Friday, December 29, 2006
Continuous Trailing stop
Don’t Lose Money: The Most Important Law of Lasting Wealth
By Dr. Steve Sjuggerud
December 29, 2006
Let’s face it – most people don’t know when to sell a falling stock. So they’re frozen into inactivity, saying, “Should I just keep holding and hoping, or should I cut my losses now?”
This state of indecision is usually permanent, and often continues until you hear the all too familiar phrase, “well, it’s too late to sell now.”
One of my good friends lost it all following the “it’s too late to sell now” principle. He bought a ton of shares in a cable company based on his friend’s recommendation that it was supposed to take over the world. The shares soon tumbled in half, and his friend, who knows about the cable business, told him to buy more, so he did. The shares tumbled in half again, and he bought even more. He finally stopped buying when the shares hit a dollar a share. The shares eventually traded for pennies.
After you’ve read today’s essay, if you follow the advice in here, your constant state of indecision will be gone. You’ll never lose another night’s sleep worrying about which way your investments will go tomorrow. Because, unlike most investors, you’ll have a plan – knowing when to get out, and when to stay in for the biggest possible profits.
Buying stocks is easy. There are thousands of theories out there for why and when to buy. But buying is only the first half of the equation when it comes to making money.
Nobody ever talks about the hard part – knowing when to sell.
In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. So please read closely here, and think about each point...
How Do You Evaluate Businesses?
In business and in stocks, you’ve got to have a plan and an exit strategy. When you have one, you know in advance exactly when you’re going to buy and sell. The strategy I’m going to show you will allow you to ride your winners all the way up, while minimizing the damage your losers can do. But before I get into the specific strategy, consider this business example...
Let’s say you’re in the tee-shirt business. You’ve made a ton of money on a tee-shirt business in the States, and you’re now in the Bahamas looking for new opportunities. You size up the market, and you figure you can make money in two markets: in golf shirts, geared at the businessman, and in muscle-tees, geared toward the vacationing beach-goers. These are two products clearly aimed at two different markets.
You invest $100,000 in each of these businesses. At the end of the first year, your golf shirts are already showing a profit of $20,000. But the muscle-tees haven’t caught on yet, and you’ve got a loss of $20,000. There are numerous reasons why this is possible, so you make some changes in your designs and marketing and continue for another year.
In the second year the same thing happens – you make another $20,000 on your golf shirts, and you lose another $20,000 on your muscle-tees. After two years, the golf shirt business is clearly succeeding, and the muscle shirt business is clearly failing.
Now let’s say you’re ready to invest another $100,000 in one of these businesses. Which one business do you put your money into? The answer should be obvious. You, as a business owner, put more money toward your successful businesses. But as you’ll see, this is the opposite of what 99% of individual investors in America do...
How Do You Evaluate Stocks?
Let me start by asking you a question – what does “owning shares of stock” actually mean? This isn’t a trick question – as you know, it means you’re a partial owner of the company, just like you’re the owner of the tee-shirt company in this example.
Owning your own business isn’t fundamentally any different than owning a share of a business through stock. However, most people treat them exactly the opposite...
Let’s say the shares of your two tee-shirt companies trade on the stock exchange.
They both start trading at $10 a share. At the end of the first year, the profitable golf-shirt company is trading for $12 a share, and the unprofitable muscle-shirt company is trading for $8 a share. At the end of the second year, the golf shirt company is trading at $14, while the muscle shirt company is trading at $6 a share.
Which shares would you rather own?
Even though you know you should buy the winning concept based on the business example, most investors don’t do so in their stock investments. They keep throwing good money after bad hoping for a turnaround. They buy the loser.
The Trailing Stop Strategy
In stocks (and in business, I believe), you must have and use an exit strategy – one that makes you methodically cut your losses and let your winners ride. If you follow this rule, you have the best chance of outperforming the markets. If you don’t, your retirement is in trouble.
The exit strategy I advocate is simple. I ride my stocks as high as I can, but if they head for a crash, I have my exit strategy in place to protect me from damage. Though I have many reasons I could sell a stock, if my reasons don’t appear before the crash, the Trailing Stop Strategy is my last ditch measure to save my hard-earned dollars. And it works.
The main element to the Trailing Stop Strategy is the 25% rule. This is where I will sell any and all positions at 25% off their highs. For example, if I buy a stock at $50, and it rises to $100, when do I sell it? If it closes below $75 – no matter what.
Don’t Let Your Losers Become Big Losers
So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.
Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!
Take a look at how hard it is to get back to break even after a big loss...
You’ll Never Recover
Percent fall in share price
Percent gain required to get you back to even
10%
11%
20%
25%
25%
33%
50%
100%
75%
300%
90%
900%
So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.
Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.
By Dr. Steve Sjuggerud
December 29, 2006
Let’s face it – most people don’t know when to sell a falling stock. So they’re frozen into inactivity, saying, “Should I just keep holding and hoping, or should I cut my losses now?”
This state of indecision is usually permanent, and often continues until you hear the all too familiar phrase, “well, it’s too late to sell now.”
One of my good friends lost it all following the “it’s too late to sell now” principle. He bought a ton of shares in a cable company based on his friend’s recommendation that it was supposed to take over the world. The shares soon tumbled in half, and his friend, who knows about the cable business, told him to buy more, so he did. The shares tumbled in half again, and he bought even more. He finally stopped buying when the shares hit a dollar a share. The shares eventually traded for pennies.
After you’ve read today’s essay, if you follow the advice in here, your constant state of indecision will be gone. You’ll never lose another night’s sleep worrying about which way your investments will go tomorrow. Because, unlike most investors, you’ll have a plan – knowing when to get out, and when to stay in for the biggest possible profits.
Buying stocks is easy. There are thousands of theories out there for why and when to buy. But buying is only the first half of the equation when it comes to making money.
Nobody ever talks about the hard part – knowing when to sell.
In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. So please read closely here, and think about each point...
How Do You Evaluate Businesses?
In business and in stocks, you’ve got to have a plan and an exit strategy. When you have one, you know in advance exactly when you’re going to buy and sell. The strategy I’m going to show you will allow you to ride your winners all the way up, while minimizing the damage your losers can do. But before I get into the specific strategy, consider this business example...
Let’s say you’re in the tee-shirt business. You’ve made a ton of money on a tee-shirt business in the States, and you’re now in the Bahamas looking for new opportunities. You size up the market, and you figure you can make money in two markets: in golf shirts, geared at the businessman, and in muscle-tees, geared toward the vacationing beach-goers. These are two products clearly aimed at two different markets.
You invest $100,000 in each of these businesses. At the end of the first year, your golf shirts are already showing a profit of $20,000. But the muscle-tees haven’t caught on yet, and you’ve got a loss of $20,000. There are numerous reasons why this is possible, so you make some changes in your designs and marketing and continue for another year.
In the second year the same thing happens – you make another $20,000 on your golf shirts, and you lose another $20,000 on your muscle-tees. After two years, the golf shirt business is clearly succeeding, and the muscle shirt business is clearly failing.
Now let’s say you’re ready to invest another $100,000 in one of these businesses. Which one business do you put your money into? The answer should be obvious. You, as a business owner, put more money toward your successful businesses. But as you’ll see, this is the opposite of what 99% of individual investors in America do...
How Do You Evaluate Stocks?
Let me start by asking you a question – what does “owning shares of stock” actually mean? This isn’t a trick question – as you know, it means you’re a partial owner of the company, just like you’re the owner of the tee-shirt company in this example.
Owning your own business isn’t fundamentally any different than owning a share of a business through stock. However, most people treat them exactly the opposite...
Let’s say the shares of your two tee-shirt companies trade on the stock exchange.
They both start trading at $10 a share. At the end of the first year, the profitable golf-shirt company is trading for $12 a share, and the unprofitable muscle-shirt company is trading for $8 a share. At the end of the second year, the golf shirt company is trading at $14, while the muscle shirt company is trading at $6 a share.
Which shares would you rather own?
Even though you know you should buy the winning concept based on the business example, most investors don’t do so in their stock investments. They keep throwing good money after bad hoping for a turnaround. They buy the loser.
The Trailing Stop Strategy
In stocks (and in business, I believe), you must have and use an exit strategy – one that makes you methodically cut your losses and let your winners ride. If you follow this rule, you have the best chance of outperforming the markets. If you don’t, your retirement is in trouble.
The exit strategy I advocate is simple. I ride my stocks as high as I can, but if they head for a crash, I have my exit strategy in place to protect me from damage. Though I have many reasons I could sell a stock, if my reasons don’t appear before the crash, the Trailing Stop Strategy is my last ditch measure to save my hard-earned dollars. And it works.
The main element to the Trailing Stop Strategy is the 25% rule. This is where I will sell any and all positions at 25% off their highs. For example, if I buy a stock at $50, and it rises to $100, when do I sell it? If it closes below $75 – no matter what.
Don’t Let Your Losers Become Big Losers
So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.
Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!
Take a look at how hard it is to get back to break even after a big loss...
You’ll Never Recover
Percent fall in share price
Percent gain required to get you back to even
10%
11%
20%
25%
25%
33%
50%
100%
75%
300%
90%
900%
So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.
Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.
Wednesday, December 20, 2006
10 stocks that could outperform in 2007
10 stocks that could outperform in 2007
By Leslie Wines, MarketWatch
Last Update: 12:01 AM ET Dec 19, 2006
NEW YORK (MarketWatch) -- Investors seeking outperforming stocks in 2007 will likely focus on factors such as exposure to the booming China market, unjustifiably low valuations, promising products under development and the most lucrative locations for drilling rigs, according to some noted stock pickers and fund managers.
DAVID CALLAWAY
Next year's news
Never doubt the market’s ability to focus on something completely opposite from what Wall Street thinks is important. So Dave's predicting a big-cap rally and commodities slowdown in 2007.
• Best & worst stocks of 2006
• 10 stock picks for 2007
• Commodities: Sweeter in 2007?
• Our top news stories of 2006
• Loeb: Slowdown, not meltdown
• Winners & losers
• Dvorak: Top tech trends in 2007
• The stock-option surprise
• Tech sequels: Big stories go on
• See the full special report
Coming up this week: The outlook for real estate, the economy, more.
Though forecasting price performance remains a slippery art, the stock pickers at least have come up with plausible theories as to why these stocks could break into higher ranges next year. Here follow their choices in no particular order:
United Technologies
United Technologies Corp. (UTXUnited Technologies Corporation
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Sponsored by:
UTX ) . This old standard was chosen by Daniel Manion, who manages a large-cap blend fund of growth and value stocks for Sentinel Asset Management, as a new twist on a China play.
United Technologies' product list of elevators, escalators, moving walkways, residential and industrial heating systems and air conditioners has positioned it to take advantage of the construction surge in China and elsewhere, according to Manion.
General Electric
Another old-line company General Electric Corp. (GEGeneral Electric Company
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
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Discuss
Financials
Sponsored by:
GE ) was the top 2007 choice of Mike Holland, who manages the Holland Balanced Fund which consists entirely of large-cap blue-chip stocks.
GE Chief Executive Jeff Immelt has generated generally strong earnings growth in recent years, but the stock price has languished in a dull range. In Holland's view, GE should have benefited more from the recent large-cap equities rally and investors are likely to recognize this and send the stock higher next year.
Southwest Airlines
Another stock chosen because it largely missed this year's rally was Southwest Airlines Co. (LUVSouthwest Airlines Co.
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
LUV ) . Don Hodges, co-manager of the multi-cap Hodges Fund, pointed out that Southwest did not rally as much as some other airline stocks in 2006 but thinks the situation will turn around in 2007.
"Southwest still has the best business model in the industry and is picking up some new routes," Hodges said. This year, Congress removed the Wright Amendment which had limited Southwest's direct flights to states contiguous or near Texas, greatly expanding the number of direct flights the airline can offer.
Transocean
Provider of offshore drilling equipment Transocean Inc. (RIGtransocean inc ord
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
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Discuss
Financials
Sponsored by:
RIG ) also was put forward by Hodges. The maker of drilling equipment should perform well next year, irrespective of whether energy prices rise or fall, as rigs are very expensive and take a long time to produce, while supply lags demand, he said.
Rowan Companies
Another oil rig play, suggested by Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, was Rowan Companies Inc. (RDCRowan Companies, Inc
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
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Discuss
Financials
Sponsored by:
RDC ) .
The stock bears a low 1% dividend, but Shacknofsky believes it is poised to report strong earnings next year. In addition to the favorable supply-demand ratio in the industry, Rowan Companies has been diversifying its fleet locations, sending some rigs out of the Gulf of Mexico to other international waters that offer more lucrative rig day rates.
Gatehouse Media
Gatehouse Media Inc. (GHSgatehouse media inc com
News , chart, profile, more
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Analyst
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Financials
Sponsored by:
GHS ) , an owner of rural newspapers which the Fortress Investment Group hedge fund brought to market in October, was another Shacknofsky pick. The stock bears a 6% dividend. Gatehouse also is in acquisition mode and should raise its dividend if it makes more cash flow accretive purchases, he said. In addition, the company's online strategy should allow it to capitalize on internet-based advertising as the field extends to smaller papers, in his view.
Gilead Sciences
Gilead Sciences Inc. (GILDGilead Sciences Inc
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Analyst
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Financials
Sponsored by:
GILD ) , a leading developer of treatments for HIV and other diseases, was the top larger-cap pick of Jason Kantor, the leading biotechnology analyst at RBC Capital Markets.
There should be positive developments next year with the integrase inhibitor HIV treatment Gilead is now developing, which should send the stock higher, he thinks.
In addition, the company sells its products directly around the world, giving it an advantage over domestically-focused biotech companies, according to Kantor.
Alexza Pharmaceuticals
Alexza Pharmaceuticals Inc. (ALXAalexza pharmaceuticals inc com
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Sponsored by:
ALXA ) , a small-cap manufacturer of drug inhalers to treat such varied maladies as schizophrenia and migraines, is another of Kantor's picks. Data from development projects for new Alexza drugs should benefit the company's stock price next year, Kantor said.
Goodrich
Goodrich Corp. (GRGoodrich Corp
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Financials
Sponsored by:
GR ) was the choice of Jeff Kleintop, Chief Investment Strategist at PNC Wealth Management. The former tire maker has transformed itself into a manufacturer of airframe, engine and electronic parts for aircraft. New routes to help serve Asia and other developing regions, and an upsurge in orders for aircraft manufacturers Boeing Co. (BABoeing Co.
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
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Discuss
Financials
Sponsored by:
BA ) and EADS (FR:005730: news, chart, profile) division Airbus, spell higher demand for jet components in 2007, according to Kleintop.
Krispy Kreme
Last is Krispy Kreme (KKDkrispy kreme doughnuts inc com
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Analyst
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Financials
Sponsored by:
KKD ) , which was put forward by Don Hodges, who admitted the stock is "a somewhat speculative bet."
However, Hodges thinks Krispy Kreme might be a good play for investors willing to accept some risk.
The doughnut maker remains mired in legal and regulatory issues, but Hodges thinks it will sort many of these out as 2007 wears on and that the stock price could improve late in the year. In addition, Krispy Kreme outlets increasingly are operated as franchises and franchisees tend to do a better job as operators, he said.
By Leslie Wines, MarketWatch
Last Update: 12:01 AM ET Dec 19, 2006
NEW YORK (MarketWatch) -- Investors seeking outperforming stocks in 2007 will likely focus on factors such as exposure to the booming China market, unjustifiably low valuations, promising products under development and the most lucrative locations for drilling rigs, according to some noted stock pickers and fund managers.
DAVID CALLAWAY
Next year's news
Never doubt the market’s ability to focus on something completely opposite from what Wall Street thinks is important. So Dave's predicting a big-cap rally and commodities slowdown in 2007.
• Best & worst stocks of 2006
• 10 stock picks for 2007
• Commodities: Sweeter in 2007?
• Our top news stories of 2006
• Loeb: Slowdown, not meltdown
• Winners & losers
• Dvorak: Top tech trends in 2007
• The stock-option surprise
• Tech sequels: Big stories go on
• See the full special report
Coming up this week: The outlook for real estate, the economy, more.
Though forecasting price performance remains a slippery art, the stock pickers at least have come up with plausible theories as to why these stocks could break into higher ranges next year. Here follow their choices in no particular order:
United Technologies
United Technologies Corp. (UTXUnited Technologies Corporation
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
UTX ) . This old standard was chosen by Daniel Manion, who manages a large-cap blend fund of growth and value stocks for Sentinel Asset Management, as a new twist on a China play.
United Technologies' product list of elevators, escalators, moving walkways, residential and industrial heating systems and air conditioners has positioned it to take advantage of the construction surge in China and elsewhere, according to Manion.
General Electric
Another old-line company General Electric Corp. (GEGeneral Electric Company
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GE ) was the top 2007 choice of Mike Holland, who manages the Holland Balanced Fund which consists entirely of large-cap blue-chip stocks.
GE Chief Executive Jeff Immelt has generated generally strong earnings growth in recent years, but the stock price has languished in a dull range. In Holland's view, GE should have benefited more from the recent large-cap equities rally and investors are likely to recognize this and send the stock higher next year.
Southwest Airlines
Another stock chosen because it largely missed this year's rally was Southwest Airlines Co. (LUVSouthwest Airlines Co.
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
LUV ) . Don Hodges, co-manager of the multi-cap Hodges Fund, pointed out that Southwest did not rally as much as some other airline stocks in 2006 but thinks the situation will turn around in 2007.
"Southwest still has the best business model in the industry and is picking up some new routes," Hodges said. This year, Congress removed the Wright Amendment which had limited Southwest's direct flights to states contiguous or near Texas, greatly expanding the number of direct flights the airline can offer.
Transocean
Provider of offshore drilling equipment Transocean Inc. (RIGtransocean inc ord
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
RIG ) also was put forward by Hodges. The maker of drilling equipment should perform well next year, irrespective of whether energy prices rise or fall, as rigs are very expensive and take a long time to produce, while supply lags demand, he said.
Rowan Companies
Another oil rig play, suggested by Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, was Rowan Companies Inc. (RDCRowan Companies, Inc
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
RDC ) .
The stock bears a low 1% dividend, but Shacknofsky believes it is poised to report strong earnings next year. In addition to the favorable supply-demand ratio in the industry, Rowan Companies has been diversifying its fleet locations, sending some rigs out of the Gulf of Mexico to other international waters that offer more lucrative rig day rates.
Gatehouse Media
Gatehouse Media Inc. (GHSgatehouse media inc com
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GHS ) , an owner of rural newspapers which the Fortress Investment Group hedge fund brought to market in October, was another Shacknofsky pick. The stock bears a 6% dividend. Gatehouse also is in acquisition mode and should raise its dividend if it makes more cash flow accretive purchases, he said. In addition, the company's online strategy should allow it to capitalize on internet-based advertising as the field extends to smaller papers, in his view.
Gilead Sciences
Gilead Sciences Inc. (GILDGilead Sciences Inc
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GILD ) , a leading developer of treatments for HIV and other diseases, was the top larger-cap pick of Jason Kantor, the leading biotechnology analyst at RBC Capital Markets.
There should be positive developments next year with the integrase inhibitor HIV treatment Gilead is now developing, which should send the stock higher, he thinks.
In addition, the company sells its products directly around the world, giving it an advantage over domestically-focused biotech companies, according to Kantor.
Alexza Pharmaceuticals
Alexza Pharmaceuticals Inc. (ALXAalexza pharmaceuticals inc com
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
ALXA ) , a small-cap manufacturer of drug inhalers to treat such varied maladies as schizophrenia and migraines, is another of Kantor's picks. Data from development projects for new Alexza drugs should benefit the company's stock price next year, Kantor said.
Goodrich
Goodrich Corp. (GRGoodrich Corp
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
GR ) was the choice of Jeff Kleintop, Chief Investment Strategist at PNC Wealth Management. The former tire maker has transformed itself into a manufacturer of airframe, engine and electronic parts for aircraft. New routes to help serve Asia and other developing regions, and an upsurge in orders for aircraft manufacturers Boeing Co. (BABoeing Co.
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
BA ) and EADS (FR:005730: news, chart, profile) division Airbus, spell higher demand for jet components in 2007, according to Kleintop.
Krispy Kreme
Last is Krispy Kreme (KKDkrispy kreme doughnuts inc com
News , chart, profile, more
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
KKD ) , which was put forward by Don Hodges, who admitted the stock is "a somewhat speculative bet."
However, Hodges thinks Krispy Kreme might be a good play for investors willing to accept some risk.
The doughnut maker remains mired in legal and regulatory issues, but Hodges thinks it will sort many of these out as 2007 wears on and that the stock price could improve late in the year. In addition, Krispy Kreme outlets increasingly are operated as franchises and franchisees tend to do a better job as operators, he said.
