Executive Summary 1 Macroeconomics And Monetary Economics: Fill & Download for Free

Lots of people are intimidated by investing in the stock market or investing in general. They have this impression that you need to be a super experienced professional or this Wolf of Wall Street type of person in order to succeed. But the truth can be farther from the truth today. Today we as the retail investors are equipped with so many free tools and resources that helps us to be on the level playing field as the Wall Street guys, as far long term investing goes.In this short guide, I will take you step by step journey on how you can get started investing in the stock market and build your wealth long term. This is NOT a get rich quick scheme. I lay down the fundamentals, not just tips or “hacks,” that will help you tremendously in your investing career well into your 30s, 40s, 50s, 60s and beyond. Stock market investing is a cumulative game. The early you start, the longer you are in the game, the more money you make.PART 1 – Lay Down The FoundationsUnderstand ValuePrice is what you pay. Value is what you get.Warren BuffettIt doesn’t matter if you are into the stock market, the real estate or whatever investment opportunities are out there, the most important concept that you need to understand is value. So what is value? Simply put, value is the cumulative total output of a particular thing or experience over the course of its entire lifetime. Usually an intelligent investor-minded individual will spend money on things with high outputs such as a business/stocks (recurring cash), tools (productivity), books (knowledge), healthy food (longer life), etc. As opposed to buying things with low or diminishing outputs such as games, toys, electronics, cars, clothes.Value = Lifetime OutputWhatever that you buy, you always want to ensure that the estimate lifetime value of the thing exceeds the price you are paying by a comfortable margin of error because your estimates can be off. Generally speaking as an investor, you should focus on acquiring assets or creating systems that generate consistent INCOME passively with the added bonus of capital appreciation.ExamplesFarm = Crops & Livestock + Capital AppreciationReal Estate/Facilities = Rent + Capital AppreciationInsurance = Premiums + Capital AppreciationOil Rig = Oil + Capital AppreciationHosting Solutions = Subscriptions + Capital AppreciationVending Machines = Products + Capital AppreciationIntellectual Property RIghts = Royalties + Capital AppreciationUnderstand Compounding EffectCompounding is the greatest mathematical discovery of all time.Albert EinsteinCompounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. By repeating this cycle, the output potential of an investment becomes exponential over time. Your investments will grow slowly at first, but eventually accelerate over time. This is one of the primary reasons how Warren Buffett was able to accumulate such gargantuan sums of wealth. He started early and he was in it for the long haul, constantly reinvesting what he earned over the period of 6 -7 decades.Let’s say you invest $10,000 into stock A. The first year, the shares rises 20%. Your investment is now worth $12,000. Based on good performance, you hold the stock. In the second year, the shares appreciate another 20%. Your $12,000 is now $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $2,400. In the third year, they will appreciate $2,880 and so on. In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000 – and that’s without adding any money to the investment!Be Clear About What Kind Of Investor You AreThere are four kinds of investors in the stock market …Day Trader – is someone who gets in and out of positions making multiple trades per day without looking at the underlying company’s fundamentals. This effectiveness of this method is doubtful due to the prevalence of HTF (High Frequency Trading).Short Term Investor – is someone who trades stocks on large price fluctuations (swing trade), shorts, margin trading, etc. A short term investor usually holds a stock for no longer than 6-12 months.Active Long Term Investor – is someone who tries to beat the market by researching and choosing individual stocks with strong fundamentals. They are usually in a stock for minimum 1 year.Passive Long Term Investor – is someone who does not research or handpick stocks. Instead they buy shares that represent the overall market like index funds and ETFs. They are merely participants in the market.In this guide, I will teach you how to be an active long term investor as I believe this is the best strategy that will get you the most results with the least amount of risk and the least amount of work. Just to demonstrate the power of long term investing, if you had put just $100 into Amazon stocks when it went public in 1997, it would be worth over $120,000 today. Although Warren Buffett did not invest in Amazon in the early days, he had made incredible gains through this simple strategy. Many of his quotes relate to this idea of buying shares in a select few companies with solid business and holding them for the long term …I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.Time is the friend of the wonderful company, the enemy of the mediocre.Our favorite holding period is forever.As an active long term investor here are some ground rules you need to keep in mind …Don’t touch penny stocks. Companies that issue penny stocks are unregulated. They do not file with the SEC (no 10-Q or 10-K) and they do not have proper auditing. This means that they can cook up numbers on profits, revenue, etc. Penny stocks are also rife with pump and dumps.Don’t touch day trading or margin trading. Unless you really know what you are doing, stay away from them. It’s impossible to game the market due to whales, insider trading and high frequency trading. Understand that 90% of the traders lose money.Invest in an index fund (ETF) if you don’t want to track companies. Investing in individual stocks requires lots of reading, research and thought. If you are a busy person or simply do not have the appetite or interest in reading all the financials and keeping up with the companies, just invest in an index fund or mutual fund. But realize that your returns will not be as high as you would get from active investing.Learn From Early Failures & Other People’s FailuresStart Early, Start LittleYou do not need to have thousands of dollars to get started. You can start with couple hundreds to practice on. When you start young you are likely to play with smaller amounts. This means that when you make mistakes (and yes you will make mistakes, it’s part of the learning process) your losses will be minimal. Whereas if you get into investing when you are in your 30s or 40s, you will most likely work with larger pool of money which means that your losses will be much greater when you make a mistake.Leverage Other PeopleLeverage other people’s experience to make better investment decisions. Look at how your friends and family lose money and learn from them so you don’t make the same mistakes. As Warren Buffett said, “we only learn through mistakes but they don’t have to be ours.” By the same token, stand on the shoulder of giants and utilize their knowledge to your advantage. Hang around with people that been in this game for a long time, follow influencers on Youtube, join mastermind groups on Facebook, read books from successful investors like Warren Buffett.Building Wealth Vs Preserving WealthAs an active long term investor, it’s important to make the distinction between growth stocks and value stocks. Both cater to two different kinds of investors as shown below. Generally speaking, young investors with low capital tend to have higher risk tolerance . They gravitate toward growth stocks because they have higher returns over time. Older investors on the other hand usually have more money and tend to be less risk tolerant. So, they gravitate toward value stocks which tend to be safer and low risk, but with low returns. High risk = high returns; low risk = low return.We will get into the metrics in more detail later.Understand that dividend paying stocks are not growth stocks. These companies are usually “safe bets” or low risk stocks that focus more on profitability over expansion (value stocks). Growth companies on the other hand almost never pay dividends because they need the money to fund their expansion and growth.Allocating Your CashNow that you know what kind of investor you are, set a budget. It’s important to decide how much money you want to set aside for stock investing. There is no minimum or maximum amount that required for investing in stocks. But as a beginner, you want to start out with a small portion of your net wealth, never the entire sum. Rule of thumb: never invest more than you are willing to lose.Personally, I would invest in growth stocks if I have less money to play with ($1000 ~ $10,000), As someone with small amounts of cash, my primary focus would be to increase my wealth in a dramatic way. It’s very difficult to build wealth through value stocks. On the flip side if I already had a significant cash reserve to invest ($50,000+) I would lean more towards value stocks and dividend paying stocks to preserve that wealth. Anything in between ($10,000 ~ $50,000), I would split it between growth and value stocks.Learn To Read The Markets & MacroeconomicsMarketsIf you are completely new to the stock market, take a look at the following terms and try to acquaint yourself with them. You will need to know these concepts in order to read the markets properly.Ticker Symbol – an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market.Index Fund – A type of mutual fund that is constructed to match or track components of the market. e.g. S&P 500Support – The lowest market prices of a stock during a bear trend.Resistance – The highest market prices of a stock during a bear trend.Correction/Dip – A temporary downward trend, usually after a bull run.Crash – A severe downward trend that is more long term or permanent.Consolidation – A breather or a temporary stall in the bull run.Volatility – the degree of variation of a trading price series over time. High volatility means that the prices fluctuate a lot.Bull Market – a financial market of a group of securities in which prices are rising or are expected to rise.Bear Market – a market in which securities prices fall and widespread pessimism causes the negative sentiment to be self-sustaining.MacroeconomicsWhen you are sifting through the news (which you should get in the habit of doing), it’s important to pick up on variables that may play a role in affecting the overall markets. Here are some metrics and concepts that you should pay special attention when reading the news …Big Three Credit-rating Agencies – Standard & Poor’s, Moody’s and Fitch Ratings. They assign credit ratings, which rate a debtor’s ability to pay back debt by making timely interest payments and the likelihood of default.Central Bank Interest Rate – The central bank rate is the interest rate that central banks charge domestic banks on loans. This directly affects the interest rates the banks offer to consumers on loans. Lower interest rates generally encourage more spending than higher interest ratesUnemployment Rate – The unemployment rate is the share of the labor force that is jobless. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall.GDP – Gross domestic product is the monetary value of all the finished goods and services produced within a country’s borders in a year. High GDP means a large market size.Trading Bloc – an agreement between countries, often regional, where barriers to trade, (tariffs) are reduced or eliminated among the participating states. e.g. European Union, ASEANFTA – Free trade agreement involve cooperation between at least two countries to reduce trade barriers (import quotas and tariffs) and to increase trade of goods and services with each other. e.g. NAFTAAusterity – a set of economic policies implemented with the aim of reducing government budget deficits such as spending cuts, tax increases. They are undertaken to demonstrate the government’s fiscal discipline to creditors and credit rating agencies.Privatization – the transfer of a business or industry from public to private ownership and control. Private companies operating with a profit motive can deliver goods and services more efficiently than government agencies that may be bogged down by bureaucracy.Sanction – commercial and financial penalties imposed by one or more countries, and targeted against a country, organization, group or individual.Lobby – a group of people banded together to influence an authoritative body such as the congress to act (pass bills) beneficial to their own own interests. e.g. tobacco and arms companies in the US.Political Liberalism (Socialism) – a philosophy that is characterized by a belief in equality, regulations, high taxes and big governments. It is the duty of the government to alleviate social ills, to protect civil liberties and human rights and to ensure that no one is in need. Liberal policies generally emphasize the need for the government to solve problems.Conservatism (Economic Liberalism) – a philosophy that is characterized by a belief in individual liberty, personal responsibility, small government, low taxes, fiscal responsibility and strong national defense. The government is responsible for providing people the freedom necessary to pursue their own goals. Conservative policies generally emphasize empowerment of the individual to solve problems.Trade War – A trade war is an economic conflict between nations resulting from protectionist policies such as raising tariffs or other barriers to trade. Increased protection generally causes consumer prices to rise, pose difficulty for businesses and reduce trade activity.Currency Devaluation – is where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies. As a result, exports become cheaper in other countries, and imports into the country become more expensive. Both effects benefit the domestic industry, and thus employment, which receives a boost in demand from both domestic and foreign markets.PART 2 – Research, Research & ResearchRisk comes from not knowing what you’re doing.Warren BuffettResearch is the most important step to investing in stocks. You will need to research into companies, hundreds of them, and evaluate them intelligently. Go through each company using the method I’m going to show below and create a list of your favorite companies. Like with real estate, you might look into 50 to 100 companies and only invest into 1 out of all those companies. Your job is to sift through the chaos to find the few gems that are going to make you wealthy in the long run.Look It UpIf you are just starting, start looking into companies in sectors that you understand or are interested in. Imagine if you had a writing assignment. Wouldn’t it be easier to research and write about something you have some knowledge in or something you care about? It’s the same deal with stocks. But if you are absolutely clueless as to where to start, try to look into companies that solve a fundamental need or want.Look At The Fundamentals & TrendsPeople FundamentalsWhere are people spending most amount of time? (leisure) e.g. Social media, YoutubeWhere are people shopping? (retail) e.g. Amazon, Etsy, FacebookHow are people making money? (business) e.g. Shopify plugins, Web hosting/solutions, Talent agency/manager of social media starsIndustry FundamentalsWhat products and services are expecting business demands? e.g. Chips for IoT/VR/electric cars/iPhone, Drones for deliveryWhat products and services are expecting consumer demands? e.g. Smartphones, Marijuana, Health foodsWhat industries are getting disrupted? e.g. Car repairs (electric cars), Cable TV (Youtube TV), Walmart/Costco (Amazon), Television Ads (Facebook Ads)Go Deep, Not WidePut all your eggs in one basket—and watch that basket.Andrew CarnegieDon’t try to understand everything. Don’t try to get everything right. There are hundreds of industries, thousands of great companies to choose from. Focus on what you understand. As Warren Buffett says, “you only need to be right about a few things to be successful.”Evaluate The BusinessThere are primarily three tools that will allow you to properly access a company’s business affairs …Investor Relations Page – Every major company has an Investor Relations section on their website where they provide an accurate account of company affairs (announcements, annual reports, 10K, etc.). This helps you to make informed buy or sell decisions.Annual Report – An annual report is a comprehensive report on a company’s activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company’s activities and financial performance.Earnings Call – An earnings call is a teleconference, or increasingly a webcast, in which a public company discusses the financial results of a reporting period via an 800 number and on the internet.Business ModelI want a business with a system so good an idiot can run it. Because sooner of later one will.Warren BuffettA business model describes a rationale of how a company creates, delivers, and captures value in a particular marketplace. Simply put, how does it make money? It’s very important to thoroughly understand a company’s business model so that you can more accurately evaluate the company. Generally speaking, you will want to invest in a company with a system exposed to the least number of variables in the first place. These variables can be external like trends, competition or internal like the financials and management. And every time a variable changes, you have to ask yourself how will it affect the business model, how will it affect its next earnings. Pay particular attention to the management variable. Oftentimes a company can go under simply through poor management decisions.ManagementThe best thing I did was to choose the right heroes.Warren BuffettPay close attention to the management track record, particularly that of the CEO. Are there any positive or negative patterns in their behaviors? Are they competent and reliable? Generally speaking, the smaller and younger the company, the more you should research into this stuff.Don’t rely solely on the track record of the management team. Also look at their incentive model. How are they compensated. Are they paid in cash or in company shares? Generally speaking, executives who are paid in shares tend to have more incentives to ensure the company succeeds because the growth of the company directly translates to the growth of their shares. On the other hand, executives who are paid purely in cash tend to be in it for themselves and care less about the company.It’s one thing to create an awesome product or service, it’s another to make intelligent money decisions. How does the management team allocate capital and resources? What is their return on invested capital? Are they good at reinvesting? Making shrewd acquisitions? You want a CEO like Mark Zuckerberg who can buy companies like Instagram at pennies on the dollar ($1B) and turn it into a behemoth ($100B+). This is especially important when you are dealing with big companies that play with large sums of cash.Finally, evaluate the general temperament of the company. You want to invest in companies run by energetic, innovative and dynamic people who are well-prepared for the task. Avoid companies with management teams that are content or complacent. Things move fast. Companies need to be on their toes and constantly innovate, improve, etc. Do they have contingency plans or something up their sleeves to deal with potential competitor coming into the space?MarketplaceInvest in companies that have the ability not only to withstand current competition but also future competition. Do they have a competitive moat? How will they react when a competitor emerges all of a sudden? Do they have a strong brand recognition? (e.g. Coca Cola) Often times, companies with strong brands tend to have strong competitive moats. Try to invest in companies that are dominant players in a given niche, or even better have created their own unique niche.Look 3 years ahead in the market not 10 years. Things used to change more slowly in the early days of Warren Buffett. That’s why he was able to look far ahead and hold stocks for 10 or 15 years with no problem. Nowadays, due to technology things move very fast. It’s almost impossible to see what’s ahead 10 years into the future. Look 3 years max.Evaluate The Price (Valuation)As mentioned at the very beginning of this guide, measuring true value of something is the single most important skill that every investor must master. In stocks, many experienced and successful investors including Warren Buffett will try to estimate the overall worth of the business. This is called valuation. And it is when that valuation is HIGHER than the price, that they will actually buy the shares in the company (granted it meets the other criteria). If not, they will wait around for the ideal entry point. They will never jump into a stock without proper value to price valuation. There are number of metrics you can use to estimate the true value of a company. They are EPS, P/E and Earnings Yield.EPS, P/E & Earnings YieldEarnings Per Share (EPS) – serves as an indicator of a company’s profitability.EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding SharesPrice/Earnings (P/E) Ratio – one of the most popular valuation measures used by investors and analysts. Generally speaking, growth stocks have high P/E ratios than value stocks. P/E ratio is also a good indication of market expectation on that stock’s future growth potential (high P/E = high future growth expectation, low P/E = low future growth expectation). Ideally, you want to invest in stocks that the market has not picked up on its future high growth potential but with low P/E ratios.P/E = Stock Price / EPSTrailing P/E – based on EPS for the trailing 12 months.Forward P/E – based on future estimated EPS (This is what you want to pay attention to).Earnings Yield – the reciprocal of the P/E ratio.Earnings Yield = EPS / Stock PriceExampleIf Stock A is trading at $10 and its EPS for the past year (ttm) was $0.50, it has a P/E of 20 (i.e. $10/$0.50) and an earnings yield of 5% ($0.50/$10).If Stock B is trading at $20 and its EPS (ttm) was $2, it has a P/E of 10 (i.e. $20/$2) and an earnings yield of 10% ($2/$20). Assuming that A and B are similar companies operating in the same sector, with nearly identical capital structures, B obviously represents a better value.Macro TrendsAlso take a look at the long term trends for more clues on its valuation as well as any abnormal activities it might have …Current Stock Price / IPO Stock Price – Generally speaking, if you are a growth stock investor you want to look into companies with lower current price to IPO price ratio. A company that has gone public more recently with stable or stagnant prices tend to have more growth potential. But be careful not to invest in a company that has just launched its IPO because the prices tend to be inflated at the very beginning.Stable Price Movements – Stay away from stocks that have experienced or is in the process of experiencing a bubble. A bubble is a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. Bubbles almost always end in a massive deflation or burst. And it is not good for the company because the investor confidence in the stock will be ruined after the burst.e.g. weed stocks, altcoinsCrash Test – If the company is old enough, look closely at their performances during the recessions. How did the prices hold compared to rest in the market? Is it crash-proof?Market Cap – If you are a growth investor you will want to look at low market companies. If you are a value investor, look at high market cap companies. Warren Buffett for example is a value investor so only looks at companies with at least $8 billion.Market Cap = Stock Price * # of Shares OutstandingValue TrapBe careful not to fall into the value trap. Some companies might seem attractive: easy to understand, been around for a long time, needs-based. But they might have reached their peak and are slowly declining in what’s called a death spiral. Always try to determine where the peak is: is it in the past, present or future. Remember too that dividends can be cut anytime. You should never invest solely based on dividend.Evaluate The FinancialsThere are three types of financial reports that you need to look at in stock investing: Balance Sheet, Income Statement and Cash Flow. Out of the three, the Balance Sheet is the most important document in a business and investment. If a company has a lot of debt will make short-term decisions because they will be scared. They will do whatever it takes to get by and live another day, making decisions that may hurt them in the long term. Just as when an individual is in debt, that person will likely be stuck in a job and live paycheck to pay check, not making progress.Go to Yahoo Finance which is a fantastic online tool that provides financial news, stock quotes, press releases, and most importantly financial reports.Balance SheetBalance sheets report a company’s assets, liabilities and shareholders’ equity at a specific point in time. In other words it provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.Assets – the economic resources a business has, including the products it has in inventory, the office furniture and supplies purchased for use, and any trademarks or copyrights it owns. These assets count toward the value of a business, since they could be sold if the business experienced difficult times.Liabilities – any debt accrued by a business including bank loans, credit card debts, and monies owed to vendors and product manufacturers. Liabilities can be divided into two major types: current, which refers to immediate debts (e.g. money owed to suppliers), and long-term debt, which refers to liabilities (e.g. loans and accounts payable).Invest in companies with strong balance sheet. This is EXTREMELY important because when an economy goes into recession, good balance sheets provide cushion to the company. It acts as an insurance. Companies with poor balance sheets tend to get hit pretty hard during market downturns, or worse go bankrupt. Companies with good balance sheets are also able to to buy companies cheap during recessions.Company with a “good balance sheet” has a high net asset. Usually that translates to cash in the bank accounts (i.e. Apple). A “poor balance sheet” has a low or even negative net asset (i.e. Tesla). Calculating the net asset is simple …Net asset = Cash – DebtAnother metric you want to look at is the Cash (asset) / Debt (liabilities) ratio. The greater the ratio, the better. Something like 2/1 or 3/1 is ideal.Income StatementAn Income Statement shows the profitability of a business during a period of time. The income statement looks at a business’ revenues and expenses through all of its activities. Often times beginner investors confuse revenue with profit. The two are not the same …Net Profit/Loss = Revenue – ExpensesGenerally speaking, growth investors will pay more attention to the revenue, value investors will pay more attention to the net profit. Both are important metrics, but I personally put more emphasis on the profit even as a growth investor because that is the goal of every business. What do you take at the end of the day?Study the number trends in the last few years. If there’s s stumble in the profits or revenue research why. This is a good opportunity to evaluate potential weaknesses and vulnerabilities the company might have.Stock Investing Criteria SummaryUnderstandableHigh growth potential (growth) / Profitable (value)Great management teamLow competitionLow forward P/E ratioGood balance sheetRely On Your Own JudgmentA public-opinion poll is no substitute for thought.Warren BuffettI will say this again, you should never invest in a business without doing proper research. Buffett reportedly spends 80% of his day reading. And he doesn’t read to learn about what other people think. He reads so that he can form his OWN opinions and judgments. This is what separates the rich from the masses. The former rely on their own judgment, the latter rely on the “experts” or “analysts” and “financial advisers.” Or worse yet, they rely on the mainstream media which are frequently manipulated by the “whales” in order to mislead the public. Think how they told you not to get into tech stocks during the 90s and now they dominate the stock market. Never blindly follow the advice of others. Be comfortable of being the boss of your own mind. And this comfort will only come from research.PART 3 – Take ActionThe battle is won before it is fought.Sun TzuMonitor & Optimize Your Shopping ListOnce you have a list of companies you are interested in, keep track of them in the news like Yahoo Finance and CNBC on a regular basis. It doesn’t have to be daily, it could be weekly or even monthly. Tune into their quarterly earnings calls to get insights, pick up on any changes. Watch them and polish your list accordingly. Continue with your research. Cross out the ones that do not hold up to your expectations, add new ones that were previously overlooked. This is your ultimate shopping list.Open A Brokerage AccountWhile you research and monitor stocks, you will want to create a brokerage account and deposit some cash into that account. Orders are all executed online these days. Popular brokerages include Fidelity, TD Ameritrade and Scottrade which are well-established with good track records. Bookmark whatever platform you use on the browser (to deter phishing scams). Be careful not to register with obscure brokerages as they might turn out to be scams. Make sure the brokerage you use is SEC compliant fully backed by insurance. The Robin hood mobile app is also a great option if you are a frequent trader. It has 0 fees. But don’t get caught up with the fees too much. In the end they don’t really matter to the long term investor and there’s always a tradeoff for lower fees (perhaps lower security, poor service, etc.). Creating an account is a simple procedure of providing identification, address verifications and other personal information.Execute At The Right MomentYou don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting.Mohnish PabraiThe key to investment is to hunt for bargains. Never be desperate to buy a stock. This is typical FOMO (Fear Of Missing Out) behavior. Wait for market correction because that’s when you can get great deals (“buy when people are fearful”). But don’t be blinded by bargains and get into bad investments. Only focus on the ones that are on your shopping list, the list you went to great efforts to perfect.When you are buying a stock, look for patterns on the charts. Most likely you will see a pattern of the prices going up and down. Place your order at the trough or the support level (NOT at the resistance!). Don’t place your order at a unrealistically low price because then it will never get filled.Structure Your Portfolio StrategicallyAs you grow your positions in the stocks that you believe in, you will want to diversify your portfolio to a certain extent. Expand your research into other sectors like tech, retail, banking, manufacturing, etc. and acquire stocks in those sectors. Here is a breakdown of an ideal portfolio …No Brainers (25%) – Companies that is pretty much guaranteed to continue its growth in the future. e.g. Apple, GoogleYour First Born (20%) – The one company that you truly believe in. Your best pick.Value Stocks (20%) – Established companies making consistent profits (low P/E ratio, dividends). Usually undervalued. e.g. Cardinal HealthGrowth Stocks (20%) – Young companies focused on expansion and market share. e.g. AmazonSpeculative Stock (15%) – Companies with incredibly high potential returns (2x,5x,10x). Very risky. e.g. TeslaDo not diversify too much. You should capitalize on the power of getting only a few things right. Your portfolio should have 5 to 6 stocks max. This requires you to build more confidence per stock you own by researching more into those few stocks. And confidence is key to surviving in this market. If you are going to diversify too wide, invest in index fund instead.Wide diversification is only required when investors do not understand what they are doing.Warren BuffettPART 4 – Prevail & Thrive In The MarketsDollar Cost AverageOnce you have decided on the stock or cryptos you want to invest in, you will want to set aside a monthly fixed amount from your savings or your paycheck to be invested in that equity. This is called Dollar-Cost Averaging which is a powerful investment strategy with a goal of reducing the impact of volatility on large purchases of financial assets such as equities. By dividing the total sum to be invested in the market (e.g. $12,000) into equal amounts put into the market at regular intervals (e.g. $250 over 48 weeks), DCA hopes to reduce the risk of incurring substantial losses resulting from investing the entire “lump sum” just before a fall in the market. Also, make sure to be in the game for the long haul. The stories you hear of people accumulating extraordinary amount of wealth in stocks, for example, usually have been in the game for decades. They have put in the money consistently and incrementally over long periods of time, often times re-investing their dividends into the stock market in addition to their monthly or yearly fixed investments.DCA is especially an ideal way to start investing if you are a newbie because there’s no real emotion tied to it and you’re less likely to respond to a swing in price. Investing through DCA becomes a mechanical process. That means you can use the movement as a motivation or opportunity to buy more shares at a lower price. Also, because the market can be so unpredictable, it can give people who may be a little hesitant a good opportunity to start investing. By using the DCA strategy, the cautious investor doesn’t have to look for the best entry point in order to invest in a particular security.Dollar cost average during dips and recessions. No one knows the bottoms and the tops of a market. Buy incrementally during bear markets, sell incrementally during bullish markets. Don’t wait or hope for the the price that might never be reached.Buy & HoldI don’t throw anything away until I’ve had it 20 or 25 yearsWarren BuffettDon’t buy a stock if you are not going to hold it for long term. Choose a company that you believe in and invest for the long-term. Commissions and taxes will eat away your profits in day trading. Stocks don’t have the level of volatility that makes day trading feasible. Be an investor, not a trader. The long term investors ultimately come out top at the end of the day when the dusts have settled.Be The Master Of Your EmotionsDon’t Over-React To The NewsWhen the emotion is high, intelligence is low.Living in a slow town in the middle of the Midwest has perhaps allowed Buffett to develop a certain detachment from the trends and the news. Most investors react to the news and will sell their positions during price drops (FUD) or they will jump on the latest big upward moving trend (FOMO). If a company has strong fundamentals it will withstand the market downturns and eventually bounce back. Don’t panic-sell, hold on to your investments during times of uncertainty. Detach yourself temperamentally from the crowd and look at things objectively.Research increases your confidence in the stock. And as mentioned earlier, confidence is key to long term investing because low confidence translates to weak hands. You are more likely to sell when the confidence is low. That’s just how human psychology works. If you have done proper research, your underlying belief should not change when the prices change. As a matter of fact, a dip in the price should encourage you to buy even more of the stocks.FOMO (Fear Of Missing Out) – Usually occurs during a bull market triggering newbie investors to buy on the high.FUD (Fear, Uncertainty, Doubt) – Usually occurs during a bear market or a news event triggering newbie investors to sell on the low.Don’t Develop Prejudice Or BiasThe investor of today does not profit from yesterday’s growth.Warren BuffettYou will have days when you win and lose throughout your investment career. Do not let that cloud your judgment. For example, let’s say you got burnt by a particular stock. This negative experience that you had would deter you from investing in the same stock ever again even when things change for the better. Conversely, if you made a lot of money from a particular stock, you will be more prone to invest in it even when things go poorly.Prepare Strategically For The RecessionPredicting rain doesn’t count. Building arks does.Warren BuffettKeep in mind that market usually move in 5-10 year cycles of boom and bust. That’s just how capitalism works. If the previous 5-10 years has been a bull run, it’s likely that the market will head into a crash or recession. Adjust your portfolio accordingly. Minimize your positions in the Growth and Speculative as they tend to get hit the hardest during bearish sentiments, start taking out profits, keep some cash on the sidelines so you can dip in during sale day.Signs In The EconomyHere are some signs you can pick up that indicate that a recession is ahead …Weakening in leisure activities (travel, entertainment) – indication of consumer cutbacks on spendingRising unemployment rate – indication companies are making less money to pay off employeesMissed targets – indication of market contractionsWeakening transportation – good indication of declining trade volumeWeakening automobile & home sales – indicates people have less confidence to pay back the loansRestructure Your PortfolioAvoid real estate, finance and cars during recessions. People cannot afford to take out loans to buy cars and houses during recessions. They also don’t have money to use that much of the financial services.Invest in needs-based or utility stocks as opposed to wants based stocks during recessions. Things that we generally need like medicine, food, toilet paper tend to be hit the least during economic downturns. Budget or low cost retail companies are also a safe bet such as McDonald’s, Walmart, Proctor and Gamble, General Mills, etc.Invest in companies that are dependent on countries that recover first during recessions. For example if you have a company that sells heavily to a particular country and that country recovers, it is likely that that company will recover as well. Investors will pick up on the sign when their earnings go up and start piling in.Have A Cash Reserve On StandbySell when people are greedy, buy when people are fearful.Warren BuffettThe time to buy is when there’s blood in the streets.Rothschild FamilyRecessions are some of the best times to scoop up on shares at bargain prices. To an intelligent investor, stock market crashes is a clearance sale day. This is why as we approach a recession it’s important to gradually take out profits and keep your brokerage accounts well-stocked (pun intended) with cash. As a rule of thumb I like advise people to incrementally sell off up to 60% of their portfolio as we approach the bear market. Sell off the riskier stocks (growth, speculative, poor balance sheet, over-valued). Do not withdraw the cash, keep them in your account ready to be deployed during the crash. Since we can never successfully predict the precise time of the crash, it’s important to sell incrementally (DCA) when you see the writing on the wall. Don’t sell off everything in a short period of time because there’s a chance the market can continue to go up. Likewise when we are in the bear market, we can never predict the bottom, so it’s important to buy incrementally. Similarly, don’t deplete your cash reserves in a short period of time, because there’s always a chance the market can slide down further.Only Short When You Are Dead Certain (Advanced)Once you have gained enough experience in the stock market you will start to see patterns and trends. You can start shorting companies with weak balance sheet (high debt) and that are capital intensive during recessions as they tend to get hit the hardest. Shorting or short-selling is essentially selling stocks that you do not own (borrowed) with the expectation of the price going down.But be very careful and cover your shorts when there’s a slightest hint of a turnaround. Shorting is a very risky trading strategy because your risks are unlimited. I personally do not recommend shorting, margin trading, etc, because they force you to think like a short term investor and not look at the fundamentals. Only get into shorts when you are 100% certain about something or have insider knowledge.Allocate Your Capital EfficientlyBuffett has used his majority stake in the Berkshire Hathaway company not only to own various companies, but to manage them as well. And one of his greatest management skill is EFFICIENT CAPITAL ALLOCATION. He takes the profits of one business and invests them in another. Use the same strategy in your own portfolio. Take the dividends and reinvest them strategically. You should also use this strategy to manage your total investments (stocks, real estate, business, cryptos, etc.).Rotational InvestingDon’t get too caught up with your stocks that you ignore the general trends in the market. Generally speaking there are the institutional investors and the retail investors. And it’s usually the institutional investors that have lots of capital to play with. They are the owns that can and will move the prices. Be aware what they are doing, at least what the majority are doing, and make your moves accordingly. Often times, institutional investors will flock to certain categories of stocks depending on the economy and market sentiments. And that category will experience a boost in prices over time and then they will sell off their positions and move into another category. So within the market there is essentially mini-bull runs or rotations. Right now over the past few years, the institutional investors have been in the tech stocks which is why we have seen such extraordinary growth so far. But this can change in the future. Pick up on this change quickly and be on the winning side.