Wednesday, April 18, 2012

Why Beat Yourself Up

I feel a lot of investors (and traders as well to some extent), sub-consciously take the more difficult road. Maybe for some, inflicting pain or making things difficult on one self is satisfyingly rewarding, but I've never been fond of doing things the difficult way when a simpler method is right in front of you.

I often have people asking me about some no-name stock, and what I think about the prospects of being able to flip it for a few bucks, or whether I think it will be worth a lot more.

I usually tell them, I have no idea, because truly, I don't.

The stock universe is a big place. Unless you believe the market is perfectly efficient (all news is priced in immediately and stocks trade at their fair value), which I do not, then at any given moment in time, there are bound to be at least 5 to 10 large cap, well known, stocks you are able to buy below their fair value.

Even for a trader, many of them try to catch falling knives when something bad happens to a company, hope that they can catch the bounce, and hope to ride the bounce to glorious profits.

Here's a thought for you, when you repeatedly try to catch a falling knife, inevitably you will slice open your hand. I'm cringing just at the thought of this...

As a part time trader (yes I do trade with a small (think less than 5%) portion of my portfolio), I would much rather buy on a breakout or correction, and look to buy high sell higher, as opposed to buying on a crash (keyword here being crash, not correction), hope to ride a dead cat bounce.

One example of this was one of my best trades of 2010, Honeywell International (HON). I bought this on Sept 24, 2010, at 44.40, a breakout from previous highs in August, after the mid summer correction. I sold the position later in December at 53.50, which wasn't the top in the run, but did net me a nice 20% profit in 2.5 months.

I believe a similar situation exists today in Cummins (CMI). This stock has broken above its 2011 high of roughly 121, but since pared back gains to come back into the mid to high 110s. Since I'm not a fortune teller, I guess we'll just have to see in a few months :)

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