Market wizard Jeff Neumann started trading with $2,500 and grew it to $50 million. He shares 6 timeless rules that helped him reach millionaire status in his first year.
- Jeff Neumann, a low-key millionaire trader profiled in Jack Schwager's new book "Unknown Market Wizards," started trading with $2,500 in college and grew it into $50 million today.
- Neumann became a millionaire at the age of 23 by trading penny stocks.
- But his style has evolved over the years to combine technical analysis, fundamental research, and the "invest in what you know" mantra popularized by legendary investor Peter Lynch.
- Neumann shared with Schwager six trading rules that contributed to his success.
- Visit Business Insider's homepage for more stories.
Quitting college when you are just a few credits shy of graduating to trade penny stocks for a living does not sound like the most sensible plan for a young man. But that's exactly what Jeff Neumann did.
Neumann, a low-key millionaire trader profiled in Jack Schwager's new book "Unknown Market Wizards," started trading in 2002 with $2,500 and grew his account to $50 million (pre-tax) today.
"Turning a few thousand dollars into $50 million is only part of the story," Schwager said. "Perhaps the real kicker is that Neumann made a large portion of his fortune trading penny stocks."
Without any prior investing experience, Neumann started trading at the computer lab during his senior college year.
He was attracted to trading because it seemed like an easy way to make a lot of money — a mentality Schwager believes to be a "wrongheaded approach" even though it worked in Neumann's case.
"I started trading not too long after the change from eighths and sixteenth to penny decimals," Neumann said, referring to the switch in stock prices to decimals from the fractional system in 2000.
While most brokers at the time only went out to a penny, Neumann's broker went out two decimals beyond the penny decimal, letting him put in an order at 7.01 cents, for example.
"So I would get filled anytime anybody sold. I was able to cut in line," he said. "When I got filled, I would put up my stock for sale at 7.99, and anytime anybody bought, I would get filled."
A millionaire at 23
Still a beginner, Neumann was quickly making thousands of dollars a day putting on such "highly asymmetric trades." Not much longer than a year after he started, Neumann made his first million at the age of 23.
However, as more people caught on to his market-making type of trading and started to do the same thing, Neumann switched to using technical analysis.
"I look for a steady downtrend, and I draw a line connecting the spikes," he said. "I wanted to be the guy who was buying a stock right when it's breaking out above that downtrend line."
Today, Neumann's trading style is a combination of the technical analysis that he still uses, thematic stock sector selection, and the "invest in what you know" mantra popularized by legendary investor Peter Lynch.
From technical analysis to sector themes
The style shift happened when he saw a post in a trading chatroom saying that there was going to be a bill to increase the amount of ethanol in gasoline blend from 1% to 5%, indicating a 400% increase for ethanol.
Neumann loaded up on ethanol stocks and sold them the day the bill went to Congress.
"I crushed it. Three of the ethanol stocks I bought went up over 1,000% in 10 trading days," he recalled. "That was the first time I saw the power of a sector move with a hard catalyst and a well-defined date."
"It is how I trade everything now. I like to buy a whole sector of stocks at the same time," he said. "Once I get conviction on the trade, I start pyramiding my positions by hundreds or even thousands of times."
Besides looking at technical analysis and focusing on sector trades, Neumann tests out the products and services offered by prospective companies.
His high success rate and market timing skills have made him one of the greatest traders hidden in plain sight, but Schwager strongly cautions about attempting to follow this aspect of Neumann's trading methodology.
"Unless a trader has similar skills, taking such large concentrated positions would be very risky and expose the trader to an account-ending loss," Schwager said.
Six rules for success
Despite some of the inimitable aspects of Neumann's wild success, his trading story still bears a lot of lessons and rules from which other investors can learn to become competitive in the markets.
Here are the six stock-buying rules that Schwager says have made Neumann, who is still in his mid-30s, an unknown market wizard.
1. "The stock has seen a large decline or an extended sideways movement near lows."
Neumann likes to buy stocks that are breaking out from a downtrend line.
"Often when prices would compress at the downtrend line, there would be large amounts offered," he said. "Let's say there were 100,000 shares for sale at 31 cents; I would try to be the guy who was buying the last 10,000 shares."
- "The company has a service or product that suggests considerable upside potential."
A few years ago, Neumann heard about 3D printing as an emerging opportunity. He spent $10,000 on four 3D printers, listened to shareholder calls of 3D-printing companies, and attended industry conferences.
While trying to become a 3D-printing expert, he discovered a bioprinting company called Organovo. He visited the CEO and got to see their bioprinter in action.
When the stock uplisted to the Nasdaq from OTC, Neumann went all in despite its immediate ~30% decline.
"At the time, Organovo was at $3.50, and within a year, it went to $12, which is where I liquidated most of my position," he said. "That was the year I made $10 million."
3. "There is a catalyst to suggest the prospect for an imminent price rally."
In 2009, Neumann noticed a one-penny stock called Spongetech trading 200 million shares in one day. He found that insiders of the company had recently bought 750 million shares, which amounted to half of all outstanding shares.
Neumann bought six or seven million shares of Spongetech and the stock kept rallying over the summer. He eventually sold out after it went up to 25 cents, merely minutes before the stock plunged to 5 cents.
It turned out that the company and its executives were engaged in a massive pump-and-dump scheme and were later charged by the SEC.
4. "The stock is part of a sector that Neumann has defined as being primed for a substantial price move."
In the depths of the financial crisis in fall 2008, Neuman saw financial stocks were "breaking through their steep downtrend lines on high-volume."
He loaded up on a basket of financial stocks and "a ton of" two-week-out options on them just 10 minutes before the market close. While driving to play tennis with his friend, he heard that the US government was going to purchase $700 billion worth of illiquid assets as part of the Trouble Asset Relief Program.
"The next morning, all the stocks I had bought were up big; some were up as much as 50% from where I had bought them," he said. "Within five minutes of the opening, I took profits on all the positions I had bought the previous day. I made nearly $900,000 that day."
5. "He is familiar with the product and has usually tried it himself."
Neumann bought his first CBD stock after hearing an enthusiastic endorsement of a CBD beverage from a local liquor store owner.
He immediately looked into the maker of the beverage — a two-cent stock that was "right on the cusp of a two-year downtrend line." He bought shares of the stock and tried the product.
"I started going to the store every day. I wanted to see who was buying the product," he said. "The stock started running and went up 1,000% from where I had bought only a few weeks earlier. The stock hit 25 cents."
6. "The stock is showing some signs of life — either a sudden up move after a period of decline or an abrupt spike in volume after a lengthy period of relative inactivity or both."
This lesson also applies to Neumann's decision to enter into a stock, whether it's Spongetech or the CBD beverage stock, he buys them "right at the moment he thinks it is ready to go," Schwager noted.
That nimbleness is similarly reflected in Neumann's swift exit out of a stock when it fails to act as he expected.
"If after Neumann buys the stock, it fails to follow through on the upside, let alone begins to drift back down, Neumann will exit the trade immediately," Schwager said.
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