Van Tharp - Super Trader, Expanded Edition: Make Consistent Profits in Good and Bad Markets

SUPER TRADER

MAKE CONSISTENT PROFITS IN GOOD AND BAD MARKETS

EXPANDED EDITION

VAN K. THARP

with Illustrations by Jillian Ellis

Copyright 2011 by Lake Lucerne LP. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-176085-0

MHID: 0-07-176085-7

The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-174908-4, MHID: 0-07-174908-X.

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This book is dedicated to three very special people in my life. My wife, Kalavathi Tharp, provides a very special spark in my life. Without that spark and her tremendous love, this book would not be possible. My son, Robert Tharp, is one of the real joys in my life. Hes a trader, and he has worked very hard to understand these concepts. Im very proud of him. And my niece, Nanthini Arumugam, has in my mind become the daughter that I always wished I would have. I am very blessed to have all of you in my life.

Would you like to live in paradise? Theres a place where the average daily temperature is 66 degrees, rainy days occur on average only every five days, and the sun shines most of the time.

Welcome to Dallas, Texas. As most know, the weather in Dallas wouldnt qualify as a paradise climate. The summers begin their ascent almost before spring arrives. On some days, the buds nearly wilt before turning into blooms. During the lazy days of summer, the sun frequently stokes the thermometer into triple digits, often for days on end. There are numerous jokes about the devil, hell, and Texas summers.

Once winter is in full force, some days are mild and perfect golf weather. Yet others present frigid temperatures, snow, and the occasional ice storm. Its good for business at the local auto body shops, but it makes for sleepless nights for the insurance companies. The winters certainly dont match the chills of Chicago or the blizzards of Buffalo. Nevertheless, Dallas is far from paradise as its seasons ebb and flow.

The yearly average temperature, though, is paradise.

Contrary to the studies that show investors that they can expect 7% or 9% or 10% by staying in the market for the long run, the stock market isnt paradise either. Like Texas summers, the stock market often seems like the anteroom to investment hell.

While historically the average investment returns over the very long term have been some of the best returns available in the United States, the seasons of the stock market tend to cycle with as much variability as Texas weather. The extremes and the inconstancies are far greater than most realize. Lets examine the range of variability to truly appreciate the strength of the storms.

From 1900 through 2009 (109 years), the annual change for the Dow Jones Industrial Average reflects an average gain of 7.1% per year. During that time, 64% of the years had positive returns and 36% had negative returns. Only 6 (about 5% of the time) of the years ended with changes between +5% and +10%. Most of the years were far from averagemany have seen enough drama to drive an investors pulse into lethal territory.

And it is really worse than that. The 7.1% number comes from the average annual returns. The compound returns are only 4.1%! If you have a 20% down year, you need a 25% increase just to get back to break even. Much of the actual return from the stock market has been dividends. In the early years of the market analysis, dividends were routinely 4% to 5%. Now they are closer to 2%!

The stock market swings from high valuations to low valuations and back to high over very long periods of time that we call secular bull and bear markets. These cycles are on average 17 years long. Being in a secular bull market can be very rewarding. From 1982 through 1999, you were up 13 times in broad stock market averages in the United States and even more in smaller niche indexes.

But secular bear markets are most decidedly not fun for the buy-and-hope investors who invest for the long term. Investors waited over 16 years for a profit from 1966 through 1982. Taking inflation into account, it was 1992, over 26 years, that investors had to wait until they had additional buying power.