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I'm the type who will gladly jump through annoying hoops to save a couple bucks (mail-in rebates, etc)...It's just my nature.

A few days ago I thought of an idea that could make me some money in stocks, involving borrowing money from my credit card and investing it.

Essentially I have a high credit limit and can borrow a fairly large amount at a very low interest rate, invest it for 9 months, and then pay back the principal, keeping the interest for myself.

This may sound risky to those reading this and I'll acknowledge that those thoughts are going through my head however, for now I'm really concerned with the following: During the period between now and next September, I will be making small payments on my credit card, but leaving a large amount unpaid. Will this adversely affect my credit history a year or two in the future - having had several thousands of dollars of debt for 9 straight months?

Can anyone point me to a resource that can confirm this?

Thanks!
-GP
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"Will this adversely affect my credit history a year or two in the future - having had several thousands of dollars of debt for 9 straight months?"

Assuming you make all the payments on time, after it is paid back there shouldn't be anything adverse on your credit report from the cards other than "paid as agreed".

Back in July I was offered 0% for one year. I took 'em up on it and put the money in CDs that will mature in June, so I'll have the money to pay it off before the loan is due. Initially I needed to buy a car, but now I have put back the money and it is sitting waiting. Meanwhile I make the monthly payments on the loan out of income.

Haven't pulled a credit report recently, but I haven't been worried. I already have the new car, and I don't plan to buy a new house anytime soon, so I'm not concerned.

But the chance to make some interest on free money and then pay it back after a year was just too good to pass up! Now, if either of us would miss a payment, of course the sky would fall in as far as this being profitable. Your risk is greater than mine--the CDs WILL mature!


Best wishes, Chris
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Stocks are not good short-term investments--too volatile. The only way I would do what you are suggesting is if I had a guaranteed-return investment, such as a MMF or CD, that paid a rate higher than the interest rate I would pay on the loan. It seems that the returns would probably be quite puny unless you could borrow at 0% APR...or could borrow a huge amount of money.
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<<
Assuming you make all the payments on time, after it is paid back there shouldn't be anything adverse on your credit report from the cards other than "paid as agreed".
>>

Crosen--

Great news--thanks! Do you happen to know if there's a web site somewhere (preferably a government/lender site) that could confirm this? I'll take your word for it, but the person lending me $ for a house probably won't. =)

When I initially had this idea, I was remembering a 0% offer I got... Turns out those are no longer offered, but 1.99% would still make me enough cash to make it worthwhile.

For others who may be interested, I'm planning on investing in an index fund, which historically will get me 10% interest, so I stand to profit 8.01% if those returns hold steady. In a worst-case scenario, I will pay back the debt from savings and keep the index fund as a long-term investment...Financially risky, yes, but I'm not "risking my credit" as I see it, since I have the money to pay off the debt should it come to that.
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pellyg,

Welcome to the board!

Just a question. If you have the money in savings already, why not invest this and not borrow more with the possibility of the fund NOT going up?

3MM
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For others who may be interested, I'm planning on investing in an index fund, which historically will get me 10% interest, so I stand to profit 8.01% if those returns hold steady.

I'm sorry, but I think this plan is insane.

Stocks only provide high returns over the extreme long run. In the short run, as many as one out of three years are losers. If you do this, you're rolling the dice with someone else's money, and in a big way.

Maybe, MAYBE I could understand where you were coming from if you had some strong reason to believe that the next nine months, in particular, would be great for some stock index. However, when you talk only about long-term average returns, that implies that you have no particular picture of the market or why it might go up or down over the next year.

Or, if you were investing in some PARTICULAR stock, with some particular reason to believe that it would do well, I could at least understand your thought process, if not be willing to take on the strategy as my own.

Note that if the market goes down, as it may well do, you will owe the entire amount of the loss, plus interest, out of pocket, and will not receive anything for it.

Even if you were sure that you knew the short-term direction of the market, if you're looking for leverage, you'd probably be much better off buying a couple of LEAPS options and risking only the comparatively small premium, while earning a large chunk of the gain. Doesn't that sound like a better combination of risk and reward?

I mean, come on, there are better ways to make money than to play Russian roulette with a credit card cash advance, low interest though it may be.

-- Mark
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Will this adversely affect my credit history a year or two in the future - having had several thousands of dollars of debt for 9 straight months?

No.

During the 9 months when you have several thousand dollars of debt, it will adversely affect your revolving credit used / revolving credit limit ratio, which could reduce your credit score (a.k.a., "FICO score"), especially if the ratio is more than 35%.

After the balance is paid off and the new balance is reported, the old balance isn't kept by the credit reporting agencies, so the revolving credit used / revolving credit limit ratio would jump back down to a low level, which would restore your good credit score (assuming, of course, that you have an excellent payment history).

So, as long as there is enough time for the credit card to report the paid-off balance before the credit score is used for other purposes, you should be OK.

Now, having said that, I should also mention that you are taking on some risks:

- You will have to sweet-talk the CC issuer to sending you a check and have it count as a balance transfer. If it is handled as a cash advance, it will probably have a fairly high interest rate.

- You will have to make sure payments are made on time, even if you don't receive a statement. A late payment is probably grounds for forfeiting the good interest rate, so you would want to have some method of regularly checking what you need to pay, maybe pre-marking the calendar and paying through the card issuer's web site.

- Even though people quote 10.6% annualized total returns for domestic large caps from 1926 to 1998, there is a lot of dust swept under that simple number: bull and bear markets, trading costs, taxes. A 9-month S&P500 index fund investment (or total stock market fund investment) has a very good chance of going down, so this would be viewed by many as more of a speculation than an investment. At least you think you can get the credit card paid off without touching the investment; many people have an unrealistic expectation of their capabilities and investment returns and get themselves into trouble if they need investment returns to pay back the debt. But would you be able to stick with this if your investment lost 30% in that 9 months? There is something about having one's own money on the line that makes one more nervous than an "investment questionnaire" or an "asset allocation calculator" could ever produce. (I speak as one who had watched my net worth decline by the equivalent of one month's take-home pay in one day.)

While the credit score part of this is pretty straight forward, this type of leverage is one approach I wouldn't personally have nerve to try. But then I don't play with rattlers, either. 8)
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Thanks for this info - it's very helpful.

For others who may be interested, I was able to get some info from howstuffworks.com: http://money.howstuffworks.com/credit-score2.htm

Thank you also for the words of caution. I'm certainly going to be thinking this over before I decide to go ahead or nix the idea altogether.

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Greetings, pellyg, read back over posts by joelcorley and by me - we have routinely borrowed money at 0% to bank, then pay back before any interest accrues. However, neither of us (nor mlk58 who is also presently doing this) chose risky vehicles. We are simply babysitting the funds and they need to be 100% safe and available for payback when due. Otherwise, it's gambling - would you be willing to risk that much of your savings on a bet? Would you take a balance transfer offer out to go to Las Vegas with?

If not, consider lowering your sights to making a surer, safer, fixed return which is still more money than you would otherwise have made without accepting such an offer. Not wanting to give offense, but don't be greedy and you'll still come out ahead. Good luck!

xraymd
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Hey Pellyg,

I have thought of doing what you are talking about. I to got a 0% interest credit card. IMO, if you want to make money buy investing it, you need to put that money in a savings account or CD. Stocks are a very bad place to play that game over 1 year.

Believe me, I see nothing wrong with borrowing money very cheaply and investing long term. I have car loans, student loans, and soon a mortgage, a lot of which I could pay off with cash today. I don't however, because that money is better put to use invested. However, it should be noted that the shortest of those loans is 5 years, the student loans are 10, and the mortgage would be 30. Over 30 years, i feel quite confident I can beat 6% interest. However, over the next year I have no idea what the market will do, and neither do you. 1 year is just too short of a horizon.

I know it has been said that stocks average 10% per year, but in reality stocks have almost never actually gotten 10% per year for any 5 or 10 year period. They have averaged 10% over the last 80 years, but that is in 20 year boom and bust cycles.

We just had a boom. Although I have no idea what the stock market will do this year, I would caution that assuming it will go up (and especially up 10%) maybe a little overly optimistic.

With a 30 year, low interest loan, I would say invest the money instead. With a 1 year loan, I wouldn't play that game.
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If you are determined to invest with borrowed money, why don't you open a margin account?

dt
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I don't like Margin accounts because they force you to sell your stocks if they drop by a certain percentage. I am investing with a 4-5-10 year horizon. If a stock drops by 30%, as long as the company fundamentals haven't changed, it doesn't bother me. I continue to hold. However, if I am on margin, they brokerage will sell everything I have without my consent to cover the margin. I just lost all of my money.

While I have no problem buying a house with 6% interest for 30 years so that I can invest the money instead, buying stocks from the brokerage on margin is a whole different animal.

There is a very famous post about margin here on TMF. I don't have the link, but some guy go caught up in margin and lost I believe $60,000. I'm sure someone can link you. Anytime I feel the urge to invest on margin, I pull that post up.
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Include me in the "you're nuts to consider borrowing money to invest in stocks for 9 months" crowd. I've got about $60,000 in 0% credit card money sitting in ING Direct, and I am pleased as can be to be earning 2.25% on it. But I would never even consider what you are proposing.
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If a stock drops by 30%, as long as the company fundamentals haven't changed, it doesn't bother me. I continue to hold. However, if I am on margin, they brokerage will sell everything I have without my consent to cover the margin.

That's only if you've purchased up to the absolute limit of your buying power. Even if you are using margin to buy stock, buying the most you possibly can is usually not a sensible choice.

-- Mark
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There is a very famous post about margin here on TMF. I don't have the link, but some guy go caught up in margin and lost I believe $60,000. I'm sure someone can link you. Anytime I feel the urge to invest on margin, I pull that post up.

I really don't see much of a difference between investing on margin and using the cash from a balance transfer to invest. While I understand there are differences, the point is that it is typically not wise to use borrowed funds for an uncertain investment. Personally, I would not do either because that is not my cup of tea. Nor would I borrow against home equity to invest in the stock market, which I think is different than investing while paying one's mortgage according to schedule.

dt

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While I understand there are differences, the point is that it is typically not wise to use borrowed funds for an uncertain investment.

Other than credit card debt, almost all borrowed funds go into uncertain investments: buying houses, capital expenditures for a business, etc.

The main difference between borrowing to invest in stock and borrowing for investments like those is that those provide substantial useful benefits beyond simply hunting for a capital gain, which makes them a lot less risky.

-- Mark
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mlk58 wrote:
Include me in the "you're nuts to consider borrowing money to invest in stocks for 9 months" crowd. I've got about $60,000 in 0% credit card money sitting in ING Direct, and I am pleased as can be to be earning 2.25% on it. But I would never even consider what you are proposing.

If you are going to borrow from your CC to get better interest, be sure that you are in a safe investment that cannot lose principle AND that you have the required discipline to pay it back at the end of the terms.

The voice of experience here -- I tried this trick about two years ago. I had $10,000 at 0% for 9 months sitting in my ING account back when the interest rate was 4.5%. The problem was that I was not disciplined enough to faithfully pay back the money at the end of the period.

In my case, getting married and moving seemed a better use of the 10k than just putting it back on the card. But in 3 months at 8% interest I had wiped out most of the gains.

Fortunately I was able to get a 3.9% for the life of the balance, so I am slowly paying that back without too much of a burden.

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Fear not. As I said, the 0% credit card money is sitting in my ING account, where it will stay until it's time to pay it back. I would never consider using it for anything else.

Duh.
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Essentially I have a high credit limit and can borrow a fairly large amount at a very low interest rate, invest it for 9 months, and then pay back the principal, keeping the interest for myself.


You might as well put the money on a heap, burn it and declare bankrupcy now - that will save you a lot of time.
People with your approach to investing always lose eventually.
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Seriously, do you realize that the stock market is extremely overvalued? Like in 1929 and 1987?
The S&P 500 could fall 50% next year and that would easily be within historic norms.
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Seriously, do you realize that the stock market is extremely overvalued? Like in 1929 and 1987?
The S&P 500 could fall 50% next year and that would easily be within historic norms.


Now I'm not advocating the OPs idea of borrowing from a credit card and investing it in the market; however, I'm not so sure either that the market is as overvalued as you say it is. Thanks to IRAs, 401(k)s & 403(b)s, there is much more market exposure by the general population than there used to be. All this additional money going into the market has created P/E inflation. You may be right, the market might be overvalued currently. But I don't see a 50% drop from the current levels either.


TW
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Now I'm not advocating the OPs idea of borrowing from a credit card and investing it in the market; however, I'm not so sure either that the market is as overvalued as you say it is. Thanks to IRAs, 401(k)s & 403(b)s, there is much more market exposure by the general population than there used to be. All this additional money going into the market has created P/E inflation.

Yes, it has. And it's not exactly the first time this has happened either. The results, of course, have always been the same. The rationalizations for why "this time is different" have also always been similar.
The stock market ALWAYS return to the mean valuation. It has to.

http://boards.fool.co.uk/Message.asp?mid=8656020&sort=username
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You might as well put the money on a heap, burn it and declare bankrupcy now - that will save you a lot of time.
People with your approach to investing always lose eventually.


That is absolutely hilarious. I am sorry but people who rail against risk takers *just because* are closed-minded.

Last year I took out a home equity line of credit for $75K @5.5%. I invested it in stocks (oh my God!!!) and gained almost a 100% return.

You can read *all* about it here:
http://boards.fool.com/Message.asp?mid=21780451&sort=whole#21792173

What I have noticed is that "long-term" investors just hate it when someone else makes quick money. My wife and I put ~$38K into our 401ks/IRAs/ESPPs in 2004. If I never invested outside of those accounts I would be ok when retirement rolled around.

Just because someone takes risks does not mean they are an idiot or that they will eventually "lose". I have a fair share of my portfolio in index funds and other "long-term" investments - if I make money on those is that "ok"? I just want to make sure that my way of making money is ok with AdvocatusDiaboli.

-BT

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That is absolutely hilarious. I am sorry but people who rail against risk takers *just because* are closed-minded.


I'm not a long-term investor by any stretch of the imagination. There is almost no asset class today that merits long-term investing.
I am not against risk taking. In fact, I often use leverage of up to 1:10 or more in my trades.
You do have to know what you're doing however and you do have to employ money management and stringent risk control.

http://boards.fool.com/Message.asp?mid=21780451&sort=whole#21792173

This is accessible only to Hidden Gems subscribers.
I therefore cannot tell whether or not you employ any kind of risk control to limit the extent of your possible losses.
The original poster no doubt didn't have any such strategy. What would you have done if your stocks had turned south after you bought them?
Did you have any kind of plan to cut your losses? What kind of stocks did you buy anyway?
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BT,

You can read *all* about it here

Would you care to repost here or even submit as an email reply to me if you don't want to clutter this board with it since it is OT. But since the board you linked to is part of the HG boards, we cannot see it unless we subscribe to HG.

I would be interested in reading more of your experience.

dt
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That is absolutely hilarious. I am sorry but people who rail against risk takers *just because* are closed-minded.

I didn't rail - I just quietly laughed. I'm 50 and have been investing for a very long time. I'm glad you had a good year. However, it was definitely risky and I wonder if you could have handled losing, say, 20% without blinking an eye. For me, that's what it takes to handle risk. I'm also having deja vu all over again from, say, 2001.

There were quite a few TMF posters who swore they understood their level of risk aversion who severely underestimated it in a market downturn.

rad
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For others who may be interested, I'm planning on investing in an index fund, which historically will get me 10% interest, so I stand to profit 8.01% if those returns hold steady.

At current valuations, stocks are priced to deliver far less than the historic average return. The 10% return is only achievable from median valuations. Currently valuations are twice as high as the historic median. It is quite likely that the return over the next 10 years will be 0% or negative. It is EXTREMELY unlikely that it will be higher than 5%.
Read this for details:

http://www.hussmanfunds.com/wmc/wmc041227.htm

Now if you really feel you must do this you should buy the fund of this guy. The ticker is HSGFX and the chance that buying it on margin will yield a substantial return is high, which cannot be said of an investment in the stock market in general
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This is accessible only to Hidden Gems subscribers.
I therefore cannot tell whether or not you employ any kind of risk control to limit the extent of your possible losses.
The original poster no doubt didn't have any such strategy. What would you have done if your stocks had turned south after you bought them?
Did you have any kind of plan to cut your losses? What kind of stocks did you buy anyway?


Sorry, I forgot that I wasn't in an HG board when I replied. It is too bad that you can't see the entire thread because it got pretty heated. I'll recap what I did without mentioning the specific stocks that were involved.

I wrote some software that automatically took advantage of the price "pop" that occurs every time Tom Gardner released a new monthly issue of his Hidden Gems newsletter. In each issue he (and a guest) recommends two stocks.

As soon as the newsletter gets out the purchase volume of those stocks goes through the roof. My software allowed me to get into those stocks as early as possible. One particular stock moved 60% in 3 days!!

So my strategy was this:

1) Use my software to automatically buy $37,500 worth of each recommendation each month.
2) I set stop-loss orders at 7% for each purchase.
3) If I didn't get stopped out I held each stock a maximum of 30 days. If I liked the gain I would sell before the 30 day limit. If I didn't see a super gain I sold the stock on day 30 for whatever gain/loss existed on that day.

I started the year with $75K (which came from my home equity line of credit) and finished the year with $149K.

Not surprisingly I am not the only person doing this - it isn't rocket science if you can write the software (I am a software engineer at Microsoft).

It should be pointed out that Tom Gardner tends to recommend companies with very solid fundies, so I could have easily converted any purchase into a longer-term investment.

A nice aspect of what I did is that the interest I paid on the money, 5.5%, is tax-deductible, which for my situation reduces the rate to approximately 3.6%.

I understand that you are looking out for the less experienced folk out there but my point is that you don't get "style point" in the market - the only thing that counts is your return. And if I can kick your a$$ using technology and an anomaly you can be sure I will take your money as fast as you can give it to me. And *that* is a lesson people need to take to heart.

-BT
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And if I can kick your a$$ using technology and an anomaly you can be sure I will take your money as fast as you can give it to me. And *that* is a lesson people need to take to heart.

-BT



god bless america.

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What you describe sounds like a fantastic strategy.
Won't work forever, of course, because the more people jump onto this the larger the initial gap up will be, the smaller the runup after the gap up and the larger the downside potential.
Eventually this will stop to work and you have to be careful not to blow all the gains out of the window again when it does.
Until then, rake in as much cash as possible.


It should be pointed out that Tom Gardner tends to recommend companies with very solid fundies, so I could have easily converted any purchase into a longer-term investment.


You should be careful not to turn any losing trade into a long-term investment no matter what the fundamentals appear to be.
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Won't work forever, of course, because the more people jump onto this the larger the initial gap up will be, the smaller the runup after the gap up and the larger the downside potential.
Eventually this will stop to work and you have to be careful not to blow all the gains out of the window again when it does.


1) There will only ever be a certain # of people who don't mind shelling out $200/yr for Tom's recommendations, so I do not anticipate that this # will "top out" any time soon (it hasn't in the past two years anyway).

2) I wondered what would happen if I didn't catch the pop correctly so I went back and examined all of the data for 2004. If I totally skipped the initial newsletter release day (ie waited until the next day) my gains would have gone from ~$74K down to ~$53K. Thus I am not afraid of missing the pop in the future... My gains for this month's recommendations are sitting right around $7K (if I sold at today's close).

3) People are supposed to be long-termers around here - a "losing trade" shouldn't even cause you to bat an eyelash... You are either in for the long-term or you are a trader - you can't have it both ways...

-BT
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2) I wondered what would happen if I didn't catch the pop correctly so I went back and examined all of the data for 2004. If I totally skipped the initial newsletter release day (ie waited until the next day) my gains would have gone from ~$74K down to ~$53K. Thus I am not afraid of missing the pop in the future... My gains for this month's recommendations are sitting right around $7K (if I sold at today's close).

I am curious - how strong was the performance during market declines like July to mid August?
Did you have any losses yet at all?

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Here are the results, month by month, assuming that you made your purchases the day 
AFTER the newsletter came out (again, purchasing $37,500 of each stock every month).  
My strategy was to buy them ON the first day but most people don't have 
the software necessary to make that work.

Of course I removed the names of the actual stocks so the the 
HG people don't kill me...

Investment	37500											

Stock		shares	Max Loss	Days	        Days	        Days	        Days	        Gain/Loss	
			Price		5	        10	        20	        30				
	1/22/2004			1/27/2004	2/1/2004	2/11/2004	2/21/2004				
XXXX	$8.10	4629	$7.53		$13.25	        $12.23	        $12.93	        $11.83	        $17,266 	
					63.58%	        50.99%	        59.63%	        46.05%				
XXXX    $25.64	1462	$23.85		$26.50	        $26.10	        $26.10	        $25.17	        ($687)	
					3.35%	        1.79%	        1.79%	        -1.83%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	2/26/2004			3/2/2004	3/7/2004	3/17/2004	3/27/2004				
XXXX	$19.75	1898	$18.37		$20.13	        $22.89  	$20.26  	$26.66		$13,115 	
					1.92%	        15.90%	        2.58%	        34.99%				
XXXX	$21.07	1779	$19.60		$20.27	        $20.09	        $20.15	        $20.96		($196)	
					-3.80%	        -4.65%	        -4.37%	        -0.52%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	3/25/2004			3/30/2004	4/4/2004	4/14/2004	4/24/2004				
XXXX	$16.98	2208	$15.79		$16.79	        $16.99  	$22.69  	$22.79		$17,863 	
					-1.12%  	0.06%	        33.63%	        34.22%				
XXXX	$12.43	3016	$11.56		$17.96  	$17.66  	$16.30  	$16.51		$12,305 	
					44.49%	        42.08%	        31.13%	        32.82%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	4/22/2004			4/27/2004	5/2/2004	5/12/2004	5/22/2004				
XXXX	$28.60	1311	$26.60		$27.09	        $24.95  	$24.88  	$25.07		($4,785)	
					-5.28%	        -12.76%	        -13.01%	        -12.34%				
XXXX	$36.55	1025	$33.99		$34.66  	$35.58  	$28.47  	$31.26		($5,422)	
					-5.17%	        -2.65%	        -22.11% 	-14.47%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	5/27/2004			6/1/2004	6/6/2004	6/16/2004	6/26/2004				
XXXX	$27.32	1372	$25.41		$27.28	        $26.44  	$25.60  	$27.02		($412)	
					-0.15%	        -3.22%	        -6.30%  	-1.10%				
XXXX	$27.25	1376	$25.34		$27.26	        $26.63	        $26.59	        $27.62		$509 	
					0.04%	        -2.28%	        -2.42%	        1.36%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	6/24/2004			6/29/2004	7/4/2004	7/14/2004	7/24/2004				
XXXX	$28.12	1333	$26.15		$28.45	        $28.48  	$30.80  	$29.36		$1,653 	
					1.17%	        1.28%   	9.53%   	4.41%				
XXXX	$22.00	1704	$20.46		$22.10	        $20.05  	$20.41  	$19.72		($2,709)	
					0.45%	        -8.86%  	-7.23%	        -10.36%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	7/22/2004			7/27/2004	8/1/2004	8/11/2004	8/21/2004				
XXXX2	$31.70	1182	$29.48		$28.90	        $29.63  	$28.58  	$28.55		($2,447)	
					-8.83%	        -6.53%  	-9.84%	        -9.94%				
XXXX2	$15.17	2471	$14.11		$14.95	        $15.03  	$13.79  	$15.67		($3,410)	
					-1.45%	        -0.92%  	-9.10%	        3.30%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	8/26/2004			8/31/2004	9/5/2004	9/15/2004	9/25/2004				
XXXX	$41.47	904	$38.57		$40.50	        $42.75  	$42.29  	$44.40		$2,649 	
					-2.34%	        3.09%   	1.98%   	7.07%				
XXXX	$30.29	1238	$28.17		$29.95	        $33.39  	$33.20  	$31.62		$1,647 	
					-1.12%	        10.23%	        9.61%	        4.39%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	9/23/2004			9/28/2004	10/3/2004	10/13/2004	10/23/2004				
XXXX    $17.32	2165	$16.11		$17.50	        $18.42  	$18.00  	$17.77		$974 	
					1.04%	        6.35%	        3.93%	        2.60%				
XXXX	$28.39	1320	$26.40		$27.58	        $31.96  	$30.90  	$30.19		$2,376 	
					-2.85%	        12.57%	        8.84%	        6.34%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	10/28/2004			11/2/2004	11/7/2004	11/17/2004	11/27/2004				
XXXX2	$44.30	846	$41.20		$45.32	        $45.36	        $46.02	        $46.60	        $1,946 	
					2.30%	        2.39%	        3.88%	        5.19%				
XXXX	$16.79	2233	$15.61		$16.82	        $16.70	        $16.65	        $16.15          ($1,429)	
					0.18%	        -0.54%	        -0.83%	        -3.81%				

Stock			Max Loss	Days	        Days    	Days    	Days	        Gain/Loss
			Price		5	        10      	20      	30				
	11/24/2004			11/29/2004	12/4/2004	12/14/2004	12/24/2004				
XXXX    $30.38	1234	$28.25		$29.15	        $30.80  	$30.10  	$35.99	        $6,923 	
					-4.05%	        1.38%	        -0.92%	        18.47%				
XXXX	$35.82	1046	$33.31		$35.80	        $36.36	        $36.03	        $37.21	 	$1,454 	
					-0.06%	        1.51%	        0.59%	        3.88%
                                        				
									        TOTAL:	$59,182 	

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Of course I removed the names of the actual stocks so the the
HG people don't kill me...


You're actually making a better case for selling Hidden Gems to me than the Fool's advertising does.

I don't think I'd do this with borrowed money unless I was confident I could pay back the loan out of non-investment funds, though.

Patzer
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My strategy was to buy them ON the first day but most people don't have
the software necessary to make that work.


Can you explain more about this? I know you mentioned that you wrote some software but I am not sure what purpose it served. If the newsletter comes out on a specific day, why can't a subscriber purchase those same stocks without any software? What exactly did your software do?

Thank you for sharing the method that you used. Clearly you had a plan in place and it worked well for you.

dt
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You're actually making a better case for selling Hidden Gems to me than the Fool's advertising does.

Likewise. It is something that I have been thinking about myself to play around with some "fun money" that I can afford to lose. I am just hesitant to drop the money for HG as I have been doing it on my own to this point.

dt
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Can you explain more about this? I know you mentioned that you wrote some software but I am not sure what purpose it served. If the newsletter comes out on a specific day, why can't a subscriber purchase those same stocks without any software? What exactly did your software do?

A subscriber *can* purchase the recommendations on the day the newsletter comes out, but think of Efficient Market Theory for a moment: technically the market has already discounted Tom's recommendation by the time the newsletter arrives. Of course this isn't 100% correct, but you would be surprised how fast the price rises.

When I first starting looking into this I was pretty disheartened. On the day that the newsletter was due I would sit there waiting for the email. As soon as the email arrived I ripped it open, logged into my brokerage account, and hit the buy button. By the time my order actually went through the price had already jumped a HUGE percentage and I ended up getting in right around the high of the day.

My software fixed the problem. My software constantly keeps my brokerage account open, and waits for the newsletter (24-7). As soon as the newsletter arrives it parses out the two recommendations and immediately makes the purchases. The total time from start to finish is about 8-12 seconds (of course my market order doesn't get filled that fast, but the last 8 months I've gotten in before the price hardly had a chance to move).

As I've stated before, I do not recommend anything I've done. I just wanted to point out to people (especially those who look down upon "short-term" traders) that there *are* other ways to make money in the market. I am not an idiot, nor do I "burn money" by trading the way that I do.

As I've said before, people hate to see someone like me make money when they jump for joy at their S&P500-like gains year over year.

And think about this: HG has a small readership when compared to some of the more prominent newsletters/etc. I have been using the same strategy using two other newsletters with exactly the same results.

-BT
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BT, care to share any info on this program you wrote (like the source code..?) I'm a software engineer as well. Without turning this thread techy, do you have a broker which allows you to make transactions via a command-line? Not a bad idea and the code would be easy enough to write.


<<
I therefore cannot tell whether or not you employ any kind of risk control to limit the extent of your possible losses.
The original poster no doubt didn't have any such strategy. What would you have done if your stocks had turned south after you bought them?
Did you have any kind of plan to cut your losses? What kind of stocks did you buy anyway?
>>

As for the "the original poster no doubt didn't have any such strategy", that's why I started this thread. :-)
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Thanks. That is very interesting.
Why do you think you need the software? I suppose the newsletter comes per email and you can enter the trade as soon as you read it?
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I would like to point out that the majority of the gains were made early on. This may have something to do with the deterioation in the market climate since then OR other people have jumped upon this market ineffíciency and have increasingly arbitraged it away.
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You wrote:

Basic laws of economics which are as certain as gravity will normalize share prices over the long term, and none of the arguments I mentioned above have the least impact on that.

PE inflation however is also a basic function of supply and demand. ECON 101: Population increases cause a rightword shift in a demand curve, thus driving prices higher. The amount of population with exposure to the market has grown dramatically. And thus share prices have grown. Can that explain the valuations the market is currently at? Probably not. But it does explain why the historical median may not be the baseline.


TW
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PE inflation however is also a basic function of supply and demand. ECON 101: Population increases cause a rightword shift in a demand curve, thus driving prices higher. The amount of population with exposure to the market has grown dramatically. And thus share prices have grown. Can that explain the valuations the market is currently at? Probably not. But it does explain why the historical median may not be the baseline.

Even if you think that some shift in the baseline takes place and that this is indeed a "new era" it is very unlikely that the new baseline is suddenly twice the old.(current valuations are 100% above baseline)
It would appear more likely that the new baseline would be maybe 20% higher than the old one or something along that line.
The problem with your reasoning is that this demand will of course over time be met with an ever increasing supply. Stocks are in effect paper and in the long run the market can print as much paper as you want it to.
As long as the production cost for paper is significantly below its market price there will be an ever bigger deluge hitting the market.
55 billion dollars in Google shares are just a recent example, issuance of new shares are at an all time high as companies grab the opportunity of selling their expensive paper for hard cash.
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Population increases cause a rightword shift in a demand curve, thus driving prices higher. The amount of population with exposure to the market has grown dramatically. And thus share prices have grown. Can that explain the valuations the market is currently at? Probably not. But it does explain why the historical median may not be the baseline.

This analysis doesn't explain a change in valuation unless you also take into account the increase or decrease in overall shares outstanding in the market. My bet is that IPOs and secondary offerings have grown along with the share price and that excess supply is more than enough to offset any increase in demand.

Also, the increase in IRAs and 401(k) plans is cancelled out to some extent by a reduction of assets in company-run defined-benefit pension plans, many of which had substantial equity investments.

-- Mark
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excess supply is more than enough to offset any increase in demand

Read "long-term increase in demand caused by a structural shift in the marketplace."

-- Mark
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BT,

And think about this: HG has a small readership when compared to some of the more prominent newsletters/etc. I have been using the same strategy using two other newsletters with exactly the same results.

Thank you for the explanation of what your software accomplishes. That makes sense that that would work relatively well because as is the case with many newsletters, there is a big run as the readers rush to make the purchase. As you have witnessed, the earlier you can get in, the better chance at profits. That is my one issue with many of the newsletters is that they essentially result in a pump-n-dump scenario.

Right now I am reading _Rule the Freakin' Markets_ by Michael Parness and he had a quote, "Last one in the pool swims with the turd!" With many newsletters, it is the people that get the newsletter and then blindly go buy the stock after it has already experienced that momentum pop from the newsletter release that get left with the loss when people begin taking their profits.

Thanks again for sharing your process and strategy. Since I am not a subscriber to any newsletter, I doubt I would pursue a similar strategy but it has been interesting reading your approach and results.

dt
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BitTwiddler,

I've read all your posts. Thank you for sharing; you didn't have to.

Excellent work on developing the program. I've had similar thoughts but could never hope of actually implementing them as you have (as I am the farthest thing from a software engineer -- just recently created my own .mac webpage and I feel like a stud). So keep on doing what you're doing. I'm with you in principle, but way behind in practice.
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