There once was a speedy hare who bragged about how fast he could run. Tired of hearing him boast, Slow and Steady, the tortoise, challenged him to a race. All the animals in the forest gathered to watch. Hare ran down the road for a while and then and paused to rest. Slow and Steady walked and walked.
He never, ever stopped until he came to the finish line. The animals who were watching cheered so loudly for Tortoise, they woke up Hare. You do know that there will be trends and that the character of price movement will not change because human emotion and cog- nition will not change.
It turns out that it is much easier to make money when you are wrong most of the time. If your trades are losers most of the time, that shows that you are not trying to predict the future.
For this rea- son, you no longer care about the outcome of any particular trade since you expect that trade to lose money. When you expect a trade to lose money, you also realize that the outcome of a particular trade does not indicate anything about your intelligence.
Simply put, to win you need to free yourself and your thinking of outcome bias. It does not matter what happens with any particular trade. Forget the Past Ironically, as well as thinking too much about the future, most traders dwell too much on the past.
They worry about what they have done, the mistakes they have made, the trades in which they have lost money. The recent past is no more important than any other historical time period; it only feels that way. Turtles avoid recency bias. They know that most of the traders in the mar- ket exhibit this tendency, and for that reason, the market often shows evidence of the same bias.
The ability to avoid recency bias is an important component of successful trading. I had a couple of close friends who were interested in learning those methods because they knew how well the system worked for me.
In I taught one of them my methods after warning him that consistency was the key. So what did he do? He became a victim of recency bias. Around February I asked him how he was doing in cocoa since I had noticed that there was a great downward trend. He told me that he did not take the trade because he had lost so much trad- ing cocoa and thought that the trade was too risky.
Table shows the cocoa trades one would have encountered by trading breakouts from April until the trade with the large trend occurred. Note that there are 17 losing trades in a row in the cocoa market before a very sizable winning trade that started in November This is typical of what you should expect to encounter in trading. If you consider a single market at a particular point in time, things can look very bleak. If you focus too much on the recent past, you will be tempted to think that certain markets are not tradable.
My friend was not unique. Most traders are plagued by the recent past. Ironically, it seems that just about the time everyone else gives up, trends appear and tend to be easy to ride and extremely prof- itable. Avoid the Future Tense Earlier in the book we established how cognitive biases can torture potentially good traders.
Recency bias, the strong need to feel that one is right, and the propensity to predict the future are to be avoided at all costs. When my circle of friends learned of my success as a Turtle, they kept asking what direction I thought a particular market would take. Sure, I could have guessed, but I had absolutely no faith in my ability to predict markets.
In fact, I purposely did not attempt to predict the future direction of markets. Unfortunately, unless you happen to be an actuary working for an insurance company, you generally do not think in terms of prob- abilities. People tend to think in terms of likely or unlikely but never in terms of probabilities.
That is why insurance companies insure against uncertain risks. An event such as a hurricane destroy- ing your house is one such risk.
There is a certain probability that there will be a hurricane that affects your house if you live near the tropical ocean. There is a slightly lower probability that the hurri- cane will be strong enough to damage your home. There is an even lower probability that it will be powerful enough to destroy your home completely.
If you knew that your house would be destroyed by a hurricane with percent certainty, you would not buy insurance; you would move. Fortunately, the risk of that happening is less than percent, so much less in fact that you decide to stay and insure your house. This is how insurance companies make money: They sell policies to cover risks for less than the probable cost of payout under those policies. Trading is much the same as insuring against uncertain risks.
You do not know whether a trade is going to make money. Thinking in Probabilities Many of you took probability and statistics courses in high school or college. No doubt you would have seen a graph like the one shown in Figure Figure shows what is known as a normal distribution. The Normal Gaussian Distribution 0. Probability density graph: The shaded area uses the legend on the left and shows how likely a particular height may be. In this case, the average height is 5 feet 4 inches.
The higher spots in the middle of the graph indicate the most likely possibilities, and the lower height areas toward the sides indicate less likely possibilities. For example, the height of the curve at 70 inches is much lower than it is at 68 inches, indicating the lower probability that a woman will attain a height of 5 foot 10 inches compared with a height of 5 foot 8 inches.
Cumulative probability curve: The solid line runs from 0 percent to percent and uses the legend on the right. It shows the cumulative probability of a woman attaining at least a particular height. For example, if you look at the green line, you can see that it reaches almost percent at about the inch level. The actual value at 70 inches is This graph and others like it use complex mathematical formu- las, but they all represent a simple concept: There is a decreasing likelihood of a woman attaining a particular height the farther away that height is from the center that represents the average.
Finally, divide those heights into 1-inch intervals and count the number of women in each interval. You are fairly likely to get around 16 women at 64 inches, about 15 at 63 and 65 inches, about 12 at 62 and 66 inches, 8 at 61 and 67 inches, 4 at 60 and 68 inches, 2 at 59 and 69 inches, and one each at 58 and 70 inches. If you created a bar chart showing the number of women at each particular height, it would look like the chart shown in Figure The type of graph shown in Figure is called a histogram.
You only need to be able to count and categorize. A histogram like this can be constructed from your trading sys- tems to give you an idea of how the future might turn out; it pro- vides you with a way to think in terms of probabilities rather than prediction. In addition to being simpler, it has a better per- formance record than the Turtle system. The histogram sections in Figure are divided into 2 percent segments. One bar lists the number of months with between 0 per- cent and 2 percent positive returns, the next bar lists the number between 2 percent and 4 percent, and so on.
Note how the shape of the histogram resembles the normal distribution of heights described above. The notable difference is that the shape is elon- gated toward the right. This elongation represents the good months and sometimes is referred to as skew and fat tails. The histogram shown in Figure represents the distribution of the trades themselves.
Figure shows how individual trades are distributed. The section on the left is for losing trades, and the section on the right is for winning trades. Note that the scales for each section include both a number scale on the outside left and right and a percentage scale in the middle from 0 percent to percent. The cumulative lines move from 0 percent to percent from the center of the graph outward. The numeric legends on the left and right indicate the number of trades represented by each 20 percent section of the graph.
The corresponding percent level for winning trades is 1, trades. This concept is known as an R-multiple and was invented by the trader Chuck Branscomb as a convenient way to compare trades between systems and between markets. An example will help illustrate this system. It may seem odd that in this histogram the losing trades out- number the winning trades by so much.
This is actually a very com- mon occurrence in trend-following systems. However, although the number of losing trades is very high, the system keeps most losses close to the desired entry risk of 1R. Winning trades, in contrast, are many times the entry risk, with 43 trades returning 10 or more times the entry risk. How does this help one think like a Turtle? As Turtles, we never knew which trade would end up being a winner and which a loser. We thought that each trade possibly could be a winner but that most probably would be losers.
And we knew that some would be medium-sized winners of 4 to 5R and some would be large winners of 12R or even 20R or 30R. Thus, when we made a trade, we did not measure our personal worth by the outcome of the trade because we knew it most likely would be a losing trade. Trade in the present: Do not dwell on the past or try to predict the future. The former is counterproductive, and the latter is impossible. Think in terms of probabilities, not prediction: Instead of trying to be right by predicting the market, focus on methods in which the probabilities are in your favor for a successful outcome over the long run.
Take responsibility for your mistakes and learn from them. I remember one in particular who was convinced that Rich had given me and a few of the others secret rules that he had not shared with the class at large.
That idea was completely ludi- crous. Why would Rich intentionally leave out important infor- mation and then give traders his own money for them to lose, not to mention losing his bet? There were no hidden secrets. The truth was that I actually used a much simpler trading method than most of the other Turtles employed.
I traded using percent of my account allocated to the longer-term week breakout system. This meant fewer trades and less monitoring of the markets. I certainly was not doing anything unusual or acting on information that had not been made public.
Excuses, Excuses The idea that Rich had left out some key ideas was the easiest way for our paranoid Turtle to explain his inability to trade successfully during the program. This is a common problem in trading and in life. Many people blame their failure on others or on circumstances outside their control. They fail and then blame everyone but them- selves. Trading is a good way to break that habit. In the end, it is only you and the markets. You cannot hide from the markets.
If you trade poorly, over the long run you will lose money. Despite the obvious and unavoidable link between what you do and your trading results, some people still try to blame the markets. Although there is no question that there many traders endeav- oring to take your money at any point in time, I have never seen any evidence of mass-scale collusion or fraud of the kind imagined by those who blame their failures on the market, their brokers, or other participants.
The bottom line is that you make the trades and you are responsi- ble for the outcome. Blaming others for your mistakes is a sure way to lose. T rading is about buying at one price and then selling at a higher price later or selling short at a particular price and then buy- ing to exit the short position at a later point. When they are deter- mining when to enter a market, most beginners employ a strategy that is no better than throwing darts at the chart.
Experienced traders would say that their strategy has no edge. The term edge is borrowed from gambling theory and refers to the statistical advan- tage held by the casino. It also refers to the advantage that can be gained by counting cards when one is playing blackjack. Without an edge in games of chance, you will lose money in the long run. This is true in trading as well. If you do not have an edge, the costs of trading will cause you to lose money.
Commissions, slip- page, computer costs, and exchange and pricing data fees add up very quickly. An edge in trading is an exploitable statistical advan- tage based on market behavior that is likely to recur in the future. Simply put, to maximize your edge, entry strategies should be paired with exit strategies. Thus, trend-following entry strategies can be paired with many dif- ferent types of trend-following exit strategies, countertrend entry strategies can be paired with many different countertrend exit strategies, swing trading entries can be paired with many different types of swing trading exit strategies, and so on.
Some concrete examples will help demonstrate this effect. The Edge Ratio E-Ratio When you are examining entry signals, you care about the price movement subsequent to the occurrence of the market actions that constitute the signal. One way to look at this movement is to break the price movement into two parts: the good part and the bad part. Good price movement is that which progresses in the direction of the trade. Consider the case where a buy results in a price that initially moves in a direction that is bad for the trade, the price goes down; then it goes up and moves to a price higher than the entry price for the trade; after this move down, the price moves up for a while and then goes down again, as shown in Figure 5.
Traders refer to the maximum move in the bad direction as the maximum adverse excursion MAE and the maximum move in the good direction as the maximum favorable excursion MFE. You can use these to measure the edge of an entry signal directly. If the aver- age MAE adverse movement was higher than the average MFE good movement , this would indicate that a negative edge existed.
One would expect that a truly random entry would result in approx- imately the same good movement as bad movement. For example, take the case in which one bought if a coin landed heads up and sold if it landed tails up.
To turn this way of thinking about an edge of an entry into a concrete way of measuring the edge for entry signals, it is neces- sary to add a few more steps. First, you need a way to equate price movement across different markets. To normalize the MFE and MAE across markets so that you can compare the averages meaningfully, you can use the same mechanism the Turtles used to normalize the size of our trades across markets: equating them by using the aver- age true range ATR.
At Trading Blox, where I head Research and Development for a sophisticated system-testing envi- ronment, we have implemented an entry edge measure we call the E-ratio short for edge ratio. The E-ratio combines all of the pieces described above by using the following formula: 1. Divide each of them by the ATR at entry to adjust for volatility and normalize across markets. Sum each of these values separately and divide by the total number of signals to get the average volatility-adjusted MFE and MAE.
The E-ratio can be used to measure whether an entry has an edge. For example, you can use it to test whether a completely ran- dom entry has any edge. The average of 30 individual tests showed an E5-ratio of 1. These numbers are very close to the 1. This is the case because the price is just as likely to go against a position as it is to go in a direction favorable to a position over any reasonable time period.
You can also use the E-ratio to examine the major components of the Donchian Trend system. The Donchian channel breakout is a rule that states that one should buy when the price exceeds the highest high of the previous 20 days and sell short when the price goes lower than the lowest low of the previous 20 days. Let me show you how to use the E-ratio to examine the trade- entry rules for the Donchian Trend system. All the tests described below were performed by using a set of 28 high-volume U.
The E5-ratio for our sample is 0. One might say more generally that an entry needs to have an edge only over the time frame for the system in which it is being used. The Eratio for our entry is 1. Figure shows how the edge ratio changes for day break- outs over varying numbers of days. First, the edge ratio starts off below 1. It is also one of the reasons you can make money using a countertrend trading style by betting on the breakout not holding and in favor of a bounce off of the support or resistance.
There is a positive edge for these strate- gies in the very short term. The Trend Portfolio Filter Edge How do the portfolio selection criteria affect the edge for the Donchian channel system? You can examine this in two ways. This is even greater than the Eratio for the entry signal itself.
This serves as a clear indication that this portfolio selection algorithm increases the edge of the system. The Eratio for our example moved from 1. The graph shows that the Eratio is about 1. The reason for this result is that breakout trades that go against the long-term trend have been eliminated. These break- outs are also indicative of the market being in a state which is not as favorable to the Donchian Trend system.
The Exit Edge Even the exit signals for a system should have an edge if possible. In other words, you can- not isolate an exit from the conditions that cause a position to be initiated.
There is a more complex set of interactions between the various elements of a system rather than just a single component. Since it is a more complex system, you are less concerned with the edge of an exit than with its effect on the measurement crite- ria of the system itself.
For this reason, it is better to measure the effect of an exit on those measurements which matter most rather than simply by looking at what happens after the exit. Furthermore, when you are looking at entries into the market, you are indeed concerned with what happens after you enter, since that is the period in which your money is in play. Traders make money only when they are in the market.
Exits are different. What happens after an exit does not affect your results; only what happens before the exit has an effect. For these reasons, you should judge exits on the basis of how they affect the performance of the entire system. Your task as a trader is to find those places and wait to see who wins and who loses. T rading edges exist because of divergences in market percep- tions and realities that result from cognitive biases.
They exist because economists are wrong in their belief that market players are rational. Market players are not rational. Chapter 2 discussed how cognitive biases provide trading opportunities in a theoretical sense. This chapter will discuss that notion in further detail by using actual price data. Support and Resistance The concept of support and resistance is fundamental to almost all types of trading.
Support and resistance is simply the tendency for prices not to exceed previous price levels. One can understand this concept most easily by examining its presence on a price chart see Figure Support and resistance results from market behavior, which in turn is caused by three cognitive biases: anchoring, recency bias, and the disposition effect. Anchoring is the tendency to base price perceptions on readily available information.
A recent new high or low becomes a new anchor against which each subsequent price is measured and com- pared. New prices are considered to be higher or lower in com- parison to those anchor prices. Recency bias is the tendency for people to place greater impor- tance on more recent data and experience. That low will have a greater meaning to the market participant because of this bias.
How does this affect the support and resistance phenomenon? Imagine that you are a trader who wants to buy coffee. This belief in and of itself will reduce their willingness to sell at or near that price since they will prefer to sell later, after the price has risen—because of the effect of support at the price. How does this affect support and resistance? When the price rose to over the next several days, you probably would not have sold because the price moved so quickly in your favor that you would have believed that it might go as high as or Subsequently, when the price dropped to , you found yourself wishing that you had sold it over Since the previous highs set in early August become the anchor against which subsequent prices are measured, prices that approach that price are considered high.
Therefore, more and more traders are willing to sell as the price approaches those highs. Finding the Edge in Support and Resistance Like many aspects of trading, the concept of support and resistance is a loose construct rather than a hard-and-fast rule. Prices are not guaranteed to bounce off former highs and lows; they just tend to. Prices are not guaranteed to bounce off the exact price of a high and a low; sometimes they react a bit before, sometimes a bit after, and sometimes not at all.
If one is employing a countertrend strategy, support and resist- ance is the direct source of the edge. The tendency for prices to bounce off previous highs and lows is what provides the edge for countertrend traders. When support and resistance holds up, the countertrend traders who rely on its effect will make money. If one is using a trend-following system, the breakdown of sup- port and resistance is what matters.
Consider what happened when the support level did not hold in the case of the December heating oil contract see Figure It is what happened next that is the most interesting, especially if you consider the likely psychological perspectives of the various mar- ket participants.
That meant that anyone who recently had initiated a long position by buying heating oil in anticipation of higher prices was holding a losing trade.
As Figure indicates, this is exactly what happened. Smart countertrend traders would have been out near or on the close on September 5 or perhaps the following morning. This could have been one of those instances. This kind of thing happens all the time to new traders. Trend followers love these occurrences because they are selling on the way down, and as the market makes new lows, they are making money.
The source of the edge for trend followers is the gap in human per- ception at the time when support and resistance breaks down. Why buy now if the price is dropping? Yet as the price continues to drop, even more people who need to sell will panic, sending the price lower and lower. This will con- tinue until the selling exhausts itself and some of those who wish to buy start to believe that the price will not drop further.
The Turtles saw this happen time and time again. Sometimes we were initiating positions, and during those times we were happy with the subsequent price movements. As breakout traders, we were buying resist- ance breakdowns to enter long trades and selling support breakdowns to enter short trades.
We sold short-term support break- downs to exit long trades and bought short-term resistance break- downs to exit short trades. Shaky Ground The prices near the edges of support and resistance represent what I call points of price instability. They represent places where prices are unlikely to remain but are more likely to move higher or lower.
In the case where resistance holds, the price moves lower, bouncing off the resistance. In cases where support and resistance do not hold, the prices con- tinue to move in the direction of the breakdown and often do so for quite some distance.
When a price level has been broken that the market has not seen for some time, there is generally no obvious sub- sequent point where one is likely to encounter further support or resistance.
There are no remaining obvious anchors that might serve as potential turning points for change in trader psychology. In both of the examples described above, the price is not likely to remain at the unstable price point. That is why I use the word unstable to describe those points. There is too much pressure at those points. One side or the other will win the battle of psycho- logical warfare, and as the exhausted side gives up, the price will move up or down. It generally will not stay where it was.
Points of price instability represent good trading opportunities. This is the case because at these points there is a relatively small price differ- ence between a trade working and not working. This means that the cost of being wrong is lower. The battle analogy is apt for another reason. In classic battles, the General of the attacking army waits until the best opportunity for success presents itself.
He may send small forays to test the defenses of the enemy, but he does not put the full weight of his army into the attack until the proper time. As the prices draw closer to those levels each side becomes more and more committed. One of the sides will lose. The price cannot both break out and fail to break out. It will do one or the other. Edges come from places where there are systematic mispercep- tions as a result of cognitive biases.
Those places are the battle- grounds between buyers and sellers. Good traders examine the evidence and place bets on what they perceive to be the winning side. Subsequent chap- ters will build on these concepts and look at complete systems. Mature understanding of and respect for risk is the hallmark of the best traders. On this point we are almost all in agreement: traders, investors, fund operators, and so forth.
This chapter will review those risks and ways to account for them, and then propose some general mechanisms for estimating risk and reward for trading systems by using historical data. Rich and Bill were very concerned with the size of our positions because they knew that there was a risk of losing their entire net worth if those positions were too large during a large adverse price movement.
A few years before starting the Turtle program, they had traded during a period when the silver market was locked down limit for days and days. This meant that there was no opportunity to exit because there were no traders willing to buy within the lim- its imposed by the COMEX futures exchange on how much the price of silver could change in a single day. Each day you are losing more and more money and there is nothing you can do about it. Fortunately, Rich was able to trim his position before this occurred, and that probably saved him tens of millions of dollars.
If he had not acted quickly, he would have lost everything. I am sure the memory of that move was vivid in their minds during the Turtle program.
Contrary to the popular notion that Rich was sometimes a gunslinger, in my experience he was very careful with his risk. Risky Business Because there are many different types of risk, there are many dif- ferent ways of measuring it. Drawdowns The drawdown is probably the risk that causes the most traders to stop trading and results in the most traders ending up as net losers. From the graph, you can see that the equity has grown at an aver- age compounded rate of There was also a period during the test that exhibited a 38 percent drawdown.
By What Measure? This is especially the case if all you are looking at is a graph like the one in Figure , which uses a logarithmic scale that tends to make drawdowns look smaller than they look on a standard scale. Figure shows the same results as those in Figure updated until the end of October , using a lin- ear scale that outlines the historical drawdowns.
Shortly after Newbie begins trading on June 1, the system enters a period of drawdown that is slightly higher than anything shown in previous tests: a drawdown of 42 percent. What is going through his mind at this point? From my personal observations, most people cannot sustain drawdowns of this sort.
This inevitably also means reducing the returns that will come from trading the system. That is a wise compromise. As Turtles, we were lucky since our boss, Richard Dennis, did not look at drawdowns that happened as a result of giving back prof- its in the same way that he looked at drawdowns that happened because of a string of losses.
For that reason, he was a very easy boss for whom to manage money. Most other investors would have panicked with the kinds of drawdowns we sometimes incurred. If you look at the returns of the former Turtles who have been the most successful at raising outside money, you will see that they are trading at a greatly reduced level from their Turtle days. This is practically a require- ment if you want to raise institutional money. Unfortunately, you cannot make the percent plus returns we did as Turtles without drawdowns at these levels.
I think my worst drawdown was something on the order of 70 percent. After three years, each of these systems will have returned the same average CAGR com- pound average growth rate of 30 percent. However, most traders would argue that a system that returned 30 percent each year would be preferable because it would offer a smoother equity curve. All else being equal, we have found that a system that consis- tently delivers good returns will be more likely to offer good returns in any future period.
Therefore, the risk of having that system deliver subpar returns in any given single year will be lower than for a system that had more erratic historical returns. Price Shocks A price shock is a sudden or very rapid movement in price that gen- erally is caused by a natural catastrophe, unforeseen political event, or economic disaster.
Since I started trading, there have been two very notable price shocks: the U. I remember it well. I actually made a bit of money on the day of the crash, but the next day was a differ- ent story.
Eurodollars closed on Black Monday, October 19, , at I was short something like 1, contracts of December eurodollars and another T-bills. The next morning the eurodollar opened up at This was a price we had not seen in eight months.
Figure shows the eurodollar market on the day of this price shock. ED: Eurodollar - December Contract It was the government freaking out and lowering interest rates overnight with no warning that killed me. Now that was a price shock. You can clearly see the large spike representing a 65 percent drawdown.
It is important to remember that that drawdown occurred overnight. There was no chance to exit the market. It is also interesting to note that the drawdown from that single day was twice anything the system would have indicated through historical testing. In other words, the historical testing would have under- stated the drawdown by a factor of 2.
All traders who wish to stay in business would be prudent to keep the reality of price shocks in mind as they settle on an appropriate risk level for their accounts.
Anyone who wants to earn high returns runs an equally high risk of experiencing a high drawdown or even a total loss of her entire trading equity if a large price shock occurs. System Death System death is the risk that a system that has been working or that appears to have worked on the basis of historical testing suddenly stops functioning and starts losing money.
This risk comes more from relying on poor testing methods than from the markets them- selves. It is also a larger risk for those who trade short-term systems that have been optimized for recent price action. Unfortunately, however, since the markets are dynamic and are composed of many other participants, it is a reality that mar- kets change, and this can affect the results of systems and methods that previously worked; sometimes those changes can be perma- nent.
One of the ways great traders distinguish themselves from average traders is by their ability to adhere to methods that others have tired of and discarded and be successful with them. This consequence that certain market participants stop trading with certain styles because they believe that those styles no longer work has an interesting side effect for trend followers.
Every few years trend- following traders experience a period of losses, and inevitably some expert will announce the end of trend following. This usually coin- cides with a large withdrawal of money from trend-following funds.
At least three or four times since the Turtle program began someone has made the claim that trend following has ceased to work. Measuring What You Cannot See There are many ways to quantify risk, which is one way to factor in the pain you would have encountered while trading a particular system.
Maximum drawdown: This is a single number that represents the highest percentage loss from peak to subsequent equity low during the course of a test. In Figure this would be the 65 percent drawdown that was due to the price shock of the crash. Longest drawdown: The largest period from a peak in equity to a subsequent new peak. This is a measure of how long it would take to regain new equity highs after a losing streak.
Standard deviation of returns: This is a measure of the dispersion of returns. A low standard deviation of returns indicates that most returns are near the average; a high standard deviation indicates that returns vary more from month to month.
The Flip Side of Risk: Rewards There are many ways to quantify a reward, which in the case of a particular trading system relates to the amount of money you might expect to earn when trading that method. For simple interest- bearing accounts this is equal to the rate of interest itself.
This measure can be affected greatly by a single period of high returns. It is relatively less sensitive to a single period of high returns for tests of more than a few years. The year was And whenever she had extra money, shed invest in very well known companies. My parents bought the stocks of giant companies of their time: San Miguel, Ayala, etc. My father retired at the age of He passed away at For those 23 years, my parents sold a portion of their stockslittle by littlefor their big expenses.
After Dad passed away, Mom announced, Im selling all my stocks. I was surprised that she still had P1 Million from that last saleeven if they were already withdrawing their cash from there little by little. I asked her, Did you sell everything? Mom said, Yes, I did. Well, I left the crumbs. What crumbs? I asked. She explained, Oh, I left the very little investments scattered in various companies. Theyre very tiny. Nothing much. That conversation took place three years ago.
Just two months ago, I told her, Mom, youre You better sell whatever you have left in the Stock Market. Yes, I know theyre crumbs. But just collect them anyway. She agreed. She called up her stockbroker and said, Can you sell all the tiny stocks I have left? She was expecting P10, At most, P20, But she got the shock of her life.
The stockbroker told her, Mrs. Sanchez, your stocks are worth P1. Mom turned to me and said, Bo, Im rich! I told her, Mom, youve always been rich. You just think youre poor. Forty-five years ago, my mother planted P in the stock market.
And through the years, she planted little seeds of P50, P, and P in giant companies. Because she planted in the spring, today, she isnt begging in the fall. In her whole life, my mother never received a huge amount of money. She never inherited money. She never won the Lotto.
She only built her wealth slowly. Remember this truth I heard from David Bach: Wealth is not built in days; Wealth is built in decades. God places the two roads before you. Penny Poverty or Pilar Prosperity? You choose. God Says, Plan Ahead! People today are living longer.
If you live until 90, will you have enough money for your needs? Or will you be depending on your kids? Remember: No one plans to fail. We just fail to make a plan. Jesus said, Suppose one of you wants to build a tower. Wont you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you, saying, This person began to build and wasnt able to finish.
God invites us to be like the ant. The Bible says, Go to the ant, sluggard; consider her ways and be wise; who, having no guide, overseer, or ruler, provides her food in the summer and gathers her food in the harvest. Proverbs In other words? The ant plants in the spring. So it wont beg in the fall. Anawim is our home for the abandoned elderly. I built it some 15 years ago. I know its a beautiful place.
Its so beautiful, some people tell me, Bo, when I grow old, I dream of living there. No, I dont want you to live there. That place is for the poorest of the poor. Old people who failed to plant in the spring and are now begging in the fall. Dont dream of being an Anawim resident. Dream of being an Anawim donor. The secret is in the next passage. Everytime I talk on finances, I ask the audience, How many of you have debts? The response is shocking. It was as if I asked, How many of you are human?
And Filipinos love the fact that they can borrow. One woman told me, Im borrowing money from the SSS. I asked, Why? She said, Sayang if I wont borrow. It would be waste. I dont get it. It says that there are two signs that God is blessing you: One, when you stop borrowing. Two, when you start lending. Friend, stop borrowing. Instead, start lending. To whom will you lend? Ninety-nine percent of Filipinos lend to banks. You deposit your savings there. But thats not a good choice.
The problem with banks is that they pay you a tiny interest of less than one percent a year. I suggest you lend your money to others who can give you a higher return. For example? Giant companies. You can do that through the Stock Market or Mutual Funds.
If you really like banks, then dont deposit your money in the bank itself. Instead, buy shares of the bank. Be an owner. Buy the stocks of. Over a year period, your returns will be much bigger! From my limited scientific knowledge, a cat produces another cat, a dog produces another dog, and a penguin produces another penguin. Thats just how Gods universe works. Ill be very worried if a cat produces a dog. If that happens, the end of the world is near.
The Bible says everything "reproduces according to its kind" Genesis In fact, this line appears six times in the first chapter of Genesis. And you see it throughout the Bible. When the widow of Zarapath gave Elijah her oil and flour, what did she get? More oil and flour. Not clothes. Not wood. But oil and flour. When Jesus fed the multitudes, He did it by surprise, surprisemultiplying five loaves and two fishes. He didnt turn stone into bread.
He didnt turn stone into gold, and then bought bread. He turned bread into more bread. Jesusthe Son of the Living Godneeded bread to reproduce more bread. Because this is a principle that operates the entire universe. Everything reproduces according to its kind. If you want to prosper, you need to learn how to multiply the little money that you have.
In , Mom invested her separation pay of P Forty-five years later, that P became millions of pesos. By the way, was really a good year for Mom. Not only did she receive P, she also gave birth to her favorite son. Learn to multiply the little money that you have and you will prosper! If you retire poor, it's not God's fault. God is giving you a choice today. Will you plant in the spring or beg in the fall? For those who didn't read my first book on the stock market, let me give you a little recap.
It all started when, every other week, I'd meet my three maids and my driver for a small prayer meeting at home. After praying and sharing, we'd end up talking about their personal lives.
And that included their finances. Seeing their inability to save anything, I taught them a very simple "5 Envelope Plan. I told them that whatever went into that envelope each month should go to the stock market.
Today, they're very happy with their investments. Here's an update One of my helpers has P, and the other one has P, in the stock market. I told my maid, "If you keep this up, you'll reach your first million in seven years. I have a rather selfish reason: so I can be one of the very few. My maids have been investing for two years now. But my driver just started a few months ago.
He gave a lot of excuses.
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