97.12
• PTR: $106.45
• MDR: $44.84
• GOOG: $382.62

So, would you rather own low priced media mentioned stocks such as SIRI ($4.51 on 6/1/06 and $3.50 today) or the higher priced $40, $50, $60, $100, $200 and $300 priced stocks above. I’ll take the 300%, 400%, 500% and 900% gains of the higher priced stocks over the losses or minor gains from the lower priced options.

A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return. High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. You have all watched more stocks double or triple from the $25-$100 range on this blog than any other price level during the past year (chrisperruna.com is one year old this month).

I bought BIDU at $103, MA at $107, FSLR at $101 and AAPL at $130 this year alone (I rounded the cents). How many sub $5 stocks did I buy this year? NONE!

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