Trade Like a Stock Market Wizard (2013) is a guide to the SEPA (Specific Entry Point Analysis) investment methodology. It navigates you through managing risk, maximizing profits, and, most importantly, having faith in your own ability. You don’t have to be a professional to get started in the stock market – in fact, your status as a lay investor might actually be your biggest strength.
Introduction: Learn how to become a skilled investor.
Table of Contents
Investing in the stock market is not a matter of chance, luck, or gambling. Instead, as with any accomplishment, it’s the result of hard work, knowledge, skill, and perseverance. Consistency, commitment, and having a long-term vision are key to avoiding the pitfalls of self-sabotaging behavior.
Gambling is designed to make you fail – statistically speaking, the more you play, the more likely it is that you will lose. This summary to Mark Minervini’s Trade Like a Stock Market Wizard will show you that stock trading is more akin to brain surgery. Sure, it would probably be a gamble if you took a knife to someone’s brain. But for the trained hand and skilled expert, it’s a matter of surgical precision.
Focus on earnings.
You’ve probably encountered the phrase, “buy low, sell high.” If so, you may have thought that 2009 was the chance of a lifetime to snap up shares in then-blue-chip companies like Citigroup, Lehman Brothers, General Motors, and American International Group (AIG) as their prices dipped to historic lows.
But then, it could have also been a sign that the value of those companies was dropping. The financial crisis saw AIG crash from $103 to 33 cents in the span of two years; it was struck from the Dow Jones Industrial Index in September 2008, as was Citigroup in 2009. The price of GM sank 95 percent in 2009, too – a loss that brought it back to its 1933 worth and also warranted its elimination from the Dow Jones Industrial Index.
There’s an important lesson to be learned here: the stock market doesn’t care about pedigree, only track record. The measurement in the marketplace is growth. Don’t let yourself be persuaded into investing in a sinking stock simply because of its name recognition or reputation. In many cases, such stocks belong to the past; the future may belong to companies with names you’ve never encountered.
Ever heard of the cockroach effect? If you live in New York City, you might know that once you see one, it’s game over – there are bound to be others, too. But this principle can be flipped to the positive. If a company’s quarterly earnings are unexpectedly greater than analysts had predicted, there is likely more good news. If a breakout company seems to be on the upswing, it might mean you should pay attention to that industry as a whole.
Such surges of attention and prospective success may lead to an influx of institutional investment in a stock before the actual numbers even come out. This can be a successful earnings-boosting strategy. And if the speculation is well-founded, that probably means the numbers will keep going up the next quarter, too.
Guess what? This contagion effect is just as applicable to less sunny surprises. Companies that fail to meet their estimated profits will often continue to disappoint in the next cycle. So when you’re starting to put together a roster of potential companies to invest in, focus on those that have exceeded their earnings expectations in the last few quarters. To put it simply, avoid those that have a negative mirror effect, and invest in those that have had positive signs of growth.
This might seem like obvious advice. But in the next section, we’ll see why it’s more counterintuitive than you’d think.
Don’t trade like a professional.
“The amateur investor has many built-in advantages that could result in outperforming the experts. Rule #1 is to stop listening to the professionals.” These are the words of Peter Lynch, who’s recognized as one of the greatest money managers ever. He grew his legendary Fidelity Magellan Fund an average of 29 percent per year over the course of 13 years, so he might be worth lending an ear to!
Despite what the world would have you believe, people who professionally manage money for a living don’t wield an upper hand over the independent investor. Why? The truth is, many of the big investment firms operate on fallacious ideas grounded in tradition, overinflated egos, and misinformation.
One of the biggest disadvantages for a large fund manager is that, as an institutional investor, they need liquidity to steer the huge numbers of shares they’re buying for their portfolios. In other words, their large size is their very handicap, as it limits them to buying shares in companies with a comparatively large amount available. A key characteristic of a promising superperforming stock, meanwhile, is the very opposite: smaller, nimbler companies that have a relatively smaller number of shares.
Second, managers of large funds can typically only invest from a selection of board committee approved companies, to whom they have to justify their decisions. Predictably, institutional boards tend to prefer other institutional favorites that ostensibly offer safety – think Google or Apple. As such, money managers generally toe the line to protect themselves. Then, if the shares dip, it’s attributable to the entire market ecosystem being in trouble; there’s no responsibility thrust on the manager. As the old Wall Street adage advises, “Nobody gets fired for buying IBM.”
Independent investors, meanwhile, have no such committee leering over their shoulder, ready to fire them if they suffer some losses on a smaller, riskier-but-promising candidate. This allows individuals the freedom to leverage shifts and opportunities in the market. And guess what? Contemporary technology means you have the same tools as the professional trader – without the burden of having to do what is accepted and conventional. You won’t get rich by following the crowd and staying in the comfort zone of the well-trodden path!
In the next section, we’ll start to map out what to look for to make spectacular, singular choices in investments.
The principles of Specific Entry Point Analysis
Mark Minervini’s legendary Specific Entry Point Analysis (SEPA) strategy is a methodology designed from three decades of actual trading experience and empirical, historical data on the stock market. It doesn’t just focus on a stock’s value – it also looks at how quickly the stock is rising and what led to its growth. “Time equals money” has a literal application when it comes to the stock market.
Let’s dive right into SEPA’s key elements. We already know the fundamentals: look out for companies whose value is on a clear upswing, as reflected by growth in revenues, margins, and earnings. But what distinguishes companies with potential star power from those that actually manifest it?
Superstar stocks are kindled by a spark that spurs them to stardom. It could be a freshly minted contract or partnership, an FDA-approved pharmaceutical development, or a hot new product with powerful branding. Think of the cult status of Apple’s iPhones, Macs, and AirPods; Microsoft’s monopoly on office essentials like Word, Outlook, and PowerPoint; and Google’s search engine whose name has become so ubiquitous that it would seem strange to say, “Can you look that up on the internet?”
These are big-name examples, but we’re actually looking for relatively youthful companies – ones within the first decade following their initial public offering (IPO). In the early 1990s, for instance, Minervini focused on trading little-known companies that had essentially no brand recognition but showed strong signs of growth and demand. One of these was US Surgical, which introduced pioneering equipment like the surgical staple and the tubes inserted through the abdomen during laparoscopic surgery. Others were companies in software and tech. The majority of investors are scared of companies whose names they don’t already know. But this is the antithesis of what you want to be doing if you’re looking for the next superstar stock.
Once you find a stock with star potential, there will be at least one chance to harness it at a lower-risk price point before it rises at breakneck speed. So, timing your entry is essential. If you fumble this, you stand to suffer huge losses in the case that the stock plummets – which will happen sometimes! Get it right, though, and it could be your big fish.
This leads into the next critical point of SEPA, which is timing your exits. Not all stocks with potential will result in huge margins of profit – and that’s even if you time your entry perfectly, at an optimal price point. As such, be careful to determine stop-loss points – junctures and boundaries at which you decide you will sell and pull out – in order to protect your bottom dollar. And even if you’ve got your hook on the prize, remember that at some point, you’ll be selling the stocks to make a profit.
The thing holding you back is not the market – it’s you.
Do you have what it takes to score big on the stock market?
The answer is yes. The market is not your biggest enemy – in fact, if you don’t take yourself seriously and dedicate the time, belief, and attention this task deserves, you might be the biggest barrier to your success.
If we look at the likelihood of success through circumstance, the pioneering trader Jesse Livermore had every reason to feel hopeless during the stock market crash of the 1920s. And yet, he succeeded. So let his words ring through to you: “Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes.”
One thing to keep in mind as you embark on (or renew) your trading journey is to not focus too much on the price/earnings (P/E) ratio; that’s the price of a stock conveyed as a multiple of the company’s value. Typically, investors tend to avoid high P/E stocks – but this is misguided. Minervini has found that potential superpower stocks often rapidly grow in their market rate, which means they might demand a premium price when you’re shopping around. Don’t let this scare you away! You get what you pay for, and if a company is on the cutting-edge of exciting new developments and on the verge of catalyzing into a meteor, the price is going to reflect that. So this might actually be a promising sign.
Though it’s difficult to imagine today, in the 1990s, no one was sure that the internet would explode in a matter of years – and with it, the value of tech stocks. In 1997, Minervini purchased shares of Yahoo! when it was trading at 938 times its earnings – meaning it had a very high P/E ratio. Yahoo! was not a household name at the time by any stretch of the imagination. In fact, most other investors Minervini spoke to recoiled from the thought of buying it, asking, “Ya-who?” Over the next two and a half years, the company would grow 7,800 percent, with its P/E ratio ballooning to more than 1,700 times its earnings. If you’d gotten in on even a sliver of that growth, you would have struck it big.
This yields an important lesson: the P/E ratio is helpful as a reflection of popular sentiment. It’s what the market values a company’s earnings in the current moment. So, it’s a good temperature check – high P/E means there are high expectations for a portfolio, while low P/E means that the expectations are, well, lower. Most traders tend to overvalue stocks with low P/E numbers, but that’s a mistake. Stick to focusing on the potential for growth, and use the P/E as a guide. Don’t give it too much power and let it stop you from doing your own research and making your own calls.
This brings us to our next point: despite the fact that we’re all trained to like a bargain, do not invest based on what’s on sale. The allure of the cheap is poisonous – if you buy something simply because it’s a “good deal,” you’ll find it difficult to sell when it sinks even lower. This is a spiral to hell for investors. Instead of looking for a red-ticket item, invest your time and money in the companies that show signs of superstar potential. As a general rule, remember that you usually get what you pay for. Let that be both a warning and encouragement to do the work and trust yourself.
You don’t need a doctorate in math to succeed in the stock market. SEPA was developed after decades of on-the-ground failure, success, and experimentation – so don’t be afraid to roll up your sleeves and make mistakes until you hit your stride and find what works for you.
Ultimately, no one is invested in your wealth and success as much as you – you are your greatest advocate here. As Henry Ford said, “There isn’t a person anywhere who isn’t capable of doing more than he thinks he can.”
The Specific Entry Point Analysis methodology maximizes the chances of reward and minimizes risk. The technique is based on three principles. First, there are right and wrong times to purchase stocks. Second, you can learn how to identify superstar stocks before they hit a meteoric rise in price. And third, it is possible to make a small fortune by wisely investing in such stocks.
Remember, success doesn’t come to those who follow the crowd; you have to do your own research to identify the next big thing. We’re often limited by the barricades we set up in our own imaginations and sense of possibility. But everything you need is already at your fingertips. Believe in yourself, and remember that records are designed to be broken!
“Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market” by Mark Minervini is a comprehensive guide that offers valuable insights and strategies for achieving exceptional results in stock trading. Drawing from his own experiences as a successful trader, Minervini provides practical techniques and principles that can help traders navigate the stock market with a focus on maximizing performance.
The book is divided into three parts:
- Part One: The Mindset of a Master Trader discusses the importance of psychology in trading, and it provides tips on how to develop a winning mindset.
- Part Two: The Methodology of a Master Trader covers Minervini’s trading strategies in detail, and it provides examples of how he has used these strategies to make money in the market.
- Part Three: The Portfolio of a Master Trader discusses how to build a successful stock portfolio, and it provides examples of Minervini’s own portfolio.
One of the book’s notable strengths is Minervini’s emphasis on the importance of thorough research and analysis. He emphasizes the need to identify high-probability trading opportunities by employing a systematic approach that combines technical analysis, fundamental analysis, and risk management. By explaining his specific methodologies and sharing real-life examples, Minervini provides readers with a solid foundation for making informed trading decisions.
The book offers a comprehensive framework for successful trading. Minervini outlines his SEPA® methodology, which stands for Specific Entry Point Analysis. This methodology helps traders identify optimal entry and exit points, manage risk effectively, and maximize profits. The author’s step-by-step explanations and detailed examples make it possible for traders to apply these strategies to their own trading activities.
Furthermore, Minervini’s writing style is clear, concise, and accessible. Despite discussing complex trading concepts, he presents the information in a manner that is easy to understand, even for readers who may be new to the world of stock trading. Minervini’s ability to break down his strategies and explain them in simple terms makes the book highly approachable for traders at different levels of experience.
The book also addresses the psychological and emotional aspects of trading, highlighting the importance of developing discipline, patience, and resilience. Minervini emphasizes the need for traders to manage their emotions, adhere to their trading plans, and avoid impulsive decisions. By providing guidance on maintaining the right mindset and cultivating self-discipline, the author helps traders develop the psychological resilience necessary to succeed in the dynamic stock market.
One potential limitation of the book is its focus on short-term trading and active stock market participation. While Minervini’s strategies are highly effective for active traders, readers looking for long-term investing approaches or strategies for passive investing may find limited applicability in this book.
In conclusion, “Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market” is an insightful and practical guide for traders looking to improve their stock trading performance. Mark Minervini’s expertise, systematic approach, and emphasis on thorough research and risk management make this book a valuable resource for traders seeking to achieve exceptional results. By applying the principles outlined in the book, traders can enhance their trading skills, make more informed decisions, and increase their chances of success in the stock market.
If you are serious about becoming a successful stock trader, I recommend reading Trade Like a Stock Market Wizard. It is a challenging book, but it is worth the effort.
Here are some additional thoughts on the book:
- I appreciate that Minervini is not afraid to share his secrets. He is very open about his trading methods and strategies, and he provides a lot of valuable insights into how he has achieved such success in the market.
- I also appreciate that Minervini is not afraid to talk about his failures. He shares some of his biggest mistakes, and he explains how he learned from them.
- Overall, I thought Trade Like a Stock Market Wizard was an excellent book. It is a must-read for anyone who is serious about becoming a successful stock trader.