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A 4-Step Formula to

Consistent and Accelerated


Returns in the Stock Market
(2nd Edition)

Kathlyn Toh
Beyond Insights Sdn. Bhd.

The Real Secret to Success is Not the Strategy


90% of people who invest or
trade in the stock market
did not make it successful.
So how do you become the
10% who makes the money?
Statistics have shown that for every success
story of people who have amassed great wealth
by investing and trading in the stock market,
there are a lot more people who failed to make
money consistently or have given up on the
market after a several attempts.
Having trained and coached more than a thousand people through their investment and
trading journey, I can safely conclude that there is a common trait or pattern that is; most
people fail due to very fundamental reasons.

Reason #1 Starting off with the Wrong Frame of Mind.
The saddest common trait or pattern I observed was that most traders lose simply due to
their psychology.
I have came across many people who buy and sell stocks based simply on hunches, news, or
hot tips from friends. In fact their act should be called speculation instead of
investing or trading.

Most people started out this way due to the promise of making a lot of money in a short
period of time, all because they heard that someone has made the money!.

The simple truth is that success in investing and trading requires discipline and the ability
to manage our basic human nature of greed, hope, fear, excitement, denial as well as our big
ego. To be amongst the top 10% of successful investors and traders, one must start with the
building blocks of having the right beliefs and embracing the psychology of top traders in
the world.

Reason #2 Trading without Money Management Principle
Many investors or traders are looking for the Holy Grail a Sure Win strategy.

They want to learn everything from a guru and follow exactly the steps defined to enter a
trade, and expect the trade to be right. So when the trade goes against them, they find it
difficult to handle the feelings of failure, they will begin to doubt the strategy and may either
give up or start modifying the strategy or try another strategy.
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The truth is that you can make money with just 50%
success rate, and you can also lose money with a so
called 90% success rate strategy!

Never risk more than 2% of your capital in any
single trade.
When I first started out trading more than 10 years
ago my results was inconsistent, I could gain a lot
and then lose it all back within a few trades, until I
learnt of this Golden Rule in investing, and this is one
rule that I cannot stress enough in my teachings.
Many people, when told of this rule, would say my capital is not that big, 2% will not allow me
to trade any stocks!.
While that may be true back in the 80s, the development of financial market and technology
have changed that. Today this rule can be achieved by either having an automated stop loss, or
a more advanced trader may use hedging strategies. The availability of leverage instruments
such as Options, CFD & Futures allow us to trade with very much less capital.

Making money consistently is all about risk management being your first priority, profits
secondary. If a trader thinks about how not to lose money first, he will then focus on
managing risk of his trades.
Reason #3 Trading without a Plan

Trading without a plan is planning to fail at trading. Question is how should one plan for
their trading?
Dynamics of a Trading Plan:

1. A Trading Plan should be designed to meet ones financial


objectives, and hence the objectives must be clearly defined. For
example if one desires a 30% return per annum based on a
$10,000 capital then the plan has to be based on the 30% returns
per annum objective.

2. A Trading Plan will be a reflection of a persons personality
and time availability. I have met traders who tried to use short
term strategies or even day trading strategies, without realizing
that their personality or time availability are better suited for
medium and long term strategies. From my observations it is very
difficult for a trader who is trading against his personality nature
to have any consistent success.

3. A Trading Plan should also include clear entry and exit criteria that govern every trade.
Which would mean every trade must be opened and closed according to what has been
defined in the plan and not based on intuition!

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4. A Trading Plan must consist of a series of actions that be repeated on a regular basis. In
my own trading plan, I have a 4 step method which I repeatedly use , I call them the S-T-
P-M formula:
S = Selecting the right stocks
T = Time for the entry and exit
P = Protect my investment
M = Multiply my returns.
Therefore for each and every trade I make, I
follow these 4 simple steps.

4. Lastly, a Trading Plan must include a good journaling of all your trades. A good journal
will help you in:
Reviewing your actions regularly to make sure you have followed your strategy, not
your emotions.
Making sure that you learn, especially from your losses. I see every loss as a tuition
fee I pay to the market.

Taking your First Step to Investment Success


Selecting the Right Stocks
When I first started out on My investing journey it was not an easy one, I had to go through
several cycles of bulls, bears and sideway markets with major ups and downs in my account
before I realized the importance of having a repeatable system so that I can win consistently. As
I continuously fine-tuned my trading it became simpler and simpler whilst using less and less
amount of time.

In the past I used to trade many stocks, every day I had to look through many stocks to find the
one that is going to make a big move and that takes so much time out of my life that trading
began to feel like a chore rather than the passion that got me started.

Now, I have a healthy bucket of only 15 stocks that generates income for me. Having these 15
stocks has saved me a lot of time and effort. The KEY to trading success is this we choose the
right stocks that can generate consistent and regular income, no use having a short list of stocks
that generate little income that defeats the purpose! Hence Selecting the Right Stocks is the
first step in my S-T-P-M formula.

I need to stress that it is very important for everyone to know his or her own investment /
trading style. There are a thousand and one ways to make money from the stock markets, we
all just have to start with just ONE way! After training and coaching more than a thousand
traders, I realized that the majority of traders have an identity crisis. For example I have seen
many who claimed that they are value investors, however when they see a big move in the
stock market they will chase after it without considering the fundamental value of the company.
And that is the major reason why most people cannot get consistent in trading they dont have
a style or method/system that they can repeat.

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Let us look at one of the most important criteria in any stock selection. Whenever we buy a
companys stock, we would want to make sure the company can grow its business but how
much growth are we looking for? Let us put the numbers into perspective if we put our
money in fixed deposit with a bank, we will be getting 2-3% returns a year. Since returns from
the stock market are not guaranteed surely we have to expect much more than 2-3%, isnt it?
Now it is a generally accepted rule of thumb that a company has to generate at least 15%
returns per annum to be considered a viable business, otherwise it will not be worth the effort
and resources.

So I personally choose companies that are making at least 30% per annum, i.e. for every $1
invested in the company - the company should be generating at least $0.30 net profit.
Technically this criterion is called Return on Equity (ROE), it is also one of the key criteria that
Warren Buffett applies when selecting his evergreen portfolio.

The reason why this works is very simple if a company is generating 30% profit or more for
every $1 invested, and if all the profit is retained in the company then the companys value
will double to around $2 in 3 years time.

Of course, nothing is ever guaranteed in the market; but this means is that this type of
companies will have a higher probability of doubling its stock price in 3 years. Whenever the
market is affected by major crisis, these are the stocks that will bounce back the fastest, the
most resilient!

Let me give you an example of a stock that I have I my portfolio YUM! Brands (NYSE:YUM).
Just a note here that I totally agree with Warren Buffett invest in companies with simple and
resilient business model, and YUM! Brands is the holding company of well recognized consumer
brands like KFC and Pizza Hut with a huge global presence and a business model that we all can
connect with and understand. Way back in Sep 2008 the ROE of this company was 127.4%.
The current ROE (as of June 2012) is 73.5%, so this is a company that has been generating good
returns consistently year after year.
Now let us look at
what the stock price
did in the past 3
years:
YUM was trading at
$33.40 on
11th
September 2009, and
$66.56 on
14th
September
2012.
That is an increase of
95.5% in a period of
3 years; will you be a
happy investor of
this company? I am.


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I personally use criteria like ROE to evaluate companies, and these days stock screening
software makes our job much easier, so all I had to do is to enter my required parameters into
the software and I instantly get a list of stocks that satisfies my requirements for a good stock,
and then I will just pick the top few. From my experience, companies that are well managed
will maintain its solid fundamentals for at least a few years. Hence, my bucket of good stocks
doesnt change very often, which makes my life a whole lot easier as an investor and trader.

To conclude on this part, I would urge everyone to learn this essential skill of stock selection by
understanding how to interpret the key fundamental data of a companies business. Start by
reading a book or find experts that are accessible to you to learn from.

Secondly, I would also encourage investors and traders to also expand beyond their local
horizon. There is an abundance of companies with strong financial performance in the
international market especially the United States. Today most of our local brokerages are
already providing facilities to trade stocks in international market so make good use of them
to expand your profit opportunity and increase your probability of success.

Timing for Buy and Sell Opportunities


The essence of what I want to share here will give you an idea on how to spot a good time to
buy and sell a stock you have selected this knowledge is commonly called Technical
Analysis. There are a few important points you must know about Technical Analysis:
The importance of Technical Analysis depends on your approach in the stock market. In
general, Technical Analysis can be used by both Traders and Investors. Traders buy
assets they believe they can sell to others at a better price, so typically they are looking
for returns within a day to a few months. Investors, on the other hand, buy assets they
believe will increase in value, and they tend to take a long-term view on their returns.
The subject of Technical Analysis can often get complicated with hundreds of
indicators out there. I can personally testify to the fact that you only need to know a
handful to be successful, and I have verified that with many successful investors and
traders I know. So the key here is keeping it simple.

Next I would like to share an example of how technical analysis is used and why it is important
to know the fundamentals whether you are an investor or trader.
I will use a stock listed in U.S. market as example, not only because I specialize in that market
but also because there are many stocks that almost all reader recognize.
Lets look at the price chart of Starbucks stocks (I was sure you know this brand pretty well)
between October 2010 and April 2011 below and I will explain how in investor and a trader
would use it.

Lets say you decide to buy Starbucks stocks back in November 2010 at the price of $30 per
share in anticipation of the year-end really and Starbucks aggressive plan to expand in US and
Asia.

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Come late March 2011, if you know your basics of technical analysis, you would have seen a
clear sell signal because of the double top chart pattern, and you will be able to sell it off at
$36 at least. Hence you would have earned 20% return in 6 months. If you check the charts
you would have seen that the stock stayed sideways for another 3 months after that before it
climbed above $36, so in this 3 months would you have preferred to enjoy the profit and invest
your capital in other stocks with more upside potential in those timeframe?


So that is my message to you - if you understand the fundamentals of reading chart patterns
you will be able to utilize your capital more efficiently and make your returns faster, by merely
spending a few minutes a week to monitor your portfolio of stocks if you are an investor or few
minutes a day if you are a trader. Lets see what a trader who is watching the market more
frequently could do.

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By reading the chart pattern you could have identified several sell and buy signals in between
the 6 months, and make $13 profit per share in total. So with a bit more effort, your return on
investment would have been 43% in 6 months.

So the difference between making 20% returns in 6 months versus 43% returns in 6 months is
spending a few minutes a day to monitor your portfolio. Whether it is worth spending the extra
time for the additional returns, its entirely up to your financial goals and discretion. The good
news is you can also preset these buy entry point, stop loss and profit taking points in the
broker system.

Now lets stretch the time-line longer and look at the stock price today (at the time of this
writing), at $51.71. If you are a long term investor holding the stocks since November 2010
without paying much attention to it, your returns would have been 70% in 2 years. How much
more would you have made if you spend more time watching your portfolio? Perhaps I will
leave this as a case study for you to look at.

While it is too much to cover in this short article, rest assured that Technical Analysis is a
subject you can learn in a short time to put into good use. I personally use the basic chart
patterns and less than a handful of indicators when I trade and thats how we teach people who
came for our investing and trading courses as well.
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I would like to stress again that selecting fundamentally strong and growing stocks is essential
to increase your success rate. One should not depend on technical analysis skills as a mean of
speculation unless you really know what you are doing. Having said that learning and
applying this skill can definitely accelerate your success in investment and trading; so if you
havent done so, I strongly encourage you to learn from online material and find out more about
courses that cover this subject.

Protecting your Investment


This 3rd step is the main differentiator between the successful investors or traders from those
who did not make it or gave up half way. It is about how you protect your investment or trades,
staying in the game despite of losses to prevail for long- term success.

Losses are Part of the Trade


Yes, no matter how much research, analysis and due diligence we put in before we invest or
enter into a trade things can still go wrong. There are factors affecting the stock market that
are beyond the companys control, natural disaster being one of it!

We are brought up in an education system where failure means we are not good enough. What
would parents usually say when their child come home from school with a score of 90 out of
100 in an exam? Why didnt you get 100, where did you go wrong? How many got 100? See
what I mean? After training people on trading psychology for the past 4 years, I see that the
fear of failure has stopped many people from progressing, as well as causing many to self
sabotage their results and destroyed what could have been a successful career as a trader.

"It's not whether you're right or wrong thats important, but how much money you
make when you're right and how little you lose when you're wrong." said George
Soros, investor and philanthropist with net worth of US$20 billion.

I hope I have stressed enough that the skill and attitude to manage losses is a must have for all
investors and traders. Lets talk about the Risk Management principals that I personally adhere
to.

Capital Preservation
I never risk more than 2% of my capital on a single trade. In other words if I am on the losing
end of a trade, Ill make sure my loss is limited to 2% of the value of my portfolio.
Lets illustrate how it is done, so that you are clear on how to implement this rule.
Lets say you have a total of RM100,000 in your investment portfolio. You have decided to buy
a company stock called XYZ. What the professionals will do at this point is to decide price to
sell and to take profit and also the price to sell and cut loss if the stock goes down. We do this by
determining the key Support line for the stock. We will cut loss if the price goes down below
this Support level plus some buffer. So assuming the determined Cut Loss point is RM9.00,
then the amount of risk we are willing to take is RM10.00 RM9.00 = RM1.00. Given 2% of
RM100,000 is RM2,000; then the number of units we can buy here is RM2,000 RM1.00 =
2,000.
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Ive seen many investors determine the number of units to buy with their intuition! Imagine if
you have a proven working strategy, with a 70% winning probability which means you should
be winning 7 out of 10 times on average. And you decided to risk 25% of your capital each time
when you trade. What will happen if you have 3 consecutive losing trades? You would have lost
75% of your capital! What if you have 4 losing trades consecutively? Your capital would have
been wiped out just like that!

Reward over Risk Ratio


So what if you have a strategy with a 50% winning
probability which means you are right only half the
time. Can you still make money?

The answer is YES! If you follow the capital
preservation rule we have discussed earlier, AND you
only choose to invest or trade when the reward over
risk ratio is AT LEAST 2 to 1. Which means for
every RM1.00 you risk in a stock, you should have
enough data to support the expectation that the stock
will go up to RM2.00 to make it a good deal.

Figure 1 is an illustration of a 2:1 Reward/Risk ratio
strategy/system with 50% winning probability
making RM500 at the end of the 10th trade. Of
Figure 1 a series of 10 trades, assuming a
course, if the strategy/system has a higher winning
maximum loss of RM100 each trade.
probability (more than 50%), then the ultimate gain
will be even higher!
As you can see from the example assuming you start with a capital of RM5000 and enforce the
2% per trade rule, you will still end up with a 10% profit with 10 trades (RM500 over RM5000)
even if you are only half right!

To summarize what we have gone through so far following strict risk management rule and
choosing only trades with good reward over risk ratio is the key to protect your investment.

Hedge for Additional Safety



As defined in Investopedia, hedging means making an investment to reduce the risk of
adverse price movements in an asset.

Lets say you have carefully selected and invested in a portfolio of growth stocks few months
back, and now you read about some looming uncertainties in the market that may cause a dip in
stock prices. What would you do? Wait and see while doing nothing? Or act on fear and sell off
everything in your portfolio? Either of those choices is far less than ideal, because you could
have loss much less than you should if you took action earlier, or you could lose out on the
opportunity to make profit if the dip did not happen. I would hedge my portfolio in these
situations.

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One example of hedging would be by selling the Index (by


using Futures, or in other markets CFD). Assuming that we
have done our part of selecting fundamentally strong
companies the stock price of these companies will usually
drop in less magnitude compared to the market Index. Thus,
whatever we have loss in the dip of stock price will be
covered by the gains we make in selling the Index.

I have just given a very brief description of how hedging
works, and there are many ways to do it. The key to effective
hedging is to know when to do it, what to hedge with and how
much to hedge against.

Although this technique is commonly used by professionals, I believe all investors and traders
should learn how to do this; otherwise you will be missing out on a great way to reduce your
risk down to the very minimum. I am also confident that this is a very learnable skill because
we have trained hundreds of new investors and traders on how to do it.

Multiplying your Profits with CFD


This 4th step is about LEVERAGE, i.e. how you can accelerate your return from stock market
investment, and how to make your money work harder for you.
The two leverage instruments I will talk about next are CFD and Options. From the survey
conducted during Invest Fair Malaysia in 2012, we realized that the percentage of investors in
Malaysia who know what CFD is only 7% and even less know about Option (only 3%). This is
naturally so because CFD and Option are not yet developed in the Malaysian stock market, or
rather our market volume has not been able to support the development of these instruments.

But for those who got to know these instruments and how to use them correctly it helps them
to venture into international stock market where much more profit opportunities are available,
at a much faster pace.

What is CFD?
CFD stands for Contract for Difference, it literally mean a contract between 2 parties to trade
the price difference of a stock, at a fraction (usually 10%) of the stock price.

For example person A thinks that Apple stock price will go up to USD 550 within a month time
and person B, with a different point of view, thinks that Apple stock price will go down to USD
500 within a month time.
Through a broker this two person can then enter a contract. Lets say the current price of
Apple stock is currently USD 525 person A will need to come up with 10% of the stock price,
which is USD 52.5 per unit of stock. So lets say in a months time the stock price actually went
up to USD 550, then person A can now close the trade earning a profit of USD 25 per unit. His
return on investment will be USD 25 USD 52.5 that is about 48% in a month!
You can see the effect of leverage here because if person A were to buy the stock itself at USD
525 per unit, then his return will be a mere 4.8% a month (which is still not bad actually).
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Lets highlight the advantages of trading with CFD:


You can invest in stocks and build your desired portfolio with less capital. This
advantage is useful for younger investors who are just starting out.
With lower investment (about 10% of stock price), it allows you to diversify with the
same amount of capital.
You can trade on both the upside and the downside of a stock or index. E.g. if you think
that the stock price or market is going down, you can short the stocks/index (means you
sell first at high price and buy back at lower price when the stock/index goes down).
That means more opportunities to make profit from the market instead of being
constrained to make money only when the market or the stock is bullish.
It also gives you the opportunity to invest in good stocks that are otherwise too
expensive. Many great companys stocks are expensive. E.g. Google stock price is more
than USD700 for 1 unit. In CFD you dont have to buy in multiple of 100 units (1 lot
concept like Malaysia), you can even buy 1 unit or 10 units. However you need to take
care of the commission impact for smaller size per trade.
As a CFD buyer, you will earn dividends as well if the stock declares dividends.
It is very useful as a protection against unexpected market movement, because you can
have a mix of stocks that you trade on the upside and downside.

What to take note of when trading with CFD
When you trade CFDs, the leverage is provided by your broker (just like how banks
provide leverage through loans), so you will need to pay interest charges to the broker
while you are in the contract. The amount of interest is very reasonable, e.g. it is just
about 3% to 4% per annum for U.S. stocks depending on the broker.
It is critical to trade with strict money management rules. Just because CFD lets you buy
a stock at 10% of its price, it doesnt mean that you can buy the same stock 10 times
more, because that means you are not managing your risk properly.
There are many CFD brokers in the market and the choice depends on your startup
capital, market you want to trade, trading style (buy and hold vs. momentum vs.
intraday), size of contract and frequency of trades (as it will affect commission). Its also
very important to find a dependable broker in terms of safety of funds and reliability of
the trading platform. Some brokers provide mobile access that may be important to you.
Not all stocks are available in CFD as there needs to be significant demand/interest on
those stocks to create a market for it in CFD. Therefore only the popular stocks and
indices are available in CFD. Its important to only trade CFD for the stocks or indices
that has high volume trading.

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Conclusion

Whether you are a short term trader, mid term trader or a long term buy and hold investor,
CFD gives you the leverage to achieve your profit target faster and the a ability to diversify with
your capital while protecting your investment much more effectively. It is definitely worth
learning if long term success and consistent income stream from the stock market is your goal.
There is much more I can share about how I have used them to generate average of 300%
returns in the past 2 years and I conduct free seminars from time to time, check out our website
www.beyondinsights.net for the next session.

In the next and final update to this article, we shall share and even more powerful instruments
called Options to achieve the P (Protect) and M (Multiply) steps. By knowing both CFD and
Options, you can have the power of Hedge Fund Managers to accelerate your returns and
protect your portfolio with many more ways than direct stock investment. Well email it to you
once it is out, so keep an eye on your mailbox!

About the Author


Kathlyn Toh is a professional investor and trader who earns
her wealth trading the Global Indices, US Stocks, Options, CFD
and Commodity Futures. While we have been hearing news
about uncertain and volatile economy conditions, Kathlyn has
been making 300% returns in the past 3 years.

Kathlyn is also the Director and Chief Trainer & Coach for Beyond
Insights a company dedicated to empower people in creating a
consistent income stream from the financial market. Kathlyn and
her company is well recognized in the investment and trading
arena. Before transitioning herself into a full time trader - Kathlyn
was
an accomplished leader in the corporate world, managing a global
team for Intel
Corporation in the APAC region. She is an NLP Certified Master Practitioner and Certified
Master Coach with American Board of NLP which makes her training and coaching methods
highly effective.

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