Trafford Publishing: The X-Discipline: Financial Independence for the Web-Savvy Investor

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The X-Discipline: Financial Independence for the Web-Savvy Investor

by Paul W. Accampo

324 pages; quality trade paperback (softcover); catalogue #03-1403; ISBN 1-4120-1034-9; US$26.50, C$31.00, EUR22.00, £15.50

The X-Discipline is a five-step investing strategy that yields higher returns in good markets and better loss protection in bad ones, for time-starved individuals who want independence from questionable financial advice.

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About the Book

When was the last time your broker called to tell you to sell?
During the 32-month bear market between March 2000 and March 2003, "buy and hold" advice from brokers and financial advisors failed to stem portfolio losses ranging from 40 to 80%. People lost money for one reason: they failed to sell. There's no safe haven where you can buy a stock and forget about it. Have you lost faith in the individuals and institutions that recommended your investments? Are you looking for a better way?
This rare, realistic book offers a, unique, practical alternative depending on others for advice and to the risks, effort, and time involved in managing a stock portfolio yourself. This book is specific - instead of the usual bland list, the author escorts you into the internals of websites with down-to-the-mouseclick procedures for extracting what you need to make clear-cut decisions. He helps you build two essential (but usually omitted) skills for investing: how to critically read the news and control your emotions. His disciplined approach to selling works under all economic conditions to protect you against market downturns; yet, the search that yields high-performing low-volatility funds requires only moderately frequent trading and only about one hour a week of your time. The method frees you from the brokers and financial advisors who have not the skills, methods, or incentive to tell you when to sell - and eliminates their exorbitant fees.
With numerous examples and detailed guidance, The X-Discipline shows you how to anticipate market moves by understanding the impact of news events. It helps you resist the temptation to react emotionally when the market gets volatile or turns against you. No longer dependent on others' advice, you can use ultra-discount brokers to trade low cost efficiently-run funds.
Synopsis of the Book

The X-Discipline is organized into four Parts that let you to use it in different ways. If you want to sit down and surf your way through the steps, start with Chapter 1 and work through to Chapter 7. Your first session will take two to three hours, during which you will find the dogs in your portfolio and build a list of potential winners. With repetition, running through the five steps will require only a few minutes weekly. Because it focuses on process, Part 1 is light on explanation. Each Part 1 chapter has a Part 2 counterpart that goes into greater detail on the origin and reasoning behind the strategy and on potential problems. You can read Part 2 sequentially or use it as a reference.
If you want to learn about The X-Discipline before adopting it, begin with Chapter 8 in Part 2. Part 3 has additional studies and time saving information, and Part 4 gives specific procedures for accessing websites. Updates to Part 4, which will change as websites change, are available on www.x-discipline.com
Part 1: Immediate Results!
Chapter 1: Charting Basics describes the use of charts to identify and measure trends, applying a technique used by experienced traders to identify trend reversals, which are key buy or sell signals.
Chapter 2/Step 1: Determine the Market Stage helps you use the trend of the NASDAQ Composite Index to determine the "Stage" of the market, which helps you decide how much of your capital to put at risk.
Chapter 3/Step 2a: Finding Mutual and ETF Winners introduces fund screeners, for exchange-traded and mutual funds. These online applications produce a list of the best performing funds during the most recent one to three months.
Chapter 4/Step 2b&c: Selecting the Best of the Best shows you how to use the relative strength chart application to trade off high performance and low volatility, and how to eliminate mutual funds having undesirable attributes.
Chapter 5/Step 3: Sell - Before You Buy describes planning your exit strategy, detecting failing performance and deciding whether when to sell.
Chapter 6/Step 4: Review the News. News moves prices, and more of your decisions will turn out right if you consider real world factors. Chapter 6 shows you how to go online for quick news updates, to employ critical thinking to assess the relevance and influence of what you read, and to create personal "outlook statement," that summarizes where you think markets are headed.
Chapter 7/Step 5: Taking Action. If you did not have emotions, Chapter 7 would be one sentence: "Click on sell." This chapter helps you deal with the fear that grips you when you actually have to commit to your plan.
Part 2: The X-Discipline explained
Chapter 8: The Case for Disciplined Investing presents the strategy of the X-Discipline, reviews market action over the last five years, shows how holding during a major downturn can create a severe loss, and gives an example of how selecting top performing funds at key times can generate high returns.
Chapter 9: Funds: The Good, the Bad, and the Ugly examines the relationship between risk and volatility, presents the case for using no-load mutual and exchange-traded funds as your primary investment vehicle, and provides a different perspective for you as a fund owner: the manager of your investment team. The chapter also explains the complex topic of fund costs and the Morningstar system for categorizing funds.
Chapter 10: Why Your Broker Doesn't Call describes how brokers operate, deals with the housekeeping necessary before you commit real money, helps you determine how much you have available to invest, and explains how to diversify. It explains tax issues and the types of accounts, the services needed from your broker, and how to avoid broker transaction fees.
Chapter 11: Measuring the Market explains in detail the significance of long- and short-term trends and shows you how to gauge the mood of the markets to determine the percentage of your assets to put at risk. Sometimes, your best investment is cash.
Chapter 12: The Challenges of Fund Screening is the first of three chapters that cover three phases of qualifying funds as "buy candidates." It gives detailed examples on how to search for funds and guides you in selecting the best screener for your needs.
Chapter 13: Excluding Volatility shows you how to visually identify volatile or weak funds through an example using the relative strength chart application.
Chapter 14: The Pre-Flight Checkup discusses key facts to check on any fund before you buy.
Chapter 15: The Art of Firing a Portfolio Manager revisits selling with a detailed analysis and addresses with examples the interpretation of charts under volatile and non-volatile conditions.
Chapter 16: Nuclear War and Other Negatives discusses how to employ critical thinking to use the news to arrive at your own opinion. Without an independent opinion on how to approach the markets, you will tend to follow other people's ideas in place of your own strategy.
Chapter 17: Investing is Emotional! explains the emotions that affect investors, points out that failure to control them will take you off your plan, and offers suggestions on how to understand them and regain control.
Chapter 18: Tracking Your Portfolio introduces a method to track progress, balance your portfolio, and act on sell signals.
Chapter 19: Bond Funds: An Equity Alternative. The recent long-term bear market made the case for investing in bond funds - under the right circumstances. This chapter shows you when to be in bond funds and how to find and evaluate them.
Part 3: The Appendices
Appendix 1: The Internet Bubble is a case study that follows the NASDAQ Composite Index through the bull market run up and the dot-com crash, showing you how the X-Discipline determined the time for staying 100% invested and the time to go to 100% cash and chronicling the opportunities for buying during the long bear market that followed.
Appendix 2: A Bond and Bond Fund Primer reviews key facts about bonds and bond funds you must know to successfully invest in them.
Appendix 3: Data Extraction and Manipulation describes several common procedures for extracting and manipulating data from web-based search results tables.
Appendix 4: What I Learned in 30 Years of Investing summarizes the principles on which this book is based.
Part 4: Website-specific Procedures
The instructions in Parts 1 through 3 make generic references to the applications listed below. These are found in a set of appendices called Procedures:

Annotated charts: Procedure W1
An exchange-traded fund (ETF) screener: Procedure W2
A basic mutual fund screener: Procedure W3
A relative strength chart: Procedure W4
An ETF profile: Procedure W5
A mutual fund profile: Procedure W6
An advanced mutual fund screener: Procedure W7

About the Author

DURING a thirty-year career in marketing and sales at Hewlett-Packard, Paul Accampo pursued a passion for investing, reading over fifty books and countless articles. Making his first stock purchases in the 1970's, he immediately learned flexibility, when investors at the time cast off stocks for gold, real estate and certificates of deposit. He and two close friends tried and discarded many investing ideas, growing their portfolios over two decades, while learning to avoid major damage from events like the Crash of '87.
Paul*s extensive travel precluded managing a large stock portfolio. Having limited time, he focused on mutual fund investing, becoming an early "telephone switcher" and an early user of online mutual fund charts. Noting the vast sums lost in 2000, Paul turned his attention to refining and explaining his methods, improving ways to control risk, refining sell criteria, discovering the best websites for obtaining fund data, and understanding volatility. Wishing to pass on the knowledge accumulated over a lifetime to his children and their generation, he has created a method of disciplined investing for Generation X.
An accomplished writer and speaker on technical subjects during his HP career, Paul has employed the analytical side of his nature (he holds an engineering degree from the University of California at Berkeley) and his marketing and sales skills to explain a most complex human endeavor in straightforward terms. He lives with his wife, Elaine, in Mill Valley, California, where he enjoys bicycling, skiing and volunteering his time in community activities.

Excerpts

Excerpt from the Chapter 17: Investing is Emotional!
One of the great vistas in the Bay Area is the view of the Golden Gate and San Francisco from the Point Bonita lighthouse. To get to it, you have to climb down a trail and steps to the tip of the northern entrance to San Francisco Bay. There, at the bottom of a 100-foot cliff, Pacific waves pound relentlessly, sending streams of foam high into the air. On a rock twenty-five feet across a chasm facing the cliff, sits the lighthouse. The gap is bridged by miniature version of the Golden Gate Bridge. It sways.
I have acrophobia.
Fear gripped me as I approached this short span. Could I fall down onto those rocks? I looked at the bridge. Steel towers fifteen feet high. Two steel suspension cables one inch thick hung on each side of the towers. A five-foot wide pedestrian path made from steel and thick timbers crossed the gap. And of course, everyone else walked it without thinking twice. I flashed on the regret I would feel if I got all the way down here and never went the last twenty-five feet and on the embarrassment of people finding out - like my wife and daughter, who were impatiently waiting for me to do something. I decided I could hold onto the railing and the bridge wouldn't break or fall into the ocean. I stepped out. I froze. I looked down. A wave of fear. I had to look only at the walkway and ignore the crashing waves. I figured, ten steps and this is over. I did it.
Here was an obvious situation (at least to me) where fear controlled everything. At a much lower level and in more subtle ways, fear and other emotions XE "emotions" control your investing. I decided to write this chapter when an early user of the X-Discipline, who had no problem buying five or six funds during a market rally, froze when it came time to sell. She was afraid she would take a loss! Some of the best writers on investing seem to ignore the role of emotions. William O'Neil XE "O'Neil, William" makes no mention in his influential How to Make Money in Stocks. David Bach XE "Bach, David" , writing to an audience of women in Smart Women Finish Rich discusses integrating your finances with your lifestyle, but not what selling feels like after your portfolio has suffered a 20% loss. By contrast, successful traders constantly discuss emotions. Almost every interview in Jack Schwager XE "Schwager, Jack" 's Market Wizards has words like "afraid," "joy," and "control." Consider this from Donald L. Cassidy XE "Cassidy, Donald" in It's When You Sell That Counts: "The disparity in market performance boils down to how well each investor - individual or institutional - can invest against his emotions. So keeping a clear head means the difference between profits and losses...It means staying clear-headed when everyone else is not, especially during market swings from panicky lows and price despair to manic euphoria."
Our emotions influence our behavior and affect all our investment decisions, causing us to act too soon, too late, or not at all, with resulting losses, missed opportunities or excessive trading. In his book, Investment Madness, How Psychology Affects Your Investing*and What to Do About It, John R. Nofsinger XE "Nofsinger, John R." examines emotions and biases and offers suggestions to improve your self-control. I have applied many of his concepts in this chapter.
Excerpt from Chapter 15: The Art of Firing a Portfolio Manager

Investors are always worried, even in bull markets. But they get really nervous in bear markets and sell quickly and massively. Bad news dominates the media, rallies are short and the downside is steep. This effect is illustrated in Chart 15-1, which compares the corrections of the uptrend during 1998 and 1999 with the crashes and swoons of the downtrend created by the post dot-com bear market.
Chart 15-1 Downtrends in a Down Market vs. an Up Market

During the uptrend, shown to the left of the dashed line, the market climbed a "wall of worry." There are occasional corrections as prices race ahead of the underlying trend, the worst of which was 16%. Corrections will tempt you to sell; however if you bolt too quickly, you will churn your account. Since you know that the long term trend is bullish, you can bet that most corrections will be moderate and set your stops such that they don't trigger. The 16% event in July 1999 would undoubtedly have triggered selling, but you could have bought back during the rebound in August to recoup any losses. The 11% and 12% corrections in February 1999 and January 2000 should not have caused you to sell if your portfolio was sufficiently non-volatile.
When the long-term trend turned down in April 2000, the entire psychology of the market changed. Each new bear market rally failure drove prices to new lows. The right side of Chart 15-1 shows five opportunities to lose more than 33% of your portfolio, in sell-offs that were four times more severe than bull market corrections. If a rally fails while the long-term trend Direction is Down, do not attempt to ride it out as a correction, or you may participate in a capitulation XE "capitulation" to a new low. Nevertheless, when a bear market rally starts, you should do some buying (according to the guidelines from the Market Stage) because you don't know the outcome - the rally could be the one that begins a new long-term uptrend.

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