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The investing environment that we, as individual investors, face today is not a friendly place. Equity prices are buffeted by factors that were inconceivable just a few years ago. Yet while markets have changed dramatically, the investing theories, methods, and resources we have available to cope with them have not. We are essentially stuck using twentieth-century tools for dealing with twenty-first-century investing challenges, and these tools no longer work.

The time has come to pause, take a deep breath, and rethink the totality of how we view and interact with equities markets. It is time to recognize that much of what we have been taught about how to invest is obsolete. To survive and thrive in today’s new investing environment, a completely new approach to personal investing is needed. Providing this new approach and the tools to implement it is the purpose of this book.

In the good old days (not many years ago), investors had a reasonable chance of predicting stock prices by analyzing company financial statements. Not too long ago, we could trust with some degree of confidence what a CEO was saying about the health and earnings potential of his or her company. 

And most of us can remember a time when news items in the financial media had at least been fact-checked. In other words, in the not too distant past, we had a legitimate chance of being successful investors by doing some good old-fashioned homework using basic equity analysis methods and tools. Unfortunately, those days are gone.

Today, a host of factors influence stock prices that have nothing to do with corporate fundamentals. And these factors are almost impossible for us to analyze using the resources available to us.

What are these new factors? Let’s look at just a few. 

• The Web. This vehicle of mass communication has changed everything. Some of the effects are good, and some are bad. Among the good effects are that individuals have access to massive amounts of investment-related information, and they can use this input to trade equities from the comfort of their homes. 
  
  Among the bad effects are that much of the information investors are exposed to on the Web is misleading at best and fraudulent at worst. Anyone can post rumors, opinions, and bogus analysis on the Web that can be made to look like legitimate news. The Web then proliferates these postings with the speed of light, and they are read by millions of people who often place trades without questioning what they read. By creating and spreading misinformation on the Web, anyone with a computer and an Internet connection can cause millions of people to make uninformed trading decisions and in this manner manipulate stock prices easily and cheaply.
  
  

• The short attack industry. Short selling is now a major factor that can dramatically influence the price of any stock. In today’s markets, major traders such as hedge funds are making tens of billions of dollars through the practice of borrowing shares of a company stock and immediately selling these shares at current market prices. They hope that the stock price will go down so they can buy back the shares at a lower price, return the borrowed shares, and pocket the price difference. This is called shorting a stock and it is a legal activity. 
  
  What short attackers do, however, is abuse this activity by orchestrating a massive smear campaign against a stock they have shorted in order to rapidly drive down its price. As a part of this effort, they may spread false rumors about the stock on the Web, create and distribute bogus financial analysis reports, and even influence mainstream media reporters to write negative articles about the company they are shorting. A short attack can destroy the value of a stock, and there is no way for us as individual investors to predict which companies are in the crosshairs.
  
  

• Government activism. As I write these words, the government is rampaging through the equities markets like a bull in a china shop. Legislators have voted to inject hundreds of billions of dollars into the financial system without a clear plan for how the money will be spent. This is all in response to a problem that the government itself created by insisting (under threat of prosecution) that banks give home mortgages to people who could not afford them (subprime loans). 
  
  Anytime the government interferes with the free market, bad things happen; and unfortunately signs currently point to increasing government activism. This is yet another factor that can dramatically affect stock prices, but that defies analysis using investing tools and analysis techniques currently available to us.
  
  

• Speculation. In commodities markets, the activity of speculators has a significant effect on the prices of such assets as gold, oil, and food, all of which are vital to the health of our overall economy. Speculative price swings in these commodities affect the earnings and thus the prices of a full range of stocks. As I write these words, in the past six months the price of a barrel of oil has moved from $80 to $140 and back to as low as $45. Such violent price movements are not totally attributable to factors that can be analyzed, such as supply and demand. Much of this price volatility is due to pure speculation, and this is yet another factor that cannot be analyzed and quantified with any degree of confidence.

These are only a few examples of equity price influences that we, as individual investors, cannot analyze with the methods and tools we have at our disposal today. Traditional fundamental stock analysis does not and cannot take into account any of the factors discussed above and this is why it is very difficult, if not impossible, for individuals to make informed investing decisions in today’s markets. This is why a comprehensive new approach to investing is desperately needed and why The Perfect Portfolio was created to provide it.

In the face of these new market dynamics and the inability of existing investing tools to deal with them, what can we do? We have three choices.

One option is to whine, complain, and say that the factors listed earlier, and others like them, are illegal or unfair and that government regulators should step in and make everything right. This course of action and $5 will buy you a cup of coffee. It is not going to happen.

A second option is to develop revised theories, methods, and tools that will enable us to analyze the new market influences such as those just described. But this would be an unbelievably difficult task to accomplish, if it were even possible at all. The new problems that plague the market today simply defy any type of rational analysis. This option is a dead end.

The third choice is to develop an updated, and improved approach to personal investing. This approach would recognize the new factors influencing equity markets and provide an updated set of tools, concepts, and methods for dealing with them.

This third option, consisting of creating a completely new approach to personal investing, is the only viable choice for enabling us to succeed in today’s markets. This is the option presented in The Perfect Portfolio.

As I write these words soon after the stock market crash of 2008, panic reigns in markets. Stock prices have collapsed based on a number of factors that I have just discussed and others. It is understandable that individual investors don’t know what to do in current chaotic market conditions. What is more interesting to me is that financial advisers and so-called experts don’t know what to do, either.

The current market malaise is shining a bright light on the financial services industry. We are discovering that the so-called experts are really no more capable of creating and managing an effective portfolio of investments in today’s new market environment than you are, and that placing absolute trust in financial professionals to manage your investments is a very risky strategy indeed.

What is becoming increasingly clear is that it is up to you to take more personal control of your portfolio in order to protect and grow your wealth. To do so, you must have the knowledge, structure, methods, and tools needed to make effective investing decisions in current markets. By reading The Perfect Portfolio you will gain all of these elements necessary for investing success.

Regaining personal control of your portfolio and becoming empowered to succeed in today’s personal investing environment are two of the many reasons why you should, and must, complete this book.

A Prerequisite for Reading The Perfect Portfolio: An Open Mind

Many students enter the classrooms where I teach the Perfect Portfolio Methodology (PPM) with a host of preconceptions. They believe that they are about to learn how to find and analyze stocks, dissect mutual funds and fund styles, build portfolios with three asset classes and be shown why buy-and-hold is the preferred investing strategy. Who can blame them? For years they have been taught that these activities form the very foundation of effective personal investing.

As my classes begin, therefore, they are literally stunned when I kick to the curb much of conventional investing “wisdom” and replace it with a dramatically different and simpler method for designing a powerful portfolio. They are, at first, skeptical when I teach none of the traditional investing activities they thought they were about to learn. But as classes progress they see the logic of the PPM and their skepticism gradually turns to excitement. They begin to realize that the investing concepts they have been taught for years have been stifling their ability to become effective investors and that there exists a far better and more logical way for growing their wealth.

It is therefore appropriate for me to give to you the same advice that I give to my new students. Before starting this book, clear your mind of any preconceptions you may now have about how personal investing works. Forget much of what you have been taught for years. Start with a clean slate. In the PPM, you are about to learn an approach to investing that enables you to view the world of personal investing from a totally different angle, one that defies tradition. You will need an open mind to appreciate and absorb this paradigm shift. Allow yourself the freedom to consider, accept and embrace change. It will make you a better investor.