Praise for Wall Street's Buried Treasure

"Mr. Houtkin has provided the reader with a wonderful education on a great strategy that has the potential to turn a very limited risk investment into an extraordinarily high return. He makes the critical distinction between penny stocks and serious opportunities available to the low-priced value investor using important examples of his own methodology. Along the way, Houtkin provides valuable insight into some of the inner workings of Wall Street."
—BILL KRAFT, trader, speaker, trading coach, and author of Trade Your Way to Wealth

"Investing without Wall Street's Buried Treasure is like trying to live without food. Mr. Houtkin provides the facts of survival one needs to make money in any market. He reports the truth that no one else wants to state. This is a playbook for success; a forty-year apprenticeship is explained right between these covers! Take advantage of it."
—JAMES DEPELISI, president of the Stock and Bond Club of South Florida; founder of LDV Capital Management; finance professor at Broward Community College; and host of Investors Business Hour radio program

Wall Street's Buried Treasure

The Low-Priced Value Investing Approach to Finding Great Stocks

---

By Harvey Houtkin

John Wiley & Sons

Copyright © 2008 Harvey Houtkin
All right reserved.
ISBN: 978-0-470-26067-8

---

Chapter One

Overcoming the Conventional Wisdom

For the past four years I have spent the bulk of my time residing in the Miami/Ft. Lauderdale area. Unlike in the New York City area, where I was born, raised, and resided for most of my life, I began spending more time with people who are retired or semi-retired, having varying amounts of accumulated wealth, and who are quite anxious to talk about their financial and investment needs and wants. As an active trader and owner of a busy broker-dealer, I seldom had time to get involved with "average" retail clients, since that was never the primary focus of my business. Electronic trading and leveling the playing field on Wall Street occupied the majority of my time and thought.

Why Is It So Hard to Get Good Advice on Wall Street?

When looking back, what amazed me was how little the average guy seemed to know about the realities and inner workings of Wall Street or the financial community in general. Even acquaintances of mine who believed they were savvy and relatively informed about Wall Street realities soon found out otherwise after a brief "no-holds-barred" conversation. Simply put, most people now realize that making money on Wall Street using conventional wisdom, techniques, and strategies historically employed does not work. The combination of market reforms, electronic access, high-speed information flow, and the general distrust of the old ways of doing business have dramatically changed the realities under which we now trade and invest.

After over 40 years of being in the belly of the beast, I'm pretty sure few people know and/or understand more than I do about the realities of the market, especially concerning the inner workings of the equities markets. In general, people know they can't entirely trust their brokers but don't exactly know why. After all, they pay them plenty of commission dollars, so why do they so often decimate their portfolios? Why did the stock you just bought drop so precipitously right after you received your execution? Why did you pay more or receive less for the shares you just traded than did your best friend, who traded it at the same time? Why did that "hot tip" fizzle right after you bought it? How can you get greater returns than you are currently receiving? How come traditional "buy-and-hold" techniques so often spell disaster?

Many questions, few good answers. People often look to me for advice. Unfortunately, I do not like giving advice because it is a thankless endeavor. If you dispense advice and you're right ... good, they seem happy, but why didn't you tell them to buy even more? If the advice turns out to be neutral ... why did you tie up their money in a stock that was dead? They could have made more in a money market account. If they wind up losing a little money, you're a bum. And if they lose a lot, you're a crook, and they may file regulatory complaints against you or even sue. Almost everyone today has a son, brother, friend, cousin, or associate who is a lawyer always looking for a few more billable hours.

Therefore, dispensing market advice or assisting people in their stock market efforts be can problematic, to say the least. Since I usually don't handle retail accounts (with the exception of a few close friends), there typically isn't even a commission motivation. The reality is that for the average person, it is very difficult to get truly good advice about stocks. If someone really has great insight into the market and is a big winner, why would he tell anyone? He would buy it all for himself (you can never have too much money) or distribute that information only to people who could return the favor in other situations. The "gems" are usually long gone before you'll hear about them. By the time you find out, it's usually too late.

I have been giving these scenarios a great deal of thought and have come up with some theories and ideas about successful investing. Most people know me as the "father of electronic trading," but my love of low-priced value investing goes back much farther than my electronic day-trading history. There are major differences between "investing" and "trading." Simply put, trading involves profiting from intraday price fluctuations of actively traded volatile stocks, while investing usually means committing funds to a stock that you believe can appreciate significantly over a period of time. The problem with investing is "knowing" what to invest in and for how long. Everyone wants to invest in something that will go up quickly and make them lots of money with virtually no risk-and I'd like to lose 50 pounds eating a high-fat, high-sugar, high-carbohydrate diet, but it isn't gonna happen!

Take Note

Simply put, trading involves profiting off intraday price fluctuations of actively traded volatile stocks, while investing usually means committing funds to a stock that you believe can appreciate significantly over a period of time.

Most stock analysis is performed by trying to evaluate the potential risks in a situation versus the potential rewards. Some of the most brilliant minds in this and other countries spend thousands of hours and millions of dollars developing sophisticated models that try to successfully analyze stocks. Some succeed while others fail, and always to a greater or lesser degree. When an analyst at a Wall Street firm comes up with an idea, it usually gets disseminated to clients in the order of a their importance to the firm. The fact is that the larger, better-capitalized clients receive this "good" information long before less-capitalized clients do. But there are problems prior to the dissemination. First, the information: is it really any good? Second, by the time you receive it, how much has the stock already been impacted?

The preceding scenario leads me to the conclusion that most stocks that are generally well covered and followed by Wall Street trade in a "neutral zone." Stocks that have brokerage, institutional, bank, mutual fund, hedge fund, large retail, or media interest are usually trading in a well-established neutral zone. What I mean by neutral zone is a price level efficiently determined by the market and basically fairly valued because so many people know virtually everything about this stock. Enough participants are actively trading or invested in the shares, which assures that the current price in the market is essentially correct based on the numerous well-disseminated factors widely available. Naturally, the shares can and will fluctuate, but it will be in a neutral-zone range created by normal fundamental and technical factors. Events that can distort activity in the zone are such things as short squeezes (although many would argue that this is a technical factor), regulatory announcements, or inside information being improperly disseminated (remember Martha).

Take Note

Stocks that have brokerage, institutional, bank, mutual fund, hedge fund, large retail, or media interest are usually trading in a well-established neutral zone.

You must ask yourself: is the potential reward sufficient enough on a stock to justify the risk of owning it? Reward is determined by price appreciation (for the time being, I'll ignore the short side). The dilemma is that if most major stocks trade in a neutral zone, the potential price movements and therefore investment opportunities are very often "neutered." If many people know what is going on at a company, its value is more or less established; only surprises to the upside or downside should move the stock significantly, and you're not supposed to know those things. It's called inside information, and trading on it is very illegal. Therefore, you must ask yourself: is potential routine price appreciation enough to justify the risk of stock ownership? Traders can potentially profit from intraday swings on the price of a stock, but an investor should be looking for above-average price appreciation to justify holding a risk position. Remember, stocks go down, too, and you may very well earn negative returns.

A World of Neutral Stocks

Are you hoping some young analyst at a high-profile firm will recommend your stock in order to kick it up in price? Is the analyst powerful enough to create an industry-wide reevaluation of its multiple, or will appreciation come only through good old fundamental earnings increases? In actuality, only an active trader might profit from a quick move generated by a recommendation from a well-respected analyst. If you're an investor, you need good, steady results to move your stock higher over a period of time. Ask yourself how long such "great" companies as General Electric (GE), Pfizer (PFE), Intel (INTC), Coca-Cola (KO), Ford (F), and so many others have traded in narrow ranges and all too often to the downside. Was the risk worth the rate of return? It is likely that you will see these stocks double or triple, or is it more likely that over another five years you'll see merely pathetic results? These companies and thousands like them have been neutered!

Most stocks trading today on major exchanges (the New York Stock Exchange [NYSE], the Nasdaq National, and the American Exchange [AMEX]), in my opinion, have been neutered. They have reached a point of neutrality and have lost their investment appeal. Big upside movements in these shares will occur only by surprise (unexpected business events, etc.) or because they are being manipulated (legally, of course) by the powers that be for their various needs (elections, foreign bank discontent, market meltdowns, etc.). Today's competitive international markets are going to make it tougher and tougher for our companies to compete; all things considered, making money now is harder than ever. The long-term outlook for American industry is not always rosy and certainly not for every company. The conventional wisdom of buying and holding has proven itself to be a fairy tale created by characters far more sinister than any Mother Goose ogre. Hey, maybe the advocates of buy-and-hold should be neutered. But I digress....

Even with this negative scenario, life goes on. The sun will come up tomorrow, and we will still be here wondering how to play this Wall Street game in a smarter, more effective way. Low-interest money market funds and stingy certificates of deposit can't cut it forever. Playing the market may be the only hope for truly getting and staying ahead, yet it can alternatively cause you to lose your head. Radical, unconventional techniques and strategies must be considered and explored as new ways of approaching today's marketplace.

Take Note

Radical, unconventional techniques and strategies must be considered and explored as new ways of approaching today's marketplace.

Concluding Thoughts

It has not been easy, but despite all the negatives of the post-2000 market meltdown, I have found an investing style and technique that has delivered results way beyond even my wildest expectations. By any standard of conventional or historical thinking, the theories of making money by investing the way I will describe here should alter your previous market notions and thoughts. In the next few chapters I will put forth for your consideration a new way of approaching the market, and perhaps you will find the treasure map of your dreams. I call my investment strategy "Uncovering Wall Street's Buried Treasures."

(Continues...)

---

Excerpted from Wall Street's Buried Treasure by Harvey Houtkin Copyright © 2008 by Harvey Houtkin . Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

---

Harvey I. Houtkin is a well-known player in the electronic trading arena. Named by CNBC as "one of the five in history who made it happen on Wall Street" and commonly recognized as the "father of electronic trading" and the "father of day trading," he possesses unsurpassed real-world expertise. Houtkin is Chairman and CEO of Domestic Securities, Inc. He has lectured at numerous forums domestically and internationally, and has been interviewed in a variety of media. He holds an MBA and a BBA from Baruch College.