Robert Lichello

“The problems were manifold. You have $10,000. How much stock should you buy right off, and how much money should you keep in reserve? Should one copy mutual funds and maintain a cash reserve somewhere between 5 and 10 percent? Have mutual funds been all that successful, and should anybody care one way or another how much cash they keep in reserve? How much profit should we have before selling off some stock, and how much loss before buying some more? Suppose at one point our stock is worth $10,000 and suddenly it is worth $5,000. Should we invest here, and if so, how much? How about investing $5,000? Fine, we put $5,000 into the market. Only one problem: we still have $30,000 cash in reserve because we were taking profits when the market was climbing. What are we going to do with that $30,000? The market is down 50 percent and isn’t likely to go down any further; it will probably rebound here—and we’re stuck with $30,000 in cash, which should have been invested at the lows. No good. Back to the drawing board. How about investing a percentage of our cash reserve? No good—it’s too easy to exhaust all our cash reserves halfway down, and by the time the market hits bottom our pocketbook is empty. Back to the drawing board. More problems: After a decline, after we have purchased lots and lots of cheap stock and our pocketbook is empty, at what point do we sell some stock to get some money to buy some more stock should the market turn around and fall again? How much should we sell? Also—and this was the most maddening perplexity—suppose we started off our program with $10,000 and now, thanks to profit-taking, we have a portfolio worth $15,000—$10,000 in stock and $5,000 in cash. Suddenly the market declines by 50 percent, and our stock is now worth only $5,000. Stocks are at the very bottom of a bear market—but we have no loss at all! We have $5,000 in stock and $5,000 in cash, a total of $10,000. With a market down by 50 percent, we should be in there buying like crazy—but how can we buy when our figures show that we have no loss? Why would we buy more stock when our portfolio shows no loss and no gain? Start from scratch. How much to invest in stocks and how much to set aside in cash at the outset? Well, what are the odds of the market’s going up and what are the odds of its going down? Fifty-fifty. The answer, therefore, is obvious. We should put 50 percent of our money in stocks and keep 50 percent in reserve, because if”
― Robert Lichello, How to Make $1,000,000 in the Stock Market Automatically