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101 Ways
to Pick

Clem Chambers

HARRIMAN HOUSE LTD 3A Penns Road Peterseld Hampshire GU32 2EW GREAT BRITAIN Tel: +44 (0)1730 233870 Email: Website: Copyright 2011, 2013 Clem Chambers First published in Great Britain in 2011 by Beautiful Books. Published in this edition in 2013 by Harriman House. The right of Clem Chambers to be identied as the Author has been asserted in accordance with the Copyright, Design and Patents Act 1988. ISBN: 9780857192769 British Library Cataloguing in Publication Data | A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher. No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author or by the Employer(s) of the Author.


Harriman House

To my Father who taught me. For the millions of ADVFN users who look to us to help build their prosperity.

About the Author

Clem Chambers is CEO of ADVFN, Europes leading stocks and investment website. He became CEO of ADVFN in January of 2002 and is credited with steering the company from likely failure to thriving market leader. Internet bible, Wired Magazine, for which he regularly contributes, described him as a Market Maven. He is also a member of their renowned Brains Trust. Clem wrote a stock column in Wired from 2000 to 2001 in a period spanning the nal boom and following bust. He is a columnist for The Business, The Scotsman, Traders and Inside Edge and is a regular contributor to a number of UK and US nancial publications including Investors Chronicle, Stocks & Commodities and Futures. He is a regular commentator on CNBC, the BBC and numerous US nancial radio stations.

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Introduction Golden Rule No. 1: Diversify WAYS 14: Internet chat rooms (discussion forums/bulletin boards) 1. Silence is golden 2. Madness is badness 3. Due dil 4. Locate minnows WAYS 525: Stock charts and technical trading 5. Good horses on steady courses 6. Dud IPOs 7. The return of the dud IPO 8. Volatility: going nowhere fast 9. Dead cat bounces 10. Buy the bull Golden Rule No. 2: Know the general market trend 11. Sell a bear 12. Selling a bull, selling a bubble 13. Buying a bear, buying a crash 14. Investing in the bull, trading in the bear buying the dips 15. Investing in the bear, trading in the bull selling the rallies 16. Flat-lining companies: dead or in a coma? 17. Volume rises 18. Buying BS when the bull rules 19. Boxing clever 20. Rockets. Ladles of money Golden Rule No. 3: Risk = reward 21. Half way or whole way 22. Long-term levels 23. Broken mountain 24. The Big U 25. The Big W WAYS 2650: Common sense ways to pick stocks 26. Know your company 27. Know your companys product 28. Get to know the companys industry 29. Read the specialist press 30. Call up the FD and say Hello 31. What is hot in the States 32. What is hot in Japan 1 5 7 8 9 10 11 13 14 16 18 19 21 23 25 27 29 31 33 34 35 37 39 40 42 44 45 47 49 50 52 55 56 57 58 59 61 63 65

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33. The market has crystal balls 34. Taxi ads 35. The curse of the shirt deal 36. Buy to the sound of cannons 37. Accounting irregularity 38. Death of a salesman 39. Portfolio: diversify or die 40. From the mouths of babes and sucklings 41. Not for sale 42. Making an offer that cant be refused 43. Invest in the obvious 44. Listen to our lords and masters 45. Takeovers 46. Takeovers: selling the buyers 47. Know the long term 48. Know your risk 49. Beaten up brands 50. Negative equity Golden Rule No. 4: A pinch of salt required WAYS 51-52: Tracker funds: simple exposure 51. Exchange-traded funds. Buy a FTSE tracker 52. Commodity ETFs. You really want to buy commodities, you really, really want to? WAYS 5360: Let the computer do the work 53. P/E, the basic cheap or not cheap indicator 54. Sales have value high sales to market capitalisation 55. Get over techno-fear. Let the robot sort you out 56. Sectors 57. Cash in the bank 58. PEG, unleashed 59. Dividends: cheques dont lie; except on the door mat 60. The big downer 50% down from the high or more WAYS 6164: Rules of thumb 61. Dont play with political footballs 62. Unhappy families 63. Old friends 64. Dont buy the top WAYS 6569: Gold 65. Lets not get physical: gold ETF 66. Buy a gold producer

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67. Buy the 49ers 68. Gold has a silver lining 69. Dont buy the gold mine, buy the spade maker WAYS 7083: Whats up, Doc? 70. Sell tips 71. When it hits the mainstream, its over Golden Rule No. 5: Get rich slow, get poor quick 72. Think long term, very long term 73. Read through 74. Contrarian: if you want a friend, buy a dog 75. Momentum: catch a rising star 76. New brooms 77. New brooms and kitchen sinking 78. Check the website 79. Every dark hurricane cloud has a silver lining 80. Buy rumour, sell fact 81. Browse and research 82. Look for history repeating itself 83. Long-term earnings growth WAYS 8489: Whats up officially, Doc? 84. Directors buys 85. Management competence: throwing parties in breweries 86. RNS alert 87. The next big thing 88. Mad management 89. Prot warnings WAYS 9091: Oil 90. Buy an oil producer 91. Those darn wildcatters WAYS 92101: Vorsprung durch Technik 92. Trading costs; the less the better 93. Sell in May and go away. Summer holidays at work 94. The Santa Effect 95. Close-of-day auction 96. No news but its moving 97. Big gains 98. Breakouts 99. Constant gainers 100. Re-examine your portfolio 101. Use all available tools

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icking stocks need not be reserved for nancial gurus and degreewielding mathematicians in investment banks.

Picking good stocks just requires a toolbox of simple ideas that zero in on companies that investors should be looking to add to their portfolio, or traders should be looking to play. Investing is not trading and trading is not investing. Investing is like farming. Trading is betting. Both can be very lucrative and either can lose you your shirt. However, in the main, investing is much easier, more leisurely and less risky. Investors might not get rich quick, but they shouldnt get poor fast either. Investing is not necessarily that popular, but everyone likes to chance their arm at being a trading genius. It is, therefore, no wonder that the stock market carries a certain aroma of the casino. Yet investing is the most prudent way to approach the market. This guide carries investing and trading rules to help you select stocks for investing and trading. The rules can and should be combined when making a stock selection. While each can be the key to a stock selection, none are contradictory. The more rules that are followed when selecting a stock, the better. Some of the 101 stock-picking techniques in this book are easy and some are tricky. A difficulty rating is therefore given to each one. A difficulty

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of one means the idea should be simple even to a novice, and, win or lose, the choice it presents to get in and out of a stock is very simple. A score in the region of ve means the technique needs careful thought and might take a bit of reection and practice to use effectively. At the high end, an eight or nine rating means the technique is extremely tricky a do-or-die method that should only be used if you are very condent.


The techniques are also categorised by signal; either long or short (sometimes both). When you buy a share you are long. Thats simple enough to understand. Long means you own the share. If you have a thousand pounds of Shell, you are long a thousand pounds of Shell. To be short is the opposite of long. This idea can be confusing. How can you own minus a thousand pounds of Shell? How can you own negative shares? Well, if you sell shares you dont have, you are short. This might sound illegal and wicked, but it is not. Going short is perfectly OK, even though people often moan about it. Shorting works like this:
You borrow some shares. You sell them at a price to someone. You buy them back and return them to the folks you borrowed them from.

When you go short, the broker arranges all the details (the borrowing and so on), so you just sell and then buy back when you are done. You sell and go short because you think a share will fall. If it falls, you buy back cheaper than you sold and make a prot. If the share goes up before you buy it back, you have made a loss.

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Picking stocks is not all about what makes a share good. It is also about what makes a share bad. So in this book there are a few no-no rules that can melt the wings of any Icarus-esque stock and justly dissuade an investor from getting involved. To pick stock market winners you need the right tools. I use ADVFN (, the website of which I am CEO, as the platform to nd the stocks I want to buy and sell. When I started ADVFN I put all my money into shares on the basis that this would guarantee my full attention on the tricky task of building a stocks and shares website that actually helps grow a private investors wealth rather than a pretty but vapid site driven by a bunch of graphic designers with no skin in the game. ADVFN is now a huge site with users around the globe. It is a leading site, not just in the UK, but in the US, Brazil and in various territories from Italy to Japan. In essence this book is the condensation of my rules of thumb for investing and trading. Amongst the many ways of picking winning shares, I have listed a few golden rules. These should be rigorously followed. Break them at your peril! If you follow the principles listed in this book you should do rather well. Please feel free to send me a Christmas card when you do. Dont be afraid to make up your own rules. If you think CEOs with beards cant be trusted, then make it a rule and keep track of how it works. You may be right. The thing to remember is there are 2,000-plus stocks in the UK market. If you exclude one share there are still another 2,000-plus to choose from. In any event you are actually going to have to ignore 99% of all possibilities, so developing your own rules is a useful way of winnowing the chaff meaningfully. As time passes you will build up your own toolkit of ideas and these will likely serve you well. Experience is the most valuable asset in investment and it soon gives rise to valuable investment guidelines all of your own.
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Golden Rule No. 1

Do not put all your eggs in one basket. This is an awful clich but one that will save you a fortune. If you invest your money in too few shares you will not reap the results you may deserve. And if you put all your money into one share at a time, you risk losing the lot. At best, if you do not diversify you will have a rough ride as the small number of shares in your selection buffets your capital around. Concentration of capital will also not help you sleep. Aim to own 30 stocks. If you do not have the capital to have 30, then build towards that number as you add money to your account. Buy shares in units e.g. of 1,000 of value at a time and do not increase your unit size until you have 30 stocks. If you make 500 on a stock, the next share you buy should still be bought as a 1,000 unit, leaving the 500 aside until you have made up the extra to buy another stock with that amount. Always remember, diversication is your best friend.

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Internet chat rooms (discussion forums/bulletin boards)

Not many people are cut out to be lonely hunters. Investors like to club together and discuss their positions. Internet chat rooms are unruly, garrulous places. They are like noisy medieval taverns; loud, uproarious and fun. Is there gold to be had from the fetid river of free speech? You bet.

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Way 1

Silence is golden

If you nd that online discussion of a stock you are interested in is muted, this is an extremely good sign. People talk a lot about stocks when they are unsure or when they think their investment needs a shove in the right direction. Solid stocks attract a solid kind of investor and while they like to communicate, they generally arent the manic kind of people that inhabit many of the topics on internet boards. Successful investors are also likely to be well-off and this again tends to keep the noise level down. They have little to prove and are merely dipping their toes into a board about a stock they own; they have no desire to cause a fuss. It takes a bit of time to get the hang of bulletin boards like ADVFNs, but once youve spent a few hours surng, you will note how some threads are madness and some are sedate. The more sedate the better.

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Way 2

Madness is badness

When you nd a share which is the topic of furious debate on a bulletin board, whatever you do, do not buy it. The noisier the thread, the more virulent the language, the more colourful the debate, the worse the prospects are for the company. Dying companies attract the attention of the worst investors. They are like lemmings to a cliff. There is some justication for this, as a disastrous stock has a tiny chance of making a Lazarus-like return and if this does happen its share price will rocket. This 100-to-one chance of making ten times your money is what attracts the stock trader moths to the ame. To them the attraction of a possible ten-times prot dwarfs the prospect of losing 99 times in a row. If you are plucky, you will short the stock and watch the spectacle of dozens of dizzy stock gamblers lose their shirts. However, its a tricky game, best played only for pennies. There are more sensible ways to make money.

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Way 3

Due dil

Bulletin boards are a great place to get the background story on a company. Quite often people discussing stocks will have a good knowledge of what the real story is behind a company. Whether its a crazy discussion about a risky stock or a boring one, a lot of detail and history will be on display. Merely reading a discussion that has taken place over a number of years will give a good avour of what is going on behind the headlines. This can be invaluable when you are sizing up a share for its inner personality. You cant do too much due diligence, and a message board thread can be like having lunch at the shares work canteen.

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Way 4

Locate minnows

There are over 2,000 stocks on the UK market. Unless you have all the time in the world and the memory of an elephant, there is no way you can know all the companies trading on the stock exchange. There are many ways of zeroing in on the interesting ones. Internet chat rooms can help. Without doubt there is a lot of bad information out there about poor companies but that shouldnt put you off. After a while spent searching for companies, youll learn what to look for. The rst thing is to become canny. You wont be able to nd the best candidates right away. Untold investors and traders are out there looking for good stocks. Once they have found one they like they then try to tell everyone, so that their friends help drive the price up. There is nothing wrong with taking notice . This kind of discussion is an opportunity to nd prospects you can add to your pick list. But you do have to be very choosy once youve learned about the share. Always go off and do your own research. There are many small companies out there, and bulletin boards can be particularly good at helping you nd them. Any company with a market cap of less than 250 million is considered small. But small can also mean a company worth just 10 million. These micro caps can be great companies but they can also be rubbish. The gems are in amongst the tailings. Forums are a good place to go sieving for these gems as, in the main, no one covers these companies with broker research. Bulletin board chat is a quick way to browse the micro-cap world to home in on companies worth further research. Its a good jumping off point in the high risk world of small cap investing.
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101 Ways to Pick Stock Market Winners

Clem Chambers

Available direct from Harriman House and all good booksellers. To order a copy of the print or ebook edition go to: Paperback: 9780857192769