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Tuesday, January 18, 2011

Let Your Winners Run, Research Your Losers

First off, I am not here to tell you which stocks to buy and which to sell. There are plenty of people that are willing to "give" you that information, which are, at most, an opinion. People, you cannot always follow Jim Cramer on Mad Money or some of the statements made in the Wall Street Journal.They do not know your unique situation. They do not know your needs, goals, time, etc. Bottom line is that you have to learn what is good for what you want.

I want to teach you is how to come at the market with a strategy for your own situation. If you are primarily interested in your 401k, chances are you are working for a company, plan on working there for some time, and usually are in your early 30s. As you get older, you want to branch away from speculative trades and stay in safer trades because, obviously, you want money to retire with.

Note: A good rule of thumb is that the younger you are, the easier it is for you to recover.

My rule is to always have at least 5-10% of my portfolio in speculative stock. These are your potentially big winners. It is how I increased my portfolio amount by 43% in one day.(Once I get 100 followers I'll tell you all about it =] ) But they also have the potential to be big losers. When this happens, you have to research why so you do not make the same mistake again.

The good thing about being human is that we are adept at picking up on patterns. But please, do not base your decisions on the charts and where the stock was a month ago. Doing such a thing does not correlate to the future of the stock and is mistake many beginning investors make that usually loses them some money. A good place to start is the news on the company. See what was being said and how it affected the stock's pricing. Take a look at the expected earnings. Did they fall short? Did they beat expectations? Then look at their debt. A good company does not have much debt.

So back to our title, let your winners run and research your losers. If your portfolio is 5-10% speculative, then the rest is in growth, bonds, or money. Most of your time should be spent researching these speculatives. We are trying to be time efficient here.Your growth stock should be in safe, sound companies with good earnings and growth, like AAPL or BA. They aren't going anywhere. Do not touch them.

I'll give you a personal example. I bought some BP back in June during the oil spill crisis when the stock plummeted. Why did I buy it? Because the American government was being pretty lenient on the company for one. The company had enough money to clean up the spill and pay back some of the locals whose businesses were ruined without having to declare bankruptcy. Of course BP was on a set back because of all that money being put to cleaning up their mistake. But the company is so big, and seemed to be backed by the government if needed, it wasn't going anywhere. So far I've made a 57.83% return on that investment.

Another example is back when the TARP funds were being handed out to the banks. This was a wonderful opportunity. The government was practically saying, these banks are fail-proof. All the banks could return their TARP money eventually, as seen. There was no question as to if they could, but rather to when they could. So, of course as banks paid back their debt, their stock rose.

Here is some homework:

Go to http://finance.yahoo.com, scroll down and click on Most Price % Change. Look at Price % Losers. The market movers that go higher do not matter, at least not to you. They have already gone up, you've missed that deal(unless you plan on shorting). Take a look at the news, earnings, and debt listed on these losers and see why they went down. See if you can find any that don't really make sense of why they lost so much. These can be your possibly big winners. Apply your knowledge by playing stock paper or going to updown.com and playing the fantasy stock market (it's free). This is for your to LEARN what to look for so you can not waste time listening to someone else and know what is best for you.

15 comments:

  1. Aware me on your thoughts on roth IRAs.

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  2. In for 100 followers to hear your opinion on how to invest. Follow back brah please!

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  8. Good post brah.

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  10. good read.. will be following for advise .

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