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I recently received an e-mail from a newsletter subscriber who asked: "What parameters do you utilize when you decide to sell? I wish to enhance my learning experience." It's an excellent question. Typically, investors spend hours or even days agonizing over whether to purchase a security. But they give very little thought as to when to sell it.
This isn't surprising because while it's easy to obtain professional advice on when to buy, you'll rarely hear a sell recommendation from an advisor and virtually never from an analyst. In fact, if you have an advisor who occasionally suggests that you exit a security be thankful. As long as there isn't churning going on, it means he or she is paying attention to your account.
I cannot recall the last time I saw a research report with the word Sell emblazoned across the top. You have to look for clues. For example, when RBC Capital Markets puts an "Underperform" rating on a stock, I interpret that as a signal to get out. At CIBC World Markets, the code term is "Sector Underperformer". Another frequently used code word is "Underweight".
Without guidance, how do you decide when to pull the trigger on a sale? Here are my personal indicators:
Sell when you reach a target price. When you buy a stock, be sure to set upside and downside targets. When the shares reach either target, do a complete review as if you were deciding for the first time whether to buy.
If the shares have reached your original upside target and you would still buy them, set new targets both on the upside and the downside. When you do this, you have the option of selling part of the position and moving your downside target to the original purchase price. That way, you guarantee yourself a profit no matter when happens later.
If the downside target is reached, take the loss and move on. This is where many investors run aground. They can't bring themselves to sell so they hang on in hopes of a recovery. Too often, it never comes.
Sell if there is a change in the economic climate that works against the stock. Certain types of stocks perform better when the economy is strong and interest rates are rising. Others do well in slow-growth, low-rate environments. When you buy shares, find out whether the company is especially vulnerable to changes in the cycle. Right now, for example, we are seeing record oil prices. This is bullish for energy companies but bad news for airlines, transportation companies, automobile manufacturers, etc.
Sell if the stock is threatened with political action. Pharmaceutical stocks have come under tremendous pressure in the past couple of years for two reasons, both politically related. One is the on-going controversy over high U.S. drug prices and the import of cheaper products from Canada. There is concern that the American Congress will move to legalize those imports or take steps to bring domestic prices down. Either action would cut profit margins for the big U.S. drug manufacturers.
The second worry is the recall of some big-name drugs like Vioxx and warnings about potential dangers from others. Here again, investors are concerned about tougher government regulations that could have a negative impact on the pharmaceutical sector. No wonder the stocks have been laggards.
Sell on unexpected and serious bad news. We never recommended Atlas Cold Storage Income Trust in any of our newsletters but I personally owned some shares in one of my portfolios. When the news broke in fall 2003 that the trust was suspending distributions, terminating their CFO, and appointing a special committee to investigate the books, I sold my entire position immediately. After that, the news got progressively worse and the value of the shares plummeted by more than 50 per cent.
There was a time when a sell-off on bad news was a signal to buy as the stock would almost certainly rebound, often sooner rather than later. But things are different now. We have seen too many cases in which bad news simply begets more bad news, especially if there is any suggestion of corporate malfeasance, and the share price continues to spiral down. If it should happen to you, the best course is to get out with minimal losses while you can.
Sell when a stock's market value exceeds 10 per cent of your portfolio. Sometimes we get lucky and a stock that we own explodes in price. If you're the beneficiary of such good news, that's terrific! But take a look at your portfolio and see how much the high-flyer represents in terms of its total value. A big gain in a short time may have pushed the stock's weighting over the 10 per cent mark. That's too much to have tied up in a single asset, no matter how well it has done. Proper diversification is one of the key strategies in risk reduction. So sell some of that big gainer to reduce the weighting to below 10 per cent. Spread the money around; there are always other opportunities.
Of course, before you sell anything in a non-registered portfolio you should consider the tax consequences. If you have to take a loss, make sure you have some capital gains against which to deduct them, either from this year or previous years. If you're going to take big profits and have no losses available (lucky you!) be sure to keep some of the proceeds in reserve in order to satisfy the demands of the Canada Revenue Agency when it comes time to file your next return.
Technical analysis
1.Make sure the stock has a well formed base or pattern such as stockcharts.com Learn about chart patterns from the tutorials. 2. Buy the stock as it moves over the trend line of that base or pattern and make sure that volume is above recent trend shortly after this "breakout" occurs. Never pay up by more than 5% above the trend line. You should also get to know your stock's thirty day moving average volume, which you can find on most stock quote pages such as eSignal's quote page. 3.Be very quick to sell your stock should it return back under the trend line or breakout point(UNLESS A COMPLETE MARKET TURNAROUND HAS HAPPENED ). Usually stops should be set about $1 below the breakout point(PULL YOUR STOPS ON YOUR LONGS UNLESS YOU INTEND TO BUY BACK IN AT A LOWER PRICE). The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price. 4. Sell 20 to 30% of your position as the stock moves up 15 to 20% from its breakout point. 5.Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. Remember stocks are only good when they are moving up.(IF YOU HAVE A STOCK GOING SIDEWAYS,TAKE A SMALL LOSS. THE POSSIBLE GAINS CAN BE MADE UP EASILY ON STOCKS ON THE MOVE) 6.Identify and follow strong groups of stocks and try to keep your selections in the these groups 7. After the market has moved for a substantial period of time, your stocks will become vulnerable to a sell off, which can happen so fast and hard you won't believe it(I THINK YOU CAN SEE THAT NOW). Learn to set new higher trend lines and learn reversal patterns to help your exit of stocks. Some of you may benefit from reading a book on Candlesticks or reading Encyclopedia of Chart Patterns, by Bulkowski. 8.Remember it takes volume to move stocks, so start getting to know your stock's volume behavior and the how it reacts to spikes in volume. You can see these spikes on any chart. Volume is the key to your stock's movement and success or failure. 9.Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out. 10.If you are new to trading or investing, I suggest reading these rules many times over until they become ingrained so you can act without emotions. 11.Stocks that breakout and move up with tremendous volume and close near the highs of the day seem to work out best. However many stocks that move up 15% or more on breakout day often fail. You'll just have to watch your stock's action like a hawk and get to see and understand these things over a long period of time. If trading were easy everyone would be making millions. It's not; it takes years and years of hard work and long hours. 12.Many traders employ a half hour rule, meaning that for the first half hour of the day many traders do not buy any stock that gaps up in price. If the price holds after the first half hour then often many traders will step in a buy the stock. I find this rule works good after the market has moved up for few strong weeks and is not very effective at the start of a new strong move. 13.If it's earnings season then it's an absolute must that you know the date that your company reports its earnings. Many traders prefer to be out 100% before a company reports its earnings in case the company misses its earnings or guides lower. Others I know reduce positions substantially before earnings are released to lower risk. The choice is up to you. Please verify this information by calling the company or visiting the company's website which you should be able to find in any search engine. 14.The market moves in waves that can last anywhere from weeks to months. Then a correction or setback starts, which can last anywhere from 5 to 8 weeks or even as long at 4 to 6 months. If however you start after the move has been going for sometime then things won't look as good as traders are paring down positions. Or even worse the market could be selling down hard and working off the prior up move in which case you will be completely discouraged. The power of charts is through waiting for the correction to end whereby the chart patterns will then be fully developed. After weeks of base or pattern building, stocks will begin to lift off and that's when the big rewards come in. The question is, are you willing to wait and be here for the start of the next big move? The biggest mistake a novice can make is to come back after a move has started.
small cap companies
When we examine small cap companies, the first metric we examine is growth rates. We examine both revenue and net income / EPS growth for the most recent quarter versus the year ago quarter. Those high growth companies that are growing by at least 20 – 30% versus the year ago period are highly attractive as potential investments.
A significant amount of risk can be eliminated by avoiding unprofitable companies, although there are always exceptions. In addition to this, we look for companies that are experiencing greater growth in their bottom line (net income) than the top line (revenues), as this implies that the company is experiencing higher profitability on incremental sales. It should be an immediate red flag for investors if revenues growth exceeds earnings growth, as this can mean that a company is simply selling more product, but doing so at low profit margins. We like revenue growth, but we prefer revenue growth with an even stronger profit growth.
Large growth is important, but investors should only purchase growth at a reasonable price. Meaning that its great to buy a company that is growing its revenues by 70% and its net income by 85%, but an investor needs to consider what price is being paid for the growth. A simple PE or PS ratio doesn’t quite fit the bill when valuing companies with substantially different growth rates.
small cap companies
One key metric is PE-to-growth, or PEG, which can be calculated by taking a company’s PE ratio and dividing it by the anticipated growth rate. Since investors base their investments on the future, not the past, we use expected PE and growth rate for the coming year, rather than using historical numbers. For growth rate, we estimate the growth of both revenues and earnings, and average them. As a rule, the lower the PEG, the less an investor is paying for the growth.
As an example, company X is expected to grow at 70% in the coming year. Shares trade at $17.50, and we expect the company to earn $0.50 in the coming year. The forward PE of this stock is 35, and the growth rate is 70, meaning that the PEG is 0.50. Consider a PEG below 0.50 to be extremely undervalued, 0.50 to be undervalued, and anything over 1.0 to be fully valued or overvalued.
Now that we have discussed some of the basics of investing in small cap companies and how to value them, we recommend you take these lessons and apply them to individual stocks that you may hold in your own stock portfolio.
A successful strategy of a real person
This is what I usually use for TA, but unfortunately works on companies working with revenues. Forcasting short term can quickly come with the uptrend site.
The 1980s were the decade of the speculator-and now, 20 years later, we have such a window of opportunity again. Successful speculators should emerge from the first decade of the 21st century wealthy beyond their wildest dreams. Fortunately, it's a profession open to all. No formal education, credentials, or licenses are required. All training is on the job, and best of all, the apprenticeship is "earn while you learn." It's an appealing job opportunity, but unfortunately one that carries a stigma.
I've been known to talk about a lot of suspiciously asocial concepts: financial crash, depression, hyperinflation, the alternative economy, hoarding. They're all buzz words that arouse vivid images and strong emotions. Perhaps the most powerful word of all, however, is "speculator." It sounds so irresponsible, opportunistic, and dangerous.
Politicians and the media throw the word speculator about so abusively. I suspect few people have ever dared to ask what one really is. In the popular mind a speculator is someone associated with shortages, price hikes, wars, natural disasters, and other calamities. A speculator is simply someone who sees, or anticipates distortions in the marketplace and positions himself to take advantage of them. He can do that because he understands their causes, and their effects.
The Speculator as Hero
Speculation will be the foundation of dynasties in the turbulent years ahead. The original Baron Rothschild knew how to profit from the politically created chaos of the French Revolution era. He became rich and famous by following his own advice to "buy when blood is running in the streets."
That doesn't mean the speculator is predatory; paradoxically, he's a humanitarian. When people are desperate to sell their possessions, he appears with cash-the very thing they want most. When they change their minds and clamor to buy those things back from him during good times, he once again graciously accedes to the desires of the majority. The speculator, like any other worker, tries to give his employers what they want. Value is subjective, and the price at which something voluntarily trades hands is exactly what it's worth at the time; the speculator simply gives value for value. If he wasn't there to buy, perhaps no one would be, and sellers would be really in trouble.
Somehow, speculators have gotten the image of careless gamblers charging about in wild, frenzied activity. It's a totally inaccurate image, at least where successful speculators are concerned. Good speculations are always low-risk speculations. Far from taking risks, speculators only go in for "sure things." They are rational and unemotional if they're successful; the irrational and emotional who like to gamble and take chances don't last long playing the game, and they soon become ex-speculators.
While simplistic, a useful way to view the methodology of the speculator vs. an investor is this:
An investor risks 100% of their money in the hopes of receiving a 10% gain. A speculator risks just 10% in anticipation of earning 100%.
If you are the least bit attentive, the longer-term risk/reward profile for the speculator is in an entirely different league than that of the "conservative" investor.
These days, while the chattering masses are frantically looking for safe harbors against the gathering storm, the speculator is accumulating positions in the quality gold companies. While gold is more in the news than it has been in years, the average investor still views it skeptically, thinking gold investors are somehow goofy.
As you'll read below, that makes this a nearly ideal time to load up, though buying aggressively early last year when few wanted to know about gold was better… a fact that the subscribers to our International Speculator will happily attest.
Investing for income is the kiss of financial death. Why haven't any of the great millionaires of the past taken advantage of the simple gimmick of compound interest to eventually take over the world? (If the Indians had invested their $26 for the sale of Manhattan for a 5% compounded return, their money would be worth $2,790,729,193. today). It isn't because they haven't tried, I'm sure. It's because no investment will give you a true 5 percent for even the length of a lifetime. In fact, there's probably nothing that can be relied upon to yield even 3 percent over more than forty or fifty years. You might comment, "What difference does that make? I'm not going to be here that long." But it does make a difference, because it shows the futility of trying to stay ahead in any type of "secure" investment. Everything is a speculation, whether people know it or not; those who settle for a low but "secure" return are penny-wise and pound-foolish in the most profound sense.
When you settle for a "conservative" return, even the slightest miscalculation, bad luck, or government fiat can wipe you out. Taxes will always erode your capital, directly or indirectly. Inflation, for the foreseeable future, is sure to get worse and fluctuate wildly as it does. Banks and insurance companies-the very institutions that have always gotten away with offering low yields because they were so stable-will fail as they always have… especially given the current overvaluation of most U.S. real estate and the underlying loans that are looking increasingly shaky.
The government itself will eventually be replaced and currency will become worthless. And there's no way to truly protect against the risks of war, theft, fraud, and natural disaster. Investing for income-especially in today's climate, when cracks can be seen in the foundations of society itself-is the height of stupidity.
If you invest for income, you're handing over responsibility for your future to others. You don't know what they're doing with your money, you can't know how intelligently they're going to conduct themselves in the future, and you don't even really know how sound their capital position is. That's a bad enough set of fundamentals for a madcap gamble, but in return for a simple yield, it's absurd.
What, then, to do? What is the method to overcome this madness? The only answer I know of is to lay a solid financial foundation, and then gather up your cash and your courage and learn the art of speculation.
Below you find some general rules of successful speculation, in summary. Decide for yourself how they match up with the opportunities present in gold and other resource stocks today.
The Practice of Speculation
There's no certain way to gauge the proper time to enter a market, but there are certain rules that will likely be just as good in the future as they have in the past because they're based on human nature, and that hasn't changed much over the thousands of years.
I've listed five signals that should be present before you enter a market. You may never find a situation where they're all there, but the more that are, the more the odds are tilted in your favor. The five rules are equally applicable whether you're buying or selling (with obvious adjustments), but I've skewed them toward the buyer. Since the long-term bias in the years ahead is going to be toward higher prices in the resource stocks, most of the time you're going to be buying more aggressively than you'll be selling.
1. A Climactic Bottom
People tend to get carried away with greed after an investment has treated them well and by fear when the market's been bad. The same herd instinct that causes a crowd to gather when someone stares up in the sky, or causes a stampede if someone yells "Fire!" in a crowded theater, causes markets to overrun themselves at both major tops and bottoms. Price moves typically become very radical and unpredictable at the point where a market is searching for either a top or bottom after a panic. If you can keep your head (easier said than done), those conditions present-or at least foreshadow-the ideal time to buy or sell.
"Blood in the streets" selling climaxes aren't the only time to buy, and manic blow-offs aren't the only time to sell, but they're certainly the best times. In 2000 was a classic speculative opportunity in the better resource stocks… even gold company executives didn't want to know about gold. Climactic bottoms, in particular, are often followed by a period of exhaustion which can give you a chance to appraise the market coolly.
2. Period of Accumulation
After a climactic bottom, a market becomes exhausted. With prices low, a lot of money has either been wiped out or has left the market. Like an athlete after defeat, the marketplace takes a while to recuperate.
It takes a sharp-and lucky-trader to catch a market that turns on a dime and heads the other way. It's more prudent to let it plateau, stabilize, and establish a new equilibrium level before buying. The gold shares, which had a decent run in the mid-90s, have only just started to come alive again… but, as pointed out earlier, the mainstream punter is still looking elsewhere. The plateau is often characterized by a "low volume" of trading.
3. Relatively Low Volume
Low volume, with few buyers or sellers, means few people are really interested in what's going on; a good speculator looks where nobody else does, to afford a better chance of finding bargains. When there's a high volume of trading, it's a sign that a lot of people are paying close attention, and that can lead to radical swings for purely psychological reasons. Successful speculators never allow themselves to be rushed or panicked, and a low-volume market offers leisure to make up one's mind. Today, most gold shares still trade at a volume that is just a fraction of their mainstream counterparts.
4. Historically Low Prices
Nothing is eternal in the markets. What seems like a "high" price one year may turn out to be a "low" price the next; it's all very relative. Speculators who get the bargains are patient.
The bottom of a bear market comes about cyclically, with years or even decades between peaks. Smart buyers sit tight until the odds are loaded in their favor. Only amateurs, pathological losers, and bank trust departments are in the market all the time.
Commodities can be considered "cheap" when they are selling for less than production costs and close to historical lows in real (after inflation) terms while there's a prospect of higher inflation. In inflation-adjusted terms, gold is currently selling at less than half the high it reached in 1980.
There are plenty of exceptions around all the time. But successful speculators play a waiting game; blood isn't in the streets every day.
5. Pessimism in the Market
After a long bear market, the stock or commodity has established a "poor track record" and is perceived as a "bad investment," with no future. That is the view that most mainstream investors currently have of gold after it's long bear market… using terms such as "archaic" to describe the stuff. That is, of course, usually the best time to buy.
Buying when no one else is interested in an investment is hard on the nerves, but rewarding.
If it were easy, everyone would be a professional speculator-and that obviously wouldn't do. And, don't forget, as the gold market - and especially the leveraged gold stocks - take off toward the moon, there will come a time when everyone is saying to buy… which is when you should be heading for the exits. I will be.
Of course, this is meant to be a quick summary. It's not easy to lay down hard and fast rules for successful speculation. There are plenty of others I could repeat here, but the important point is to adopt a bias towards speculation. Done right, which today means building positions in the quality gold stocks, can result in returns that will surprise even you on the upside in the months and years just ahead.