Are you ready to follow the journey of a school dropout who turned into a multimillionaire trader by 34? Intrigued by how the world’s greatest trader, Jesse Livermore, inspired his trading strategies? Curious about how he caught big movers like Microsoft and Amgen in the early '90s and developed a strategy to identify superperformance stocks? Discover how he used powerful computers to conduct quantitative analysis, and track stocks in real time.

Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market

Champions are not made in gyms but from within, driven by desire, dreams, and vision, as Muhammad Ali famously noted. This principle applies not just to sports but also to the stock market. Successful stock traders are distinguished by specific traits and skills. The good news is that these traits can be developed with the right mindset and strategy.

In this book, Mark Minervini shares his journey of becoming a successful trader over 30 years. Starting with just a few thousand dollars, Mark became a multimillionaire by 34. Trading is more than a career for him; it’s a passion. He didn’t start out successful—Mark made many mistakes but learned from them to achieve what he calls "superperformance."

Superperformance in stocks can be life-changing. It's about achieving extraordinary returns, far beyond average market performance. According to Mark, anyone can attain this level of success with the right strategy and discipline, regardless of their background.

Mark's story began with a thirst for knowledge and an unshakeable commitment. Dropping out of school at 15, he self-educated by devouring investment books and studying market behavior. Despite discouragement from others, Mark persevered, driven by the desire for financial freedom. Trading offered him the opportunity to achieve this freedom, regardless of his lack of formal education.

Starting with small capital, Mark learned to make consistent profits, honing his strategies and adopting a risk-first approach. This mindset allowed him to achieve remarkable returns and navigate through market downturns.

Persistence is crucial. For six years, Mark didn’t make money from stocks, but he didn’t give up. The key is to commit fully and persistently, learning from both successes and failures. Preparation meets opportunity in the stock market, and when it does, you must be ready to act.

To succeed, Mark advises treating trading as a business, with a focus on buying and selling shares for profit. Avoid the pitfalls of conventional wisdom and the limitations of institutional investing. Individual traders have the advantage of agility and can seize opportunities that large funds cannot.

Defining your trading style—whether as a trader or investor—is essential. This clarity helps avoid indecisiveness and regret, allowing you to stick to a plan. Success requires sacrifices and a focused approach, as well as the willingness to endure setbacks.

Remember, your greatest challenge is not the market but yourself. Control your emotions and stay disciplined. Records are meant to be broken, and with the right mindset and strategies, you can achieve superperformance in stocks.

How Can You Achieve Stock Market Superperformance?

When Mark first started trading stocks in the early 1980s, his strategy was impulsive and unsuccessful. He bought low-priced, beaten-down stocks, assuming they were bargains. 

However, Mark quickly learned that many were low-priced for good reasons and continued to decline. He observed that stocks hitting 52-week highs often soared even higher, prompting him to question what set these high-flyers apart and if there was a way to identify big winners early.

From 1983 to 1988, Mark embarked on a comprehensive research journey, reading extensively and even photocopying books at university libraries. His collection of stapled, photocopied books in his mother's dining room might have looked comical, but it laid the groundwork for his eventual success.

A turning point came when Mark read Richard Love's "Superperformance Stocks," which analyzed stocks that increased by at least 300% in two years. This inspired him to study stocks with similar traits. He also came across Marc R. Reinganum's article "The Anatomy of a Stock Market Winner," which focused on stocks that doubled in a year. Both studies highlighted the characteristics of top-performing stocks, reinforcing his belief in reverse factor modeling—studying the best to find the best.

Mark continued to learn from various market masters, including Robert A. Levy, Edward S. Jensen, Richard Donchian, and William L. Jiler. Their insights on relative strength, blueprinting, trend following, and chart patterns shaped his approach. Jesse Livermore, the greatest trader ever, further inspired him with his pragmatic work "How to Trade in Stocks."

By the late 1980s, with the advent of powerful computers, Mark could conduct quantitative analysis and screen thousands of potential companies for superperformance characteristics. This technology allowed him to track stocks in real time, confirming historical findings in a modern context.

In the early 1990s, Mark caught some big movers like US Surgical, Amgen, and Microsoft as they transitioned from the 1990 bear market into a new bull market. These relatively unknown companies displayed strong fundamental and technical characteristics, but many investors missed them due to their high price/earnings (P/E) ratios.

Using decades of trading experience and historical data, Mark developed the Leadership Profile, identifying the qualities of superperformance stocks. His Specific Entry Point Analysis (SEPA) strategy combines corporate fundamentals with technical behavior to pinpoint precise entry and exit points for high-probability trades. SEPA focuses on five key elements: trend, fundamentals, catalyst, entry points, and exit points.

To find superperformance stocks, Mark screens for stocks that meet his Trend Template, then filters them based on earnings, sales, relative strength, and price volatility. The remaining candidates are scrutinized for their fit with the Leadership Profile and ranked for further evaluation.

Superperformance stocks often have common traits: they are usually young, small-cap companies with proven business models and significant growth potential. They emerge during market recoveries and have identifiable catalysts driving their performance.

Despite the allure of low P/E ratios, they can be deceptive. Stocks with exceptionally low P/Es may have fundamental problems or be headed for bankruptcy. Conversely, high P/E stocks like Yahoo! and TASER have delivered explosive returns, proving that high-performing stocks often come with high valuations.

Ultimately, the P/E ratio is less important than a company's potential for earnings growth. Mark advises to focus on companies with rapid revenue growth, exciting catalysts, and strong fundamentals. By honing your approach and committing to a disciplined strategy like SEPA, you can increase your chances of finding the next superperformance stocks and achieving substantial returns.

From Early Struggles to Stock Market Mastery

In stock trading, success lies in the ability to blend science and art. Dick Clark famously said, "I don’t set trends. I just find out what they are and exploit them." This principle is crucial for stock traders who must navigate the complex and often ambiguous market dynamics.

Key to this approach is the adherence to nonnegotiable criteria rooted in technical action. For instance, never buy a stock below its declining 200-day moving average, regardless of its fundamentals. This ensures alignment with the prevailing trend and avoids stocks in long-term downtrends, which lowers the odds of owning a big winner.

Understanding the market is akin to Newton’s first law: an object in motion stays in motion. This analogy applies to trends in the stock market. The trend is indeed your friend, and learning to identify and ride these trends is essential. At a 1990 investment conference, Stan Weinstein introduced the concept of the four stages of a stock's life cycle: 

1. Stage 1—Consolidation (Neglect Phase): The stock moves sideways with lackluster performance and low volume. Avoid buying during this stage.

2. Stage 2—Advancing Phase (Accumulation): The stock is in high demand, with higher highs and lows, supported by strong volume. This is the optimal time to buy.

3. Stage 3—Distribution (Topping Phase): Increased volatility and erratic price movement signal smart money is taking profits. It's time to consider selling.

4. Stage 4—Declining Phase (Capitulation): The stock is in a downtrend, characterized by lower highs and lows, and increasing volume on down days. Avoid buying and consider selling.

Superperformance stocks typically make their significant gains during Stage 2, the advancing phase. Identifying this stage involves analyzing price action and volume, ensuring the stock is in a confirmed uptrend. Overlaying this with fundamental analysis helps pinpoint the cause of these advances, often tied to earnings momentum.

Using the Trend Template criteria ensures a stock is in a Stage 2 uptrend before buying. This includes the stock price being above its 150-day and 200-day moving averages, with higher volume on up days.

Timing within Stage 2 is crucial. Stocks often move in waves, with periods of consolidation (basing) followed by advances. Recognizing these bases can guide optimal entry points and help avoid late-stage buys that carry higher risk.

Trusting price action over fundamental analysis is vital. Even if fundamentals look good, the stock price must confirm this. Institutional buying patterns are essential indicators. When a stock shows signs of topping or declining, respect the trend and consider exiting, regardless of positive earnings reports or analyst opinions.

For example, financial stocks in 2008 showed clear Stage 4 declines well before the crisis peaked. Similarly, stocks like Crocs and Vicor experienced significant declines before earnings deteriorated, highlighting the importance of heeding price signals.

In short, aligning with the dominant trend ensures the wind is at your back, propelling your stock higher. Focus on stocks in solid uptrends and avoid those in downtrends to increase the likelihood of achieving superperformance.

Can You Master Stock Trading By Trading With The Trend?

When evaluating a stock for purchase, the first step is to categorize the company to understand its earnings growth potential within its industry. Over years of analysis, Mark has identified six categories that companies generally fall into: 
- Market leaders, 
- Top competitors, 
- Institutional favorites, 
- Turnaround situations, 
- Cyclical stocks, and 
- Past leaders and laggards.

Market leaders are Mark's favorite, as they often show the fastest earnings growth. These companies are usually the top players in their industry and are easy to spot. They often appear expensive, but their rapid growth can lead to significant price appreciation. For example, Cisco Systems' stock price increased 13-fold from 1989 to 1993, while Walmart's stock appreciated 1,000 percent in the early 1980s.

Category killers like eBay and Apple dominate their markets, making it nearly impossible for competitors to catch up. Similarly, companies with the cookie cutter concept like McDonald's and Starbucks replicate a successful formula across multiple locations, leading to sustained earnings growth.

Top competitors, though not market leaders, can still offer great investment opportunities. For instance, MCI Communications challenged AT&T in the 1980s, leading to a 500 percent increase in MCI's stock price. Similarly, Netflix's emergence led to Blockbuster's decline, with Netflix's stock increasing by more than 3,400 percent since its IPO.

Institutional favorites like Coca-Cola and General Electric have a proven track record but generally offer slower growth. Turnaround situations, such as Apple in the early 2000s, can provide big profits if the company demonstrates strong recent performance and has a viable plan for growth.

Cyclical stocks, sensitive to economic conditions, have an inverse P/E cycle. They often have high P/E ratios when poised to rally and low P/E ratios near the end of their cycle. It's crucial to understand the cyclical nature and inventory dynamics of these stocks to time investments correctly.

Finally, laggards are stocks in the same group as market leaders but with inferior performance. Avoiding laggards and focusing on leaders can lead to better investment outcomes.

Understanding these categories and industry dynamics can guide you to make informed investment decisions, identifying the stocks with the highest potential for growth.

Investment Insights: How Apple, Netflix, and Cisco Became Stock Market Champions

In 2008, big banks like Citigroup, and investment firms such as Lehman Brothers and Bear Stearns, faced a financial meltdown due to overleveraging and deteriorating balance sheets. The recession saw stocks like AIG and General Motors plummet, leading to their removal from the Dow Jones Industrial Index. Despite the temptation to buy these "bargains," it's crucial to remember that deteriorating fundamentals often signal a longer decline.

The key to stock market success is identifying superperformance stocks—those with strong growth potential, often not found in the bargain bin. These stocks thrive on real growth in earnings and sales, surpassing Wall Street's expectations and attracting institutional investors.

Earnings are the lifeblood of the stock market, akin to "location, location, location" in real estate. Investors should ask three questions about earnings: 
1. How much? 
2. How long? 
3. How certain? 
Profitability, sustainability, and visibility drive stock prices. Big institutional investors react to earnings surprises—when companies report better-than-expected results, leading to upward revisions of earnings estimates and inviting more buying.

Stocks move on anticipation and surprise. Anticipation drives prices up in expectation of good news, while surprises—unexpected positive or negative events—cause significant reactions. Positive earnings surprises often lead to sustained stock price increases.

The "cockroach effect" suggests that one positive surprise likely indicates more to come. Conversely, negative surprises can lead to further disappointments. Investors should focus on companies with consistent positive surprises and avoid those with negative ones.

Not all surprises are equal. Be wary of companies that just slightly beat analysts' estimates, as these minor surprises are often guided by management to ensure they look favorable. Look for significant upside surprises that indicate genuine growth.

Earnings revisions by analysts—especially upward revisions—are a positive signal. Companies with strong earnings growth attract more analyst coverage and institutional interest, leading to higher stock prices. This cycle of strong earnings, upward revisions, and increased attention can lead to substantial stock price performance.

Earnings acceleration—where growth in earnings increases quarter-over-quarter—is a strong indicator of future stock performance. More than 90% of top-performing stocks showed earnings acceleration before their price surged. This is supported by revenue growth, ensuring that earnings aren't just due to accounting tricks.

Annual earnings growth is also crucial. Consistent strong quarterly results translate into strong annual performance, driving long-term stock price increases. For example, Apollo Group's stock rose significantly from 2000 to 2004, fueled by nearly 40% annual EPS growth.

Look for a breakout year where current earnings surpass previous years' trends, indicating a significant positive shift. Turnaround situations—where a struggling company suddenly reports strong earnings—can also signal a good investment opportunity, provided the growth is substantial and sustained.

However, earnings deceleration is a red flag. Companies that show slowing growth rates often see their stock prices decline, as seen with Dell Computer and Home Depot. To succeed, focus on stocks with strong, accelerating earnings and avoid those showing signs of slowing growth.

Did The 2008 Financial Crisis Teach Us the Real Secret to Stock Market Success?

Earnings quality is a crucial measure when evaluating a company's financial health and potential for growth. High-quality earnings come from core operations and are sustainable over time. For instance, if earnings are boosted by slashing costs or selling assets, they may not be reliable indicators of long-term performance.

XYZ Corp. once reported a 25% increase in earnings per share, which seemed impressive. However, upon closer examination, it was found that $0.84 per share came from a nonrecurring asset sale, leading to a real earnings drop of 7%. This illustrates the importance of distinguishing between core earnings and one-time gains.

Companies can manipulate earnings through various tactics. For example, they might issue warnings to lower analysts' expectations, only to later "beat" these lowered estimates, creating an illusion of performance improvement. Similarly, habitual use of one-time charges can mask true earnings quality.

Inventory and receivables analysis can also provide insights. An unexplained buildup of finished goods inventory relative to sales might signal trouble, as it could indicate overproduction and future markdowns. Conversely, a strategic increase in raw materials might indicate anticipated demand.

Dell's innovative "build-to-order" model exemplified how effective inventory management could lead to higher margins and market dominance. By reducing inventory risks, Dell managed to outperform competitors during downturns.

Finally, understanding company-issued guidance is essential. Positive guidance can significantly boost stock prices, while negative guidance can cause sharp declines. For example, Dick's Sporting Goods saw a substantial stock price increase after issuing positive forward guidance.

In short, assessing earnings quality involves looking beyond headline figures to understand the underlying sources of earnings, evaluating inventory and receivables trends, recognizing management's potential to manipulate expectations, and considering the company's guidance about future performance. This comprehensive approach helps investors make informed decisions and avoid pitfalls.

Unmasking Earnings: Lessons from XYZ Corp., Dell, and Dick's Sporting Goods

Bull markets thrive in their early stages, with many top-performing stocks already on the rise before major market indexes catch up. To capitalize on this, savvy investors should follow the leaders—those stocks that resist declines and surge ahead of the market. Legendary investors like Jesse Livermore and the author himself made significant profits by focusing on these leading stocks.

For example, in 2010, Pharmacyclics Inc. (PCYC) was recommended while the Nasdaq Composite was hitting a low. PCYC then soared 1,500% in 33 months, outpacing the Nasdaq's modest 18% rally. Similarly, in 2001, Amazon bottomed ahead of the market, offering a 240% gain in 12 months.

The early stages of a bull market often feature a "lockout rally," where the market moves steadily higher without significant pullbacks, locking out hesitant investors. This was evident in 2001 with Emulex, which gained 160% in 17 days while the Nasdaq barely moved.

W.R. Grace & Co. (GRA) in 2004 and Panera Bread (PNRA) from 2000 to 2002 are other examples of stocks that emerged as leaders during market downturns and then soared. In 1990, Amgen displayed strong relative strength during a bear market, gaining 360% in 14 months after the market turned.

Identifying leading stocks involves looking for those that hold up well during market declines and rally quickly. They often show strong relative price strength and may benefit from positive earnings, new products, or industry changes. Stocks like American Power Conversion (APCC) in 1990 and Panera Bread during the early 2000s exemplify this behavior.

Investors should buy the strongest stocks first, those that break out early and with the greatest power. A key strategy is to focus on the new 52-week-high list during the early stages of a new bull market, as many big winners will be found there.

However, just as leaders lead on the upside, they also lead on the downside. After an extended rally, leading stocks often decline sharply, making it crucial to have a plan to lock in profits. History shows that leaders of one bull market rarely lead the next, emphasizing the importance of staying alert to new emerging leaders.

Ultimately, by focusing on leading stocks and tuning out media noise, investors can position themselves for significant gains. The key is to follow the leaders, do your homework, and be prepared to act quickly when new bull markets emerge.

Can You Profit Like Jesse Livermore by Spotting Leading Stocks Early?

Although the cheetah, the fastest animal in the world, can catch any animal on the plains, it waits for the perfect moment, often hiding for a week to ensure its prey is vulnerable. This meticulous strategy reflects professional trading, a concept championed by Mark Weinstein.

Critics of the Efficient Market Hypothesis (EMH) believe the stock market is perfectly priced, making it impossible to outperform it without luck. However, successful traders disagree. Human emotions and errors create opportunities, often visible through price and volume analysis on stock charts.

Charts, much like navigational star charts for ship captains, help traders understand market trends and investor behavior. They are essential tools for timing trades, managing risk, and identifying high reward-to-risk opportunities. The Volatility Contraction Pattern (VCP) is particularly useful, showing when a stock's price has settled and is ready to move higher.

The best stock trades often emerge from a pattern of price consolidations, with volume contracting at key points. This indicates that supply is diminishing, setting the stage for a potential breakout. For example, Meridian Bioscience in 2007 displayed strong demand after several price shakeouts, indicating institutional accumulation.

Investors should focus on stocks in a clear uptrend and avoid deep corrections or time compression scenarios, where a stock's rapid rise increases the risk of a sharp decline. It's also crucial to look for evidence of demand, such as significant price spikes on high volume, suggesting strong institutional interest.

The primary base, the first buyable base after a company goes public, is a powerful indicator of future performance. For instance, Amazon's primary base in 1997 led to a 2,500% increase in 16 months. Similarly, Body Central Corp. in 2011 and Dick's Sporting Goods in 2003 also saw significant gains from their primary bases.

Not all stocks will succeed, so traders must be prepared to cut losses and reassess when necessary. For example, iRobot's primary base failed, leading to a significant decline. However, identifying and acting on failure resets can offer new opportunities.

In short, successful trading requires a combination of technical analysis, disciplined strategy, and the ability to adapt to market conditions. By focusing on new market leaders and using chart patterns like the VCP, traders can identify high-potential opportunities and achieve superperformance.

Mastering the Market: Insights from Mark Weinstein on Strategic Trading and Chart Patterns

In the world of competitive trading, one of the ultimate tests of skill was the U.S. Investing Championship (USIC), founded in 1983 by Norman Zadeh. Zadeh, a brilliant mathematician and market speculator, aimed to show that certain individuals could indeed outperform the market. The contest quickly gained prestige, with winners like David Ryan and Martin "Buzzy" Schwartz going on to be featured in Jack Schwager's "Market Wizards."

In 1996, Mark Minervini, the author, entered the contest, confident in his trading skills. He started with $25,000 and by the end of the first six months, Mark had achieved a return of 190.08%. Unfortunately, the contest was suspended due to an SEC inquiry. When it resumed in 1997, Mark had to start over. Despite the new rules and competition from options and futures traders, Mark ended the year with a 155% return, securing the championship title.

The key to Mark's success was consistency and risk management. Many traders make the mistake of treating their gains as "house money," leading to reckless decisions. Mark learned to view every profit as part of his principal and to protect it diligently. Losses, he realized, should be kept small—around 10% or less—to preserve capital for future investments.

A pivotal moment in Mark's career was when he adjusted his past trades to see the impact of capping losses at 10%. This exercise revealed that doing so would have significantly improved his overall performance, turning a loss into a substantial gain. This convinced Mark that strict risk management was crucial.

Research supports this approach. A study by Itzhak Ben-David and David Hirshleifer found that investors often hold onto losers too long and sell winners too quickly. By focusing on avoiding large losses, traders can ensure long-term success. Consistent winners, like those in poker, know when to fold and when to play, always managing their risks carefully.

In the stock market, patience and discipline are paramount. You don't have to act on every market movement; instead, wait for the right opportunities. And remember, the difference between successful and unsuccessful investors often lies in how they handle losing trades. Accepting mistakes, cutting losses, and moving on are essential for long-term profitability.

Ultimately, great trading is about managing risks, staying disciplined, and continually refining your approach. By mastering these fundamentals, Mark believes you can achieve consistent success and avoid the pitfalls that cause many traders to fail.

Can You Achieve David Ryan-Level Success in Trading with These Risk Management Strategies?

Larry Hite once said, "If you don’t bet, you can’t win. If you lose all your chips, you can’t bet." This encapsulates the essence of risk management in trading and life. For three decades, through bull and bear markets, Mark has navigated the stock market, preserving his capital and gains through diligent risk management.

Risk is inherent in stock trading, and the key to success is managing it. Most investors focus too much on potential rewards and neglect the risks. To truly win, you must be disciplined, develop a sound plan, and stick to it. This involves setting clear stop-loss points, preparing for contingencies, and learning to sell both into strength and into weakness.

A sound plan isn't just about strategies but also about lifestyle habits. Discipline in trading mirrors daily habits like brushing your teeth. If you trade emotionally, expect a volatile and exhausting ride. Instead, aim for intelligent repetition and develop successful trading habits.

Contingency planning is crucial. Just like pilots prepare for every possible scenario, traders must plan for market surprises. This means having predefined responses for various situations, from market crashes to unexpected news. By doing so, you can take swift, decisive action when needed.

Stop-losses are vital. Determine your risk in advance and stick to it. If a stock hits your stop-loss point, sell immediately. This approach prevents small losses from turning into large ones. Remember, your first loss is your best loss.

Handling losing streaks involves assessing your stock selection criteria and the market environment. If you're repeatedly getting stopped out, it may signal a market correction. Reduce your position sizes and raise cash until your trading improves.

Avoid the cardinal sin of averaging down. Buying more of a losing stock only doubles your risk. Instead, scale into winning positions and build on success. Diversification doesn't protect you in a bear market; concentrate on a few high-quality stocks and monitor them closely.

Finally, trading has evolved. Today, with advanced tools and lower commissions, the playing field is more level. Learn from others' mistakes, execute a sound plan, and maintain discipline. Best of luck!

Larry Hite's Golden Rule: Mastering Risk Management in Stock Trading

Success in any field, whether sports or stock trading, stems from internal drive, vision, and perseverance. Key traits for successful trading include the right mindset, commitment to learning, and risk management. These traits can be cultivated through discipline and strategic planning. 

Mark Minervini’s journey to becoming a multimillionaire trader began with self-education and a relentless pursuit of knowledge. Despite early setbacks and a lack of formal education, he honed his strategies and developed a risk-first approach. This persistence paid off, leading to what he calls "superperformance" in stocks, where extraordinary returns are achieved. 

A crucial aspect of successful trading is treating it as a business, focusing on precise entry and exit points, and avoiding the traps of conventional wisdom and institutional limitations. Defining a clear trading style helps in maintaining discipline and making informed decisions. 

Mark's strategy, Specific Entry Point Analysis (SEPA), involves detailed screening based on corporate fundamentals and technical behaviors. This method helps identify superperformance stocks, which often share common traits like being young, small-cap companies with significant growth potential. 

Earnings quality and growth are vital indicators of a stock’s potential. Consistent positive earnings surprises and upward revisions by analysts can drive stock prices higher. Conversely, earnings deceleration is a red flag. 

In trading, charts and technical analysis are essential tools. Patterns like the Volatility Contraction Pattern (VCP) can indicate potential breakouts. Identifying market leaders and focusing on stocks in clear uptrends increases the likelihood of substantial returns. 

The importance of risk management cannot be overstated. Maintaining discipline, setting stop-losses, and avoiding the temptation to average down are crucial strategies. A sound trading plan includes contingency planning and the ability to adapt to market conditions. 

Ultimately, success in trading requires a blend of science and art, a commitment to continuous learning, and the discipline to manage risks effectively. By following these principles, traders can achieve consistent success and avoid common pitfalls.

Home

Trending Books

News & Mags

Relax

Curated

Collections

Key Ideas & Notes

Insights

Highlights & Bookmarks

Listening History

Improve your Career, Health & Life with 15min insights from 9000+ non-fiction books

Key Ideas

#1