Stock Investing Guide

KEYS TO BEING A SMARTER INVESTOR - -PART 3

11.DON'T OVER LOAD ON COMPANY STOCK

As many employees at Enron and other large bankrupt
companies learned the hard way, loading up your 401(k)
with your employer’s stock can be disastrous. Both your
job and your retirement security are riding on the fortunes
of a single employer and a single industry.
Financial planners typically recommend limiting company
stock to no more than 5 or 10 percent of the account’s
value. But this can be difficult to do if the employer will
only match your plan contributions with company stock
while restricting how soon you might sell the stock
and diversify through other investment options offered.
Consequently, you may need to try to diversify your overall
portfolio through other types of assets you hold outside
your 401(k) plan.

1 2.DON'T CHASE 'HOT' PERFORMANCE

Today’s hot investments are often tomorrow’s cold
turkeys. The most recent glaring example of this was
tech stocks, represented by the NASDAQ stock index. The
NASDAQ returned a record-smashing 85.6 percent in 1999,
but fell nearly 40 percent the following year, and lost
another 21 percent the next year.
The major problem with chasing the current hottest
investments is that by the time most investors discover
that an asset category or specific investment is “hot,” the
investment often has already realized much or most of its
run-up in value. Consequently, investors often get in at
about the time the investment is ready to fall.
Calculations by DALBAR, a consulting firm, show that
stock investors who frequently trade in and out of mutual
funds earned a meager 3.51 percent annually between
1984 and 2003—dramatically below the 12.98 percent
annual average earned by the S&P 500 stock index over
the same period.

13. DON'T IGNORE 'COOL' PERFORMANCE

The opposite of chasing hot investments is ignoring those
suffering through tough times. Real estate investment
trusts, for example, did poorly in 1998 and 1999, but
boomed in 2000 and 2001 when stocks faltered.
Government bonds lost money in 1994, but returned
nearly 14.5 percent the next year.
A time tested way to avoid the problems of ignoring cool
performance and chasing hot performance is to stay
diversified and stick with the asset allocations spelled
out in your investment policy statement.

14. STAY IN THE MARKET

Nervous investors often sit on the sidelines during
down markets until they’re “convinced” the market is
rebounding. But by the time they get up enough nerve to
get back in, they’ve likely missed much of the rebounding
market’s gains, which commonly occur in the early stages
of recovery.
SEI Investments studied 12 bear markets since World War
II. Investors who either stayed in the market through its
bottom, or were fortunate to enter at the bottom, saw the
S&P 500 gain an average of 32.5 percent (not counting
dividends) during the first year of recovery. Investors who
missed even just the first week of recovery saw their gains
that first year slide to 24.3 percent. Those who waited
three months before getting back in gained only 14.8
percent. The secret is time, not timing!

15. START INVESTING EARLY

Remember the famous image of Archimedes moving the
world on the end of a long lever? Investing over time
provides that same kind of leverage. The longer you invest
money (the longer the lever), the more it “works” for you
by growing faster and faster.
For example, invest $10,000 at an eight percent annual
return inside a tax-deferred account, such as an IRA, and
you end up with $21,589 after ten years. Keep the money
in for 20 years and it grows to $46,610. Keep it in for 30
years and the same $10,000 initial investment balloons
to $100,627.

KEYS TO BEING A SMARTER INVESTOR - -PART 2

6. EDUCATE YOURSELF ABOUT INVESTMENTS AND INVESTING

Even if you work with a financial planner or other
investment professionals, you need to have a solid
understanding of how different types of investments
work, their potential returns, their risks and how you
can assemble them in a cohesive portfolio that’s right
for your needs and goals.
Pay particular attention to investment risk. All investments
carry some degree of risk. While stocks in general tend to
perform well over long periods of time, for example, their
short-term risk can be high, as many investors painfully
learned during the market decline of 2000–2002. Risk is
not limited to stocks, either. You can lose money in real
estate, corporate bonds, gold and commodities. This is
why it is important to note that diversification among
different asset classes may help reduce risk.
Even so-called “safe” investments carry some risk. U.S.
Treasury bonds, for example, are federally guaranteed
against loss of principal as long as you hold them until
they mature. Because they are subject to interest-rate
risks like any other type of bond, however, it’s possible
to lose money if you sell them before maturity.
Don’t understand interest-rate risk? If you don’t
understand how a particular investment works, or
the risks that come with it, ask for help before you invest.
Invest a little in education first. Ask your financial planner
or investment professional for resources to help you make
the best decisions.

7. HOLD REALISTIC MARKET EXPECTATIONS

One of the downfalls for many investors during the
booming market of the late 1990s was their belief that
high double-digit returns were normal for stocks. But
historical investment returns reveal otherwise.
According to Ibbotson Associates, large-company
stocks, such as those found on the Dow and the S&P 500,
returned an annual average of 10.4 percent from 1926
through 2006. During the same period, small-company
stocks returned 12.7 percent and long-term government
bonds averaged 5.4 percent.
But these are only averages over many years. In any given
year, you will probably not earn the annual “average”
return. You’ll earn either more or less than the average.
Knowing the historical average returns can keep these
fluctuations in perspective.

8. FOLLOW A DETAILED WRITTEN PLAN

Formally, this is called an investment policy statement.
It’s a road map to keep you on course through good times
and bad, to eliminate investment ideas that don’t fit your
circumstances, and to provide a way to monitor the actual
performance of your investments. This plan is, of course,
subject to changes over the course of your investing
lifetime and should be reviewed periodically.
The plan outlines such things as:
• Investment goals and time horizons
• Minimum average annual return needed
to achieve those goals
• Current income needs from the portfolio,
if any
• Types of investments you will and
won’t include

9. ALLOCATE INVESTMENTS ACCORDING TO GOALS AND NEEDS

How will you divvy up your investment dollars among
various asset categories such as large-company and small company
stocks, international equities, government and
corporate bonds, cash, real estate and other assets?
The answer depends on several factors. Key among them
are your investment goals and your time line for achieving
them. The sooner you’ll need the funds, usually the more
conservative your investments should be.
Also, what other financial resources are available to you?
If Social Security and a good pension will generate most
of your income needs in retirement, you may feel
comfortable with a more aggressive approach to your
investment portfolio. You may opt for a more conservative
approach, however, if your investment portfolio will be
a primary source of retirement income.

10. DIVERSIFY YOUR INVESTMENTS

Too often, individual portfolios invest heavily in a single
type of asset, often to the near exclusion of other types.
A popular choice in recent years has been large-company
U.S. stocks, also called “large-caps.” These stocks
outperformed other major asset categories in 1989 and
from 1995 to 1998. Yet, in all other years between 1965
and 2006, large-caps were outperformed by small company
stocks, international stocks, intermediate
bonds or investment real estate.
Because it’s almost impossible to identify in advance
which asset classes will lead the way during any given
time, it’s wisest to spread dollars among several
investment classes. Research has shown that this
diversification reduces risk while at the same time
maintaining or even improving portfolio performance.
Investors also may want to diversify within broad
categories. Among stocks, for example, they might divide
their money between value and growth stocks, or between
large-cap and small-cap. They may also want to include a
variety of industries or sectors like technology, consumer
goods and health care.

Urbanizing Income in China Gives Us a Quick 17% Gain

Shares of American Oriental Bioengineering Inc (AOB: NASDAQ) are up more than 17% in the past week on news of a strong fourth quarter. The company posted revenue of $96.3 million – a 68% jump – and net income of $21.7 – up 43% on the quarter.

While pharmaceutical companies here in the U.S. are struggling to keep up, AOB is catching fire. This solid growth is what attracted us to the company in the first place. After almost a full 12 months of holding it, we are still impressed every earnings announcement.

The company recently expanded its capacity and product line. It also has ambitions to reach further into the rural Chinese market. As we noted when we first recommended AOB, rural China is the place to be. Our colleague, Chris Mayer, recently found this chart, which sums up our point:



As you can see, China is currently in a heavy period of urbanization. With this many people moving to major cities, average income will rise. When that happens, we’ll see a large increase in discretionary spending, which means more money for supplements and pharmaceutical products.

AOB is, and will continue to be, the country’s leading pharmaceutical provider as long as they reach as many customers in rural areas now. If they can do that, these customers will stay loyal when they move to the cities and have larger incomes.

We are already seeing this take place, and should continue to see results like these for a while. If you haven’t already, we recommend you buy shares of AOB.

Action to take: Shares of American Oriental Bioengineering Inc (AOB: NASDAQ) remain a buy at current prices.

Finally, a Bull Indicator For Our Silver Play

We just got word that for the first time in many months, the short interest in Coeur d’Alene Mines Corp (CDE:NYSE) is down. That means, the number of people now shorting – or betting on it to fall – is 18% lower than it was two weeks ago.

One of the common complaints on Wall Street last year was the amount of people shorting the banks. Many of those companies blamed the shorters for causing a panic and depressing share prices. We found out they were wrong in that case, but they still have a point: shorting can depress share prices.

This is one of the reasons our shares of Coeur have fallen in value. There’s been a massive short interest since we bought in 2007. These shorts are now finally leaving this trade. They’ve done well over the past year, but now it’s our turn.

Coeur, as we’ve said, is about to start production at its Palmarejo mine this month. You’ll want to be on board when that happens.

Action to take: Shares of Coeur d’Alene Mines Corp (CDE:NYSE) remain a buy at current prices.

1.UNDERSTAND THE DIFFERENCE BETWEEN SAVING AND INVESTING

Saving is for smaller, near-term goals, such as the next
family vacation, a car or a financial emergency. Keep
cash in a savings account, money market or short-term
certificate of deposit where you would have little or no
risk of losing principal and can have immediate access
to your funds.

Investing is for larger, long-term goals—at least five years
away — such as retirement or college. Investing carries risk
such as loss of principal or not earning as much as
anticipated. But wise investing also provides a greater
opportunity for earning a significantly higher rate of return
over the long run than you can earn through savings.


2.PUT THE REST OF YOUR FINANCIAL HOUSE IN ORDER FIRST

Before investing, consider tackling several other household
financial issues. Create a budget, or spending plan, in order
to free up money for regular investing. Pay off expensive
credit cards or other high-interest consumer debt that eat
up valuable investment dollars. Build a cash emergency
fund that includes three to six months of living expenses
and buy the right kinds and amount of insurance to protect
against a financial setback—otherwise, you may be forced
to raid your investment accounts for cash at a time when
the market is down or with costly tax consequences.


3.CLARIFY YOUR GOALS

Smart investing means investing with a specific purpose—
those life goals such as your desired retirement lifestyle or
passing money on to heirs. Investing with purpose makes
it easier to stick to your investment plan and to invest
income you might otherwise spend. Goals should be
realistic, with a specific amount to accumulate by a
reasonable target date. “Retirement” isn’t a goal. What kind
of retirement you want and when you want to retire are.
Write down your goals and discuss them with your family.


4.DON'T JUST GRAB FOR THE HIGHEST RETURN

One of the most misunderstood aspects of investing is
the belief that investing is all about seeking the highest
possible returns. This misperception is why so many
investors got into trouble during the booming stock
market of the late 1990s when they disdained “average”
returns and began chasing the riskiest of stocks. Their
purpose was simply to “make as much money as possible
in the shortest time.” This example illustrates why
investment goals are important. With reasonable, specific
goals, you can make informed, realistic investment
decisions designed to accomplish your financial goals
without taking unnecessary risk. Making decisions based
on these investment goals is what steers you on an even
course between the rocky shores of greed and fear.


5.UNDERSTANDING YOUR OWN RISK TOLERANCE

In addition to understanding the risks of each type of
asset and investment vehicle, you need to understand
how much risk you’re willing to take and which types
of risk worry you the most. Risk tolerance is partly a
function of your investment goals, how much time you
have to invest, other financial resources you have and,
frankly, your “fear factor.” Investments that keep you
awake at night, regardless of how “good” they might be
for your needs, are not the right investments for you.
Accurately gauging your tolerance for risk can be tricky,
however. It’s easy to feel confident when the market is up
and conservative when it is down. A CFP professional can
help you assess where you truly stand. Questions you and
your planner might ask include:
• Are you more concerned about losing
principal or losing purchasing power?
• How much principal are you willing to lose?
• How worried were you about your
investments during the recent market decline?
• Which of your current investments keep you
awake at night?
• Do you track your investments daily
(a possible indication of unease)?
• How diversified is your portfolio?
• What investment vehicles you’ll use, such
as individual securities, mutual funds,
separately managed accounts, or taxable
and tax-favored accounts
• How assets are to be allocated within the
total portfolio
• Rebalancing procedures
• Potential tax consequences
• Estimated risk level of the portfolio
• Updating income needs due to inflation
and medical costs

PETROLEUM PRICES UP.

Oil rose above $48 a barrel on Friday ahead of OPEC's Sunday meeting in Vienna, after two volatile days of trade this week.

The producer group gathers in the Austrian capital this weekend to discuss its output policy and perhaps adjust the 4.2 million barrels per day cut it implemented last September in reaction to the depth and speed of the global financial crisis.

"OPEC has done everything they can to set the market up for some kind of cut to try and push the price a bit higher," said Simon Wardell, director of global oil analysis and forecasting at IHS Global Insight.

"But it might be that what we get in Vienna is talk of implementing full compliance of previous cuts before we get to the next one, to try and give the hard pressed economy of the world a respite," he said

Oil has hovered between $33 and $50 since the beginning of the year after OPEC implemented and began showing compliance to output cuts put in place to arrest its slide off last July's peak above $147 a barrel.

U.S. light crude for April delivery rose 99 cents to $48.02 a barrel by 1220 GMT, having jumped $4.70 on Thursday to settle at $47.03 and erasing the previous two sessions' losses.

London Brent crude rose 61 cents at $45.70.

FURTHER CUTS?

Ahead of its meeting on Sunday, OPEC released a report in Friday showing world oil demand is contracting faster than expected and increasing pressure on prices.

The Organization of the Petroleum Exporting Countries said global demand would fall by 1.01 million bpd on 2009, revising its earlier forecast of a fall by 580,000 bpd.

"With continued economic deterioration and demand erosion as well as the impending low demand season, there is likelihood of renewed pressure on prices," the report said.

Earlier on Friday, the International Energy Agency, which advises 28 industrialized nations on energy policy, said strict adherence to OPEC's September cuts would shrink oil stocks in developed nations, even as it projects further demand contraction, implying OPEC would not lower output curbs on Sunday.

"Our view it that they don't really need to do very much more in terms of new targets," said head of the oil industry and markets division David Fyfe of the Paris-based IEA.

OPEC seaborne oil exports, excluding Angola and Ecuador, will fall to a five-year low in the four weeks to March 28, to 22.76 bpd, down 350,000 bpd, UK consultancy Oil Movements said in its latest weekly estimate on Thursday.

To track how your stocks are doing, you have to look at stock listings. Stock listings are published in just about every newspaper. The listings look confusing at first, since they look like a mixture of numbers, but can be a very useful tool when tracking your stock's progress. The listings are organized into many columns, including the following information:

52 WEEKS HIGH AND LOW: This field is a good indicator about a stocks volatility. Volatility is an indicator of the riskiness and potential for profit that the stock has. The greater the difference between the high and low, the riskier the stock is for loss and gain.

COMPANY NAME: This field is usually abbreviated in the listings, and listed alphabetically.

SYMBOL: This field is a one to five character symbol used as a sort of nickname for the company.


DIVIDEND: This field is listed in currency format, and it is the cash amount of money that the company will pay you each year for each stock.

PERCENT YIELD: This field is calculated by dividing the dividend by the closing price. It just tells you how much of the price of the stock you will be paid in dividends each year.

PE RATIO: The price-earnings ratio calculates the relationship between the price of a company's stock, and the annual earnings of a company. It is calculated by dividing the closing price of the stock by the earnings per share of each stock.

VOLUME: The volume is the amount of stocks that were traded the day before.

HIGH,LOW AND CLOSE: These are the highest and lowest prices of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day.

NET CHANGE: This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising.

In addition to the stock listings, stock price charts can sometimes offer a better view of how the stock is doing.

The price charts graphically organize the value of the stock over time. The charts can give you information on the company's historical performance, the stock's stability or volatility, the stock's current price relative to the past, and the stock's growth rate.

PATIENCE:

Wait for all the stars to line up! Good things come to those who wait, be it low buy prices or high sell prices. Sometimes if you had only waited, you could have sold higher or bought lower.

Have patience! It's without a doubt one of the golden keys to making money in the stock market. The patient trader has self-control and waits for his indicators to tell him when to enter or exit.

Even if the market "appears" to have ended its rally, if it does not meet certain criteria the trader had previously set for himself, he must wait.

REVERSE PSYCHOLOGY:

If patience is the golden key to trading, then the silver key is doing things opposite from the rest of the market! You want to buy when the average investor is selling and driving the price down.

And when good news is driving a stocks price higher, you want to sell your shares at the over inflated price.

Buying when stocks are falling and selling when they are moving into higher ground is one of the hardest things to learn to do when you first start trading.

We don't have the luxury of holding our stocks for years to help iron out the little highs and lows. We live off the little highs and lows! Buy when there is blood in the streets!

EMOTIONS:

The stock market is very good at playing on your emotions. In order to be a good trader, you must look at the market in a cold, hard way. When the masses are selling in a panic, you must stand fast or step up and buy.

Remember that the market is made up of emotional herds buying and selling in waves. You must be the cold, cunning and calculating wolf looking over the herd for your kill. Don't panic sell and don't buy on hysteria.

MARKET ORDERS:

Don't use them unless you have to. Don't ever place a market order for a stock at the opening of the market, or when a stock is making new ground fast.

Putting in a market order in the first 15 minutes of the market is a sure way of paying the highest possible price for your stock, because as all the built up orders from the previous day go through, it lifts the stock prices for a few minutes.

You can be pretty sure that your order will go off at the high of the day this way. (but keep in mind it's sometimes handy to sell during this time).

STOP LOSSES:

These are almost as bad as market orders. Stop losses are a sure way of selling at a loss.

You can only use them when you are "in the money" and would normally sell your stock, but want to retain a slight possibility that it might continue to go higher.

BUYING LOW:

Sometimes the best way to buy low is to put in an order for a stock at "a price you'd love to own the stock at." Let's assume for a moment that the stock you want is trading at 100, try putting in an order at 95 and wait it out, what do

you have to lose? You never know when you might hit the low for the day that way. It's far better than putting your order at 99, only to find it crashed past that, filled your order and continued down to 95. You'd be surprised what an effective way this can be to both buy and sell. When you get your "dream" price, it's a great feeling.

SELLING: Selling is actually harder than buying in many ways. Try to decide what price you want to sell your stock at as soon as you buy it, so when that price does come along, you'll be ready to move.

FREE LUNCH: If there is a free lunch in day trading, it's picking stocks that are making new medium trend highs to trade with. That way if you do get in at the wrong point, there's a much better chance that your high buy will turn into the next low buy as the stock moves higher in its overall trend. This is one of the only safety nets you have in day trading, when combined with patience and some extra cash reserves.

IF YOU ARE WRONG: Then you are wrong! Don't try to justify a bad trade by convincing yourself it will turn into a good trade. If you buy on the high side, then sell at break even and buy back in on the low side. Talking yourself into believing that your mistakes are actually wise moves in disguise is very costly. Be professional enough to spot your mistakes and move on.

PROFITS AREN'T AS IMPORTANT AS YOUR CAPITAL: If you miss out on some profits, that's okay, you can always find another stock to buy. However, if you lose a big chunk of your trading money then the game is over. Protecting your trading capital is your number one mission, followed, of course by increasing it.

DON'T GET GREEDY: Greed will make you poor! If you experience an overwhelming emotional urge to take a trade because you are sure to make a killing this time, then you are experiencing greed. Greed and fear drive the markets and for the most part drive the average investor to making mistakes. Sell with good profits, but don't get too greedy. A savvy trader once said, "Pigs get fat, hogs get slaughtered".

BIG SWINGS:

Big moves up are sometimes followed by big moves down and visa versa. Sell on abnormally large moves to the upside and buy on abnormally moves to the down side.

They are generally out of character of the stock and can many times be followed by a "snap back" on the stock. Knowing your stock's trading habits can be very helpful.

HOT STOCKS:

Stocks that are hot move great, but nothing lasts for ever. If you buy a stock for a big, quick gain and find that the stock has "lost its heat," don't allow your money to be dead -- unless you are looking for an investment!

Sell and move on, don't justify your mistakes - it tends to be a costly justification process in the long run. Others in the stock for the hot ride will start to bail out as the stock cools off and looks like it"s not capable of making "hot moves".

JUSTIFICATION IS COSTLY:

Don't hold a losing stock to justify your purchase. If you make an incorrect buy or end up with a stock that is falling when you thought it would climb handle those mistakes quickly.

Do not be tolerant of stocks that are costing you time and money! Get rid of them!

SUDDEN MOVES UP:

Be very careful buying stocks that have just made sudden moves up. Many times they are following very closely with sudden profit taking.

TIME TO BUY:

One of the best times to buy is when a stock is going down on low volume (with no news) as compared to recent increases on higher volume.

This suggests that the selling is lighter and that the holders of the stock that are going to sell have finished selling and the rest are holding.

The sellers of the stocks then may come back into the market when they see the price stabilize. It's also not a bad idea to sell on high volume on the way up, as this usually creates abnormally high prices that cannot be maintained for long.

DAILY VOLUME:

Do not day trade in thinly traded markets, or on stocks that have very low volume. You may find you can't get out of the market as timely as you think.

TRADING TRUISMS ARE LIES:

If it were possible to implement, "Buy low and sell high" or, "Cut your losses and let your profits run" in any meaningful way, then the majority of the people would be making money.

THE SWITCHES:

Your investment method starts losing, so you switch to another, which immediately also starts losing ...

By switching, you open the door to getting the worst results from each method and none of the good and the overall result can be much worse than even the worst system followed faithfully.

THE DIPS:

You can't take advantage of market dips if you are already in the market. It's better to be out of the market more for day trading than in the market.

This will allow you to get in and out with profits fast and be on the sidelines should dips occur. Try to be out of the market more with your trades and in the market more with your investments!

The techniques and the characteristics of the most successful investors are diverse, and there's not a guaranteed formula of success.

Nonetheless, by looking at the mindsets of certain successful investors, we can learn by following 8 of their key traits:

1. REASON:

Arguably the most important characteristic. You need to justify why you hold each company in your portfolio. You must seek out high-quality stocks that are undervalued by the market, and therefore cheap.

2. COMMITMENT:

To exploit your strategy you have to do the research - and keep doing it - including surveying all financial data, online investment resources and company reports. Don't forget that "numbers have no prejudices."

3. DISCIPLINE:

The research process doesn't finish once you've bought a stock.You have to obsessively follow your purchases, to make sure they were sensible.

You'll need discipline, because successful investing is about running your profits and cutting your losses. The stockmarket is a rollercoaster, so you have to ride out the peaks and bottoms.

4. FLEXIBILITY:

If you're going to have rules you need to be able to break them!" The same stocks won't perform well in all markets.

5. Guts:

The best time to buy stocks is the time of "maximum pessimism" - when everyone is selling and fleeing the markets. To do this takes bravery.

6. OPEN MIND:

Seeking out opportunities ignored by other investors prevents prejudices coming between you and an opportunity.

7. PATIENCE:

"Unfashionable stocks" are unlikely to turn around overnight, so you need to know when to hold on.

8. KNOW YOUR LIMITS:

This means accepting you won't be the next Warren Buffett. Professional investors spend their whole day researching companies, have analysts to help them, and can visit companies. That doesn't mean you can't stock-pick successfully as an amateur ...

The best trick is to keep it simple and stick with what you know.

Are you a truly expert investor as you really believe? Do you consider yourself as a well-informed investor who is capable of anticipating and avoiding the majority of the risks that are usually associated with investing? Chances are, you are making many common errors that are costing you a lot of money and may even harm your financial independence and security. Below you can find the two most costly errors investors make with their investment portfolios: 1. Asset Classes and Subclasses How you allocate your portfolio, rather than which investments you select or when you buy or sell them, determines the majority of your investment performance over time.The solution is to allocate your portfolio to many asset classes and subclasses and be careful not to over or under weight any asset class.

Do not mistakenly believe that a properly diversified portfolio is a properly allocated portfolio. Properly allocate your portfolio among the different asset classes first and then diversify the investments within each asset class.

Diversification is the cornerstone of asset allocation and is key to reducing risk, namely company-specific risk. To properly diversify, you should hold sufficient quantities of not-too-similar securities with comparable risk and return trade-off profiles.

2. Inflation

Inflation can destroy the real value of your portfolio over time, thus placing your future financial security at risk.

As a general rule, the longer your investment time horizon, the more you should allocate to equity investments. For shorter investment time horizons, emphasize fixed-income and cash and equivalent investments.

By avoiding these two mistakes -- besides other investing mistakes -- you will be able to design an investment portfolio that will provide the best opportunity to achieve and protect your financial independence and security!

A Blue Chip-Busting Biotech:How One Tiny Drug Developer IsAbout to Take Down Pfizer and Company.

DKS Defies the Recession

Dick's Sporting Goods Inc. (DKS:NYSE) defied recession worries this morning when it announced fourth-quarter earnings would fall near analyst expectations. Aside from noncash impairment charges related to its Golf Galaxy acquisition, the company expects to earn 49-56 cents per share this quarter.

Investors were clearly expecting the worst, because the good news sent shares way up this morning. As we type, the stock is up about 17% on the day.

Even better is that the stock is still in your buy range…

Action to take: Shares of Dick's Sporting Goods Inc. (DKS:NYSE) remain a buy up to $16 per share.

Setting the Stage for a Rally in Arena

In just a few short weeks, Arena Pharmaceuticals Inc. (ARNA:NASDAQ) could have the data it needs to move forward with its revolutionary new weight loss drug, Locaserin. The company will release key data from one of the final patient studies sometime in March.

According to CEO Jack Leif, talks continue to find a major firm to partner up with Arena for marketing and distribution. However, Leif told Reuters that potential partners are interested in seeing these new data when they becomes available.

So the timetable is set. If results are everything we're hoping for next month, we should hear about a solidified partnership sooner, rather than later. That will leave us with only one more statistical hurdle -- the second 4,000-patient trial results, tentatively scheduled for release in early autumn.

The stage is set. Good results in March will more than likely be enough for Arena to snag a partner. And we're confident that these data will prove the drug has legs. Remember, Locaserin's efficacy was not the main concern in a majority of its late-stage trials. Instead, it was safety. Arena has made certain not to repeat mistakes made by the makers of Fen-phen -- also a serotonin activator -- that ended in class action lawsuits over heart problems linked to the drug.

The bottom line is this: Locaserin works. And it will help patients lose weight. All of the safety data so far have been more than acceptable. If this trend continues, even the most skeptical regulator should have what he needs to approve this medication.

Even the public is becoming more confident regarding Arena's prospects. Stock is up more than 35% this week. Most of the gains came Wednesday, when Arena announced it will present at the BIO CEO & Investor Conference next week.

Action to take: Continue to hold shares of Arena Pharmaceuticals Inc. (ARNA:NASDAQ)

Looking Ahead, Terex's Future Shines

Terex Corp. (TEX:NYSE) just trimmed its fourth-quarter profit guidance by 24 cents, to $5.40 per share. In any other market at any other time, this would have caused a massive sell-off. For a company with Terex's growth and market position to miss a number would have caused panic. Luckily, investors are starting to catch on.

Instead of looking at this one quarter -- or even one year -- investors are beginning to pay more attention to the company's long-term outlook. The consensus is clearly shifting. Investors expect the infrastructure spending to grow. For Terex, this will translate into higher heavy equipment revenues.

That's why Terex shares are rising. The stock steadily climbed to $14 from the announcement on Tuesday. That's good for a $2.50 jump, or more than 21%.

Action to take: Shares of Terex Corp. (TEX:NYSE) remain a buy up to $17.50.

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On an otherwise normal evening in 1964, a woman known as "Miss Witness" received a disturbing telephone call from alleged loan shark Frank Sacco. Here is her account of the call:

That evening, I received a phone call from him to look at my car and that "it" would happen to me if I didn't pay up.

The next day, the woman received another call, this time from her brother-in-law who had been using her car. He told her that a bomb had blown her car to bits.

This is not a scene from a classic mobster movie. This story is, in fact, a true account of a 1960s loan shark case in Yonkers, N.Y. The woman - who remained unidentified in news reports - told just one of the many horrific stories about threats and violence used by infamous loan shark rings throughout the country.

Many of the stories involve physical harm, irrevocable monetary problems and even murder. Luckily, we don't hear of these types of cases anymore. With other financial options opening up over the last several decades, the need for loan sharks has put many of these criminals out of business for good.

Today's first pick is one of these new legitimate players in the loan business. And you don't even have to "pay up" to profit from this fast-growing penny stock…

A Painfully Dismal 2009 Forecast Uncovers a Profitable Opportunity

Millions of people all over the world are facing tough financial times these days. All the pundits have compared this economic downturn to the Great Depression. And yes, there are some similarities.

Economists expect unemployment will reach between 8.5-10% in 2009. The only stock market to post a gain last year was Tunisia - a small North African country. Mega players like the UAE and Iceland were all but wiped off the international investment stage.

Home foreclosures are expected to reach an all-time high this year, which will only add to the unbelievably high rate of homes for sale. Prices are still crashing - currently sitting about 35% below a year earlier.

Credit is nearly frozen. Banks and credit card companies alike are buckling down and leaving very little money free to loan out - even with the drastic actions undertaken in Washington.

We aren't writing this to shock you. But you have to understand how bad it's getting for some families. Bills don't go away when the economy turns sour. And many people will need to turn to short-term lenders to get through these tough times.

The Solution to Millions of Americans' Financial Problems

Many view payday loan shops as corrupt, greedy modern-day loan sharks. That's simply not the case. These payday loan companies are providing a needed service. And as today's current economic situation worsens, payday loan shops are cashing in.

No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families. Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it's becoming a more frequently used solution for many who never thought they'd be in that position.

Families facing foreclosure aren't the only ones running to cash advance stores. Many are taking out payday loans to fund unexpected expenses. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult. Electric, telephone and grocery bills are becoming huge hassles for many.

We found one company that has its hand in many essential services that millions will inevitably look to over the next 12-18 months.

Dollar Financial Corp. (DLLR:NASDAQ) is a key player in payday loans, cash checking, money transfers and even prepaid Visa cards. The company owns or franchises over 1,300 stores in the U.S., Canada, the United Kingdom and Ireland.

Dollar owns brands like Money Mart, The Check Cashing Store and American Payday Loans. While not creatively named, these brands are widely recognized.

With leading market shares in Canada and the U.K. and the second largest share in the U.S., Dollar produces over $600 million in revenue and more than $63 million in profits per year. With a market cap of just over $250 million, you might never find a better deal.

How to Play the Game: Market Position and Cash

Dollar's nearly 30 years of experience has given the company an upper hand on its competition in the ever-changing world of payday loans. Over the past century, federal, state and even local governments have imposed various laws and regulations. The largest concern to many is the out-of-control interest rates in place for these quick loans.

Starting in 1917, limitations on the industry have poured in from every agency and bureau you can think of. It took around 70 years to work itself out, but the industry finally found its footing in the early 1990s. By that time, Dollar was already a top dog.

Market dominance is important in this business. After all, it is still the retail business. In times like these, unsure newcomers will look to the largest of lenders, not the small-time convenience stores.

Besides market dominance, the second most important factor when looking into a payday loan investment is cash. If a company doesn't keep a lot of cash on hand, there's no way it can prosper when a wave of customers is banging on its doors. You can't give out loans if you don't have any money. Dollar has plenty.

With over $200 million in hard cash on hand as of Sept. 30, 2008, the company is in prime position to profit in 2009. Compared with its competition, Dollar is far ahead of the game.

Of course, these numbers don't tell the whole story. There are all kinds of other factors not featured in this chart, like debt and accounts payable and receivable. But it does sum up the main point: It takes cash to successfully run a cash advance operation.

A Better Opportunity Than the Best of 2008

Last March, we recommended a company called First Cash Financial Services (also featured in the "Cash Is King" chart). First Cash is similar to Dollar in that it also offers payday loans and cash checking services. The company also runs pawnshop businesses.

When we recommended First Cash, we were at just the beginning stages of the 2008 sell-off. Foreclosure rates were beginning to make headlines. Precious metals were exploding. And of course, the Bear Stearns collapse was the top story on every news channel.

These reasons, along with many others listed in that issue, brought us to recommend First Cash. In just two months, we closed an 82% gain. The economic situation back then now looks like 1999 compared with today's. The argument for First Cash is even stronger now for Dollar.

Another reason we fell in love with First Cash was its unbelievably low ratios. The company was trading at a P/E of 7.8 and a P/S of just 0.64. Dollar makes these numbers look like those of tech companies at the turn of the century.

With a price-to-earnings of less than 5 and P/S of 0.42, shares of Dollar might as well be free. In an economic situation that will dramatically force higher revenue and earnings for any payday loan store, it's unbelievable how low investors are valuing Dollar's stock.

But there is more to this story - and this timing - than just cheap valuations and hard economic times…

Grabbing a Slice of Other People's Tax Returns

Throughout the long history of payday loans, there has never been a better time to invest than right now. That's because there is a virtually guaranteed flood of business just around the corner. Let me explain…

Along with payday advances, short-term loans and prepaid credit cards, Dollar Financial also offers another critical service that is extremely cyclical - tax refund advances.

A great majority of Americans rely on tax refunds. In good years, they use this money to buy new televisions or fund home improvements. In recession years, they use this money to pay bills. Since we are in one of the worst recessions dating back to the Great Depression, the need for these refunds is astronomical. Dollar is expecting a flood of business, which should create a record quarter for the company.

Over the past 12 months, Dollar set a company best by recording $609 million in revenue and $52.5 million in earnings. The greatest increase came from its tax refund check cashing services in the quarter ending March 31, 2008.

There are two ways for Dollar to cash in on this annual boost in business. The company offers both regular check cashing, which guarantees a quick cashing fee for Dollar, and tax refund advances, which provides the company with an even larger return. The company charges the same for refund advances as for payday advances, but the guarantee of being paid is much greater. A history of pay stubs is great, but a guarantee from the U.S. government is even better.

Of course, Wall Street normally accounts for this cyclical behavior. The company's share price has been relatively flat during third-quarter announcements in past years. This year, we suspect something quite different.

You see, investors have beaten Dollar's stock down. But instead of accounting for a larger amount of business this tax year, these same investors have oversold shares. The company will see this boost in revenue. Yet Wall Street continues to ignore this obvious fact. Once those numbers come out - usually, around the second week of May - we could be in for the ride of our lives.

We couldn't find a better time to buy Dollar Financial than right now. We expect a huge year in this absolutely recession-proof play.

Action to take: Buy shares of Dollar Financial Corp. (DLLR:NASDAQ) up to $11.00.

CXS Breakdown: Dollar Financial Corp. (DLLR:NASDAQ), www.dfg.com In a year when millions more Americans (and Europeans alike) will default on their mortgages and struggle with their bills, payday loan centers will prosper. Dollar Financial Corp. will use this opportunity to show its alpha dog status. Now with tax season fast approaching, the company should soon shatter its own quarterly earnings record. It's time to get in on this cash cow. Top-Line Power: Dollar Financial's long history of growing its revenue is impressive. But the next few quarters should blow these numbers out of the park. Tax time is around the corner, and that's like Christmastime for Dollar investors. Score: 2 of 2 Profit Fortress: There's big competition in the payday loan industry, but Dollar can handle it. With the top spot in the U.K. and second largest market share here in the U.S., the company is as fortified as any short-term loan company can be. Score: 1 of 2 Black Clouds: For some reason, Dollar's shares have collapsed over the past 12 months. After starting 2008 at around $30 per share, its stock fell to a mere $6. We waited for it to find a bottom. It's arrived. Investors are starting to see it as well. Now is the time to get in before shares skyrocket. Score: 2 of 2 Profit Catapults: As we mentioned, tax season is almost here, and Dollar's tax cashing/advance services should provide the company with a record quarter. On top of being both lucrative and timely, these services are practically government guaranteed - after all, Uncle Sam is signing the checks. Score: 2 of 2 Business Shock: Dollar might not be breaking any legs or blowing up any cars, but it certainly does shock some. Even so, individuals and companies have been loaning each other cash all of history. Dollar's approach isn't brand-new, but it does seem to work the best. Score 1 of 2 CXS RATING: 8 out of 10 Financials Market Capitalization: $254 million Recent Price: $10.60 Price/Earnings: 4.95 Price/Sales: 0.42 Price/Book: 1.27

How the Worst Year in Automotive History Could Pave the Way For Historic Small-Cap Gains

Now is not the time to be in the car business. As the stock market plunged in October, car sales followed suit. Used cars were hit especially hard, with sales tumbling a massive 20.7% in November alone.

It's not only the used car dealers that are suffering. Every facet of the auto business is feeling the heat. Credit is tight, meaning prospective car buyers will need a better credit score if they want a car loan. On top of this, consumer uncertainty and economic woes are persuading consumers to hang onto their old cars a bit longer than they normally would.

The results have been nothing short of devastating. Used car dealers have seen about half as many customers on showroom floors this year, according to The New York Times. Industry insiders and experts don't expect a miraculous turnaround, either. Ford Motor Co. execs are predicting industrywide December sales numbers to drop by 35% from last year. And they don't expect the first quarter to be a lot better.

December was especially brutal to General Motors as well. GM posted a 2008 U.S. sales drop the likes of which has not been seen in 49 years, dragged down by a 31% drop in December. With 2008's numbers now officially in the books, GM's total sales of 2.95 million cars was the least the company has posted since 1959, according to Automotive News.

The industry is, indeed, in turmoil. But there's one company in the auto biz that's prepared to weather the storm. And when business as usual finally returns, this industry leader will emerge stronger and more profitable than ever before.

So are we crazy to bet on a car dealer in the midst of this painful downturn? Read on and decide for yourself…

Buying the Business No One Else Wants

CarMax Inc. (KMX:NYSE) is a name we're almost certain you'll recognize. It's a Fortune 500 company - and one of Fortune's "100 Best Companies to Work For." Most importantly, CarMax is the largest retailer of used cars in the United States.

Obviously, the entire business has been hit hard by recent events: retail, auto and credit markets are three of the most (if not the most) damaged sectors right now. But if you look past the carnage, you'll see that CarMax is prepared to take its business to the next level while others continue to slog through the industry's most difficult economy in decades.

CarMax is not your father's used car lot. The company sets itself apart from the competition with its unique business model that includes no-haggle pricing, strict quality controls and trade-in guarantees. It'll even give you a written promise to buy your old car even if you decide to not purchase a new one.

Staying Smart During the Downturn

Like other car dealers, CarMax has seen a considerable decrease in store traffic. To combat lower sales, the company has taken action early and often to defend its margins and get though the recession in one piece. In reaction to lower store traffic, management has made efforts to reduce inventory year over year by $340 million, and has even improved turnover, and subsequently decreased costs.

Management has also made the decision to temporarily suspend store growth until conditions improve. Growth was originally reduced to five-10 new store openings earlier in 2008. In the third quarter, CarMax opened just one store, in the Charlotte, N.C., market. Looking ahead to 2009, the company will finish construction in progress on four new locations, but will open only one of these for the time being.

Staying smart has been the name of the game - and company management says it intends to stick to the business model that made CarMax the leader in used car sales. Even though industrywide sales are down 30-40%, CarMax will not be dropping prices or offering any gimmicks or discounts. Company policy is everyday low prices, and it will not move away from this model - the consensus is that any type of sale or offer would not improve traffic in these economic conditions.

We happen to agree with this stance. The company was built - and will continue to grow - under this model. We believe offering a no-haggle shopping environment attracts buyers that would normally be wary of used car shopping.

Superior Financing Will Help CarMax Survive and Thrive

In today's economic climate, exposure to subprime debt has been a death knell for scores of lenders. And while at first glance you wouldn't expect a car dealership like CarMax to be affected by financing woes, it certainly has been. That's because CarMax has its own lending arm - CarMax Auto Finance (CAF) - that has dealt the company some unwelcome losses this year. Ultimately, CarMax's unique brand of financing should shield the company from troubles down the road.

At most dealerships, selling a car involves two commissions: one for the employee who sells the car and another for the financing team when they originate a loan. CarMax's system is a little different - at CarMax, customers deal with one salesperson throughout the entire process, financing and all, and the sales team doesn't get any incentives for pushing one loan over another. When a car buyer sits down to look over his financing options, he's presented with side-by-side offers so that he can pick the option that works best. That's a novel idea in the auto finance world…

CarMax customers aren't bound to loans offered by CAF - the company uses financing from third-party lenders as well. If you're wondering why CarMax would provide so much transparency to customers (at the risk of losing out on financing a car it sells), the bottom line is this: CarMax is in the business of selling cars.

While CAF has been a profitable enterprise most years, the dealer's financing arm really serves just as a means to get more cars out the door. As a result, the company isn't interested in holding onto the loans it writes; it packages groups of loans into securities and sells them on the debt market each month.

The practice of unloading most loans right away did a good job of protecting CAF from the horrendous potential losses the unit would have incurred had it been holding onto the debt. That said, a lack of liquidity in the market for securitized debt and a lower volume of cars to finance have been the primary drivers of CAF's losses this year.

When liquidity returns to the securitized debt markets that CAF uses, expect the unit to spin those losses into future profits. All told, with plenty of capital to fund its operations in the interim, the credit crunch should take less of a toll on CarMax than on most other lenders.

Scary Numbers Are Combated With Increased Market Share

When CarMax released third-quarter finances in late December, the results were far from pretty. Store traffic was down considerably, used car sales were down 17% and the company reported a 10 cent per share loss. Selling and administrative expenses also increased to 14.9%, squeezing margins even tighter.

But this recession is giving CarMax the opportunity to scoop up market share as smaller independent dealers bite the dust. Recent data indicate that CarMax continues to gain market share in the late-model used car market. And internal customer surveys indicate customer satisfaction rates are at all-time highs across the board.

As we move into what is set to be a very difficult year for the economy, we believe the outlook for CarMax will improve significantly as 2009 winds down as investors begin to see the light at the end of the tunnel.

Preparing for a Massive Comeback

In a recession like this one, consumers put off the purchase of big-ticket items like appliances, furniture and, of course, cars. CarMax is in no way immune to consumer tendencies, and we should expect the company to continue to post negative sales growth from its existing locations in 2009. However, we do not expect this trend to continue for more than four quarters. As consumer confidence returns, we can expect CarMax to return to an annual growth rate that's well in the double digits.

Remember, CarMax's problems are not internal. Rather, they are a symptom of a lagging economy. CarMax's business model itself is nearly flawless. The company has proven this with its impressive track record of year-over-year growth. CarMax will continue to grow its business - and its share price - once the economy improves.

For this play, time is on our side. Right now, CarMax shares trade about $8 per share. We believe we can get a better price during the early part of this year.

Action to take: Buy shares of CarMax Inc. (KMX:NYSE) if the stock dips to $7.40 per share or less.

CXS Breakdown: CarMax Inc. (KMX:NYSE), www.carmax.com CarMax Inc. (KMX: NYSE) is a dealer of new and used cars that sells vehicles through its 100 car superstores in 41 metropolitan markets. The company focuses on selling late-model vehicles with less than 60,000 miles. To date, CarMax has sold more than 2 million used cars. Top-Line Power: Like most other dealers, CarMax has been hurt recently by a slowdown in car sales. That said, the company is one of the best positioned for a recession. In the long term, CarMax should continue its trend of stellar growth. Score: 1 of 2 Profit Fortress: CarMax's brand recognition is a significant competitive advantage in the used car arena. As cautious consumers opt to purchase pre-owned vehicles, a reputable name like CarMax will be a significant sales factor that other dealers can't measure up to. Score: 2 of 2 Black Clouds: With the economy in recession, cars dealers have been hit harder than ever before as sales have slowed significantly year over year. Locally owned used car dealers are feeling the pinch, and CarMax is ready to step in and fill the void. Score: 1 of 2 Profit Catapults: CarMax's unique customer-centric business model makes the company a standout among dealers. When consumer confidence again favors auto sales, this company will be a first stop for many. Score: 2 of 2 Business Shock: Bringing reputability to the used car market has proved to be a game changer for CarMax, a fact that hasn't lost any of its cachet. Its no-haggle pricing policy attracts a new demographic to the used car market Score: 2 of 2 CXS RATING: 8 out of 10 Financials Market Capitalization: $1.81 billion Recent Price: $8.23 Price/Earnings: 42.14 Price/Sales: 0.24 Price/Book: 1.17