- Differentiate between a breakout stock or a broken stock. Breakout stock are low-priced, undervalued and have specific catalysts in the near future that put them on the threshold of breaking out to much higher prices.
- Cat 1: Fallen Blue Chips (e.g. S&P with less than $10)
- Analyze whether the company can turn around
- Cat 2: Undiscovered Growth Stocks
- Often companies in not a limelight industry
- Steady growers of at least 15 percent for past 5 years
- Decent insider ownership of 10 percent or more
- Or explosive growers with earnings growth of at least 100 percent
- Low debt to equity
- Cat 3: low Price to Book value
- Take into account only sellable assets
- Low debt
- Cat 4: Under the radar biotech
- check out fda.gov
- Steal ideas from top managers
- Find out more from medical professionals
- Cat 5: Invest Globally
- Look for what Wall street missed. Reach the 10Q and 10K. Use qualitative research to have an edge
- Do proper portfolio sizing
- Cut loss and let winners run and take profit along the way if fundamentals can’t sustain
- Beware of high spreads
- How many trades did you enter this month, quarter and year?
- How many trades were profitable?
- How many were losing?
- What was your win rate?
- What were your average days in the trade?
- How much was your average win?
- How much was your average loss?
- How much did you win or lose on average per trade?
- What is your average yield (realized profit/margin used) per trade?
To select your strategy, below are some useful questions
- Which market(s) are you going to trade?
- What is the direction?
- What is the time frame?
- What is the volatility of the underlying and its options?
- What is the risk/reward?
Before the trade:
- What is the risk/reward ratio of this trade?
- What is the probability of success?
- What is the maximum loss acceptable for this trade?
- What is the expected return and target profit of this trade?
- Does the new trade maintain the balance or diversification of the portfolio?
During the trade:
- Has the trade reached the maximum allowed loss?
- Has the trade reached the target profit?
- Is the reward of keeping the trade open worth the risk?
After the trade:
- Did you follow the risk management rules on this trade? If not, why?
Tips on risk management:
- Create a money management policy
- Define a position sizing policy
- Maintain a diversified portfolio
- Adjust the trades or exit when it goes bad
- Buy portfolio insurance to protect against black swan events
- Buy Rules
- low debt, less than 50 percent
- Focus on tangible book value
- Look at realistic earning potential
- Enter when it’s half of (book value and earning potential)
- Sell Rules
- Take profit if the stock approaches your estimated fair value
- Sell if market, sector, company specific risk increases
- Sell if stock becomes overweighted in the portfolio
- Sell if find a better opportunity
- Take profits if you can lower your overall portfolio risk
- Personal website: http://www.tenstocks.com
- Recent recommendation: CPLP (Target 4.5), PWE (Target 3.5)
- selling puts and covered call
- Sell when 20 days MA crosses below 50 day MA
- Always look to buy back cheap options. Buy back option when you have a 75 to 80 percent gains to free up the capital
- Avoid catching falling knife
- Look for short-term market “disconnects”
- Successful investing requires a major time commitment to stock research
- Don’t accept company figures when analyzing a stock
- Avoid value traps
- Sells when the ratio of intrinsic value to price falls below 1.25
- Don’t just look to popular investing sites for investment ideas and strategies. Trolls SSRN.com and Google scholar for academic papers for new ideas
- uses F-score, or Fraud score
- Develop www.earningstorpedo.com
- Developed 11 variables to screen for long
- Low P/B <5
- Positive return on assets
- Positive return on equity
- low debt to equity (generally less than 30 percent)
- Relatively low price-earnings multiple
- Price at or near its 52 week high
- Five year revenue growth rate of at least 10 percent but not more than 40 percent (if revenue growth is too high, like 80 percent, generally avoid)
- low F-score (roughly equivalent to (net income – cash flow)/assets
- Low short interest
- Institutional buying
- Insider buying
- Find stocks that have smart money, value, growth, and quality attributes
- Avoid story stocks
- Develop a sell discipline and stick to it
- Don’t follow the flavor of the moment investing style
- Don’t data mine excessively
- Go where the money and growth are
- Do your homework! Read and follow up the leads
- Minimize mistakes
- Look at short interest relative to average volume on the feel of negative sentiment in a company
- Seek out promising companies that are undervalued because of temporary setbacks or hiccups
- Seek entry points in stocks after sellers have dried up and signs of accumulation are beginning
- Look for companies that serve an unmet medical or health care need
- Avoid companies with short interest
- If the market appears to be overbought, hedge your portfolio
- Diversify but don’t overdo it
- Try to invest without emotion or bias no matter how promising or likable a company or its treatments are
- Avoid the sunk cost effect. Cut your losses and move on
- Find stocks that are being ignored by Wall street
- Seek out companies with strong business models, preferably monopolies, duopolies, or oligopolies
- Focus on enterprise value/EBITA rather than price/earning ratios
- Beware of false confidences like “Invest in What you Know”
- Use government sites or academic sets like http://www.cia.gov or http://www.ssrn.com
- Don’t invest in gold stocks – especially junior miners – unless you are prepared for extreme volatility and losses
- Do you own due diligence before committing significant amounts of capital
- Avoid leverage and set aside cash
- Ride the coattails of smart people
- Only invest in things you understand
- Seek out special situations
- Cut your losers when they fail to execute
- Above all, be flexible. Trades the trend
- Listen to what the market is telling you
- Sell Rule: Don’t get too greedy
- Uses Fibonacci analysis, Elliott Wave theory
- Buy stocks at support level and sell stocks at resistance levels
- Pay attention to moving averages
- Use sentiment indicators as contrarian tools such as https://sentimentrader.com/
- Avoid story stock
- Don’t mess with double short ETFs or if there’s too much fine print, avoid it
- Use stop losses when stocks sink 5 percent below your purchase price
- Regarding profits: If your trade produces a 25 percent gain, sell one third. At 50 percent gain, another one-third