Of course, it begs the question:
“What did Dan Zanger do to make so much money so quickly trading stocks?”
Especially since he was just an ordinary everyday guy with no formal training or experience.
Well, to answer that question, you need to understand this…
As far as we know, only three investing strategies account for all stock market returns.
The first of these is… Value Investing.
The most famous value investor is, of course, Warren Buffet. Value investing is a simple and proven way to make money in stocks.
You find companies undervalued when compared to their actual ability to turn a profit. You buy shares in those companies. You wait to see the share prices rise as the companies grow and turn higher profits.
Let’s pretend you were born in 1919. Your grandparents – Ma and Pa Jenkins – bought one share of Coca Cola stock for you at $40. The split adjusted value of that single share… with dividends reinvested… would be worth somewhere in the neighborhood of $8.7-million by 2011. Nice neighborhood!
Oh… and your one share would have grown to 129,000 shares. And you’d also be getting about $242,000 in annual dividend payments.
The downside of value investing is you have to wait it out. Sometimes decades. While riding the inevitable ups and downs of the market.
If the companies you invest in last, you could end up with a hefty portfolio.
Of course, you might be too old to do anything with the money… but… that’s another issue altogether.
The second is… Small Cap Investing.
Another simple and tested concept. You buy smaller companies with high growth potential. As they become bigger companies their share prices go up too.
You don’t have to wait as long with small caps to see a profit. But if you don’t pick the right ones you’ll lose money faster as well.
Pretend a fictional company named Pimples-B-Gone, Inc. comes out with a real cure for… um… pimples. The company is tiny with a market cap of $400-million. Any company under a $2-billion cap is generally considered small.
Because of its size, Pimples-B-Gone, Inc. is not on the radar of any of the big institutional traders. So it goes unnoticed by just about everyone.
Share prices sell for $7 or so.
You get in on the bottom and buy a boatload of cheap shares.
Word spreads about the product. Since it works, pimple-faced teens buy it in droves. Investors take notice. They begin pouring hundreds of millions into Pimples-B-Gone, Inc. The result is share prices skyrocket to $21 in a year.
You sell and make 300% on your investment. Or you could sell sooner and make less. Or you could wait and hold on while share prices continue spiking.
The point is you get faster and often bigger returns. That’s the basic idea anyway. In fact, you could use this strategy as an income-generator in the short term.
Value Investing and Small Cap Investing have been around for decades. They account for 90% of stock market returns. The other 10% was a mystery until the mid-1990’s. It’s based on a variation of what Dan Zanger did to become a multi-millionaire trader.
Professors Eugene Fama and Kenneth French began a detailed analysis of stock market data in the 1980’s.
They developed a model which explained how value and small cap investing beat the overall stock market. Yet they were unable to figure out the last piece of the puzzle.
That is until one of Fama’s understudies – Mark Carhart – used the university’s stocks database to do a little testing of his own.
Almost by accident, Carhart stumbled upon the concept of…
… Momentum Investing.
Which explains the final 10% of stock market returns. After decades of being in the dark, we now know the only three ways to make money in the stock market.
What’s more, with momentum investing you can profit from short, medium and long term time frames. You can trade momentum daily, weekly, monthly or whatever.
Momentum trading describes the buying and selling force behind a price move.
A “body” in motion tends to stay in motion. So do stock prices. A stock surging up tends to keep surging. A stock dropping down tends to keep dropping.
The two components of momentum trading are: (1) a rapid price move… and… (2) high volume support. Once a price starts moving… and… a bunch of investors plow money into the stock… the price keeps on moving in the same general direction.
For the most part, that is the strategy Dan Zanger used. In an interview with FORTUNE, Zanger said, “I trade whatever the market is going to push up the most.”
He relies on the same process today.
Now there are a variety of ways (a.k.a. “systems”) for trading momentum. Zanger’s is one 99% of regular traders couldn’t follow in a million years.
I’ll tell you why in just a bit.
Before I spill the beans, I think it’s important you understand why my style of momentum trading is a high-profit, low-risk strategy:
- #1: You’re finding the small cap stocks overlooked by most traders. These stocks “run-up” higher and faster than any others. After all, it’s much easier for a $3 stock to go to $6… than… for a $100 stock to jump to $200. You’ll have little competition. Institutional investors won’t pay attention to them. Main Street investors won’t know about them.
- #2: You choose the small cap stocks which are going up MORE THAN other stocks. In other words, not just any stocks will do. Only stocks with the biggest, most recent gains make for the best momentum trades. Keep this in mind…
“Stocks outperforming the market tend to keep outperforming the market in the future.”
- #3: You “bet” on the most likely winners by going with an established trend and not against it.