How to Make 300% to 600% in the Stock Market!Thursday, July 3, 2008 | Ethan Roberts |
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Last week I wrote about traveling a great distance to find value in the Real Estate market. Today I am going to share one method with you for how to find tremendous value in the stock market. But in order to find it, we are once again going to turn on the time machine, and go back into the past to find great opportunities for the future. Fortunately, since our last journey of a few weeks ago, I've modified the time machine's engine, and I've subsequently increased my gas mileage!
My wealth building time machine....10 years to the gallon!
Let's face it, everybody and his uncle talks about Buy low, Sell high, as the ultimate way to get rich. Yet we all know that this is easier said than done, and that few people will ever achieve this goal. But why is that? First, let's review the negative emotions or thinking that people use to sabotage their own wealth building results, and then I will tell you what you can do about it:
1) Fear - of buying something that has declined so much. Average Joe tells himself, "If this stock (or real estate, bonds, gold, etc) has fallen this much, and Andy Dandy Analyst on CNBC says it's going even lower, I would have to be crazy to buy it, even though its incredibly cheap right now. No matter how much a company's stock is on sale, we may ask ourselves, "but what if it goes even lower?"
2) Shame - of having to justify the purchase to your spouse, your colleagues, or your dentist. "Are you crazy, buying XYZ?!", cries Joe's dentist. "Don't you know that stock has fallen about one million percent in the past year?!"
4 out of 5 dentists would not recommend this stock...
3) Impatience - Even when Average Joe does manage to buy low and the stock goes up, he may take a quick small profit, rather than really allowing the company's improving performance to translate into a very large gain over a longer period of time. Perhaps he believes he just got lucky and he'd better sell the position before the stock heads lower again. Joe's immediate gratification need triumphs over a possible longer term reward.
4) Faulty Assumptions - Average Joe's perspective in life tends to be very short term. Sometimes its hard to see the bigger picture. Just because an investment is in the dog house today, does not mean that it will be there forever. In fact, historically, just the opposite has proven to be true. Today's bear market is next year's bull market and vice versa. Just look at tech stocks in 2000, U.S. Real Estate in 2005, and more recently the Chinese stock market, to see great examples of how roaring bulls can be trashed in a short period of time.
The most important variable for wealth building is time. They say that time heals all wounds, and nowhere is that more true than in the investment world. If you are a short term trader only, this article is probably not for you. But even short term traders (and I myself have dabbled there more than once or twice) can still throw some money into the old "sock drawer", as they say, for a couple of years now and then. In fact, if you haven't spent your tax stimulus check yet on gasoline and food, now is the perfect time to invest that money for the long term!
I know it may seem that the title of my article contains a bit of hyperbole. But I have one important rule for buying low and selling high in the stock market that I am going to share with you. This rule is so important that if you follow it, you will have a great opportunity to match the results that the title suggests. However, if you violate the rule, your results may not even be close. Ready? The important rule is this:
THE STOCK THAT YOU BUY LOW MUST BE FROM A LARGE, WELL KNOWN COMPANY THAT HAS BEEN AROUND FOR DECADES!
You see, I am not talking about buying the stock of some two year old company that has just developed a method to turn cow patties into biofuel, has 20 employees, and whose stock has dropped from $15 to $2. I am talking about major U.S. companies, the kind you will find on the DOW or S&P 500, the kind your mom and dad owned and maybe even your grandpa. And I am suggesting that in particular, you buy these stocks when they are unloved, unwanted, unheralded, uninspiring, and most importantly, you are very, very, UNSURE if they will ever recover.
BECAUSE THEY ALMOST ALWAYS DO!
Now please, don't write in to remind me about Enron, WorldCom, or some crummy airline that bit the dust and never came back. For every Enron, there are 50 more instances where the large company "ugly duckling" came back to life as a beautiful swan. DOW stocks such as Caterpillar (CAT), Exxon Mobil (XOM), and McDonald's (MCD) were all ugly ducklings at one time in the last decade, and then rebounded to become swans.
Here are four more examples of well known stocks that defied the critics, coming back from the dead to make large profits for those investors with the courage and tenacity to commit to a medium to long term position. These returns do not even include the dividends:
1) Altria (formerly Philip Morris, symbol MO):
In early 2000, nobody loved the big bad cigarette maker. Tobacco Law suits abounded and Dot.com tech stocks were the only place to be. On 3/10/2000, MO would finally bottom, closing at 10.49. But that was the beginning of the Nasdaq crash, and after that money began to pour into defensive stocks such as food and tobacco. By 5/18/01, MO was at 31.27. That's a triple in 14 months. Not too shoddy. But those who bought near the lows and held MO until the beginning of 2008, saw the price of their stock go as high as 81.38.
HOW DOES A 675% RETURN OVER 8 YEARS SOUND TO YOU?
Yes, I know, you wouldn't have caught the absolute bottom to buy it, nor the absolute top to sell. I get that. So maybe your return would have been only 500%?!
2) Walt Disney Co. (DIS):
After the market melt down from 2000-2002, Disney shares were at 13.77 on 8/13/02. We had just been through 9-11 and nobody wanted to fly anywhere. This especially hurt the entertainment stocks like Disney. In fact, hundreds of stocks were at their lows at that time, and most seemed like screaming buys because they were so cheap. But many of them never recovered, simply because they were not true quality, they were simply victims of the market collapse. The trick was to buy the tried and true companies, such as Disney, that had been temporarily beaten down. By 2/12/04, Disney was back to 28.00, a gain of 103% in 18 months! Hold the stock until May of 2007, and the return becomes 165%!
3) Ford (F):
I wanted to include Ford because this stock is so trashed right now. As I write this, the stock has just dropped below five bucks a share. You have to go back to 1991 to find this stock as low as it is today. People talk about Ford and GM like nobody will ever buy a car again. The fact is that sooner or later all these rattletraps wear out and people have to buy another one. Remember the Ford Pinto? The Chevy Vega? If you don't, consider yourself lucky. Today's cars may be better made, but people can only put off buying a new car for so long. Eventually the auto sales will rebound. Let's set the time machine for the last day of 1991. The economy stinks and Ford is at 4.68. Buy it then, throw it in the sock drawer, and hold it until 6/30/92, when it closes at 8.76. Now you have an 87% profit in six months. Nice! But hold Ford until 6/2/98, when it closes at $32.49, and you have a seven year profit of nearly 600%!
Even nicer!
4) Citigroup (C):
Ugh! Everybody hates this one. A couple of Tycoon writers were absolutely blasted by the readers a few months ago for recommending this one at higher levels than where it is now. But I want to share a little history with you. On 4/11/97, Citi closed at 13.29. Anyone who recommended the stock near that price, or especially above that price, probably got blasted as well. Most people would not touch the stock at that time. Well, fast forward the time machine to 6/5/98, and Citi closes the day at 26.12. Almost a double in 14 months! Now hold the stock until 9/1/00 when Citi closed at 53.59. That's a 300% gain in 3 1/2 years! So ease up on the fellas here, ok? History is definitely on their side, and as George Santayana said, "Those who do not learn from history are doomed to repeat it."
Ironically, as I'm writing this piece, I get a message from my friend, Tim, who works for one of the largest Brokerage Houses on Wall Street, a company listed on the S&P 500. His company stock has recently been trashed, and he tells me that it's now hitting new long term lows. I can sense his panic, and when people who don't ordinarily talk about a stock's negative performance begin to do so, that's often a contrarian signal to me that at least a short term bottom may be close. I commiserate with him, and after pulling up the chart, I point out that between May and October, 2001, his stock was cut in half from $70.00 to $35.00. But those who bought shares at $35 rode the stock back up to $60 by early 2004, and to $95 by 2007. I tell him to buy some more, and keep buying it even if it goes lower than current levels. Eventually he will be rewarded.
Ok, you say, but how do we know when it's the exact bottom?
The answer is, we don't! Oh sure, we can use the Bullish Percent Index and various technical indicators such as MACD and RSI to help us get into a stock, sector, or market near the bottom. But only a very lucky soul can pick the exact bottom. That should never be our objective.
My point is that you don't have to pick the exact bottom to still make a ton of money. If I buy Ford at $5.50 and it drops to $4.68 before it rebounds and rises to $32, who cares? I will admit that the toughest part for many investors is sticking with a declining stock before it goes back up. Sheepishly, Average Joe tells himself that the dentist was right, and what is worse, begins to doubt his own judgment. With his confidence low, he sells the stock, then feels absolutely horrible when the stock climbs higher again. No wonder he either decides to pull out of the stock market completely, or he panics by buying stocks that have already run up like parabolic spikes. At least the dentist no longer laughs at his picks, but Joe's return over the next year or two is probably flat to negative.
So declare your independence from the market returns of the Average Joe!
If you stick with the type of companies I have detailed, and buy them for the medium to long term when they are trashed and unloved, you will make some very large profits over the years. Here is a quick three step process for you:
1) Type "List of DOW stocks" into your browser, and pull up any site with a current list of the DOW 30.
2) Go to Yahoo or Big Charts and pull up long term charts ( 5 year or maximum) for several DOW stocks.
3) Look to see where long term support for each stock has been. In other words, what was the lowest price for that stock each time it bottomed and moved higher?
Step three will give you an idea of the approximate level where the stock may bottom again. If the stock is near that price, don't try to pick the absolute bottom for your entry position. The stock may very well be reaching levels where your risk of loss is diminished, and the potential for upside is the greatest. If you are really nervous, split your buy order in half. Enter one buy order at market price and the other at a limit price 4-5% below the market order.
If you don't like buying DOW stocks, you can use the same method with any of the larger, well established S&P 500 stocks that meet the rule criteria that I discussed previously. If you like this method, but want to hedge your bet a little bit, you can always buy an S&P index fund or one of the market index ETF's instead of buying individual stocks. Just bear in mind that your return will probably not be as great with an index fund or ETF. During the eight year period of time that MO was gaining 675%, the DOW itself only gained about 50%.
Unless you are very lucky, you may not see a profit the first week or even the first month, but give it a couple of years and you will be way ahead of the game. You see, history does tend to repeat itself in the stock market. If someone on CNBC says "this time it's different", alarm bells should go off in your head. It's never different! Frothy bubble stocks always sell off and beaten down great companies almost always come back.
Oh, and by the way, maybe it's not such a good idea to talk stocks with your dentist, especially during those times like now when the market is declining, and you find yourself in somewhat of a vulnerable position....!
Finding a great stock is like pulling teeth sometimes...
Have a very happy 4th Of July! See you next week!
4) Faulty Assumptions - Average Joe's perspective in life tends to be very short term. Sometimes its hard to see the bigger picture. Just because an investment is in the dog house today, does not mean that it will be there forever. In fact, historically, just the opposite has proven to be true. Today's bear market is next year's bull market and vice versa. Just look at tech stocks in 2000, U.S. Real Estate in 2005, and more recently the Chinese stock market, to see great examples of how roaring bulls can be trashed in a short period of time.
The most important variable for wealth building is time. They say that time heals all wounds, and nowhere is that more true than in the investment world. If you are a short term trader only, this article is probably not for you. But even short term traders (and I myself have dabbled there more than once or twice) can still throw some money into the old "sock drawer", as they say, for a couple of years now and then. In fact, if you haven't spent your tax stimulus check yet on gasoline and food, now is the perfect time to invest that money for the long term!
colorful sock drawer for your beaten down socks... er, um, I mean stocks...
I know it may seem that the title of my article contains a bit of hyperbole. But I have one important rule for buying low and selling high in the stock market that I am going to share with you. This rule is so important that if you follow it, you will have a great opportunity to match the results that the title suggests. However, if you violate the rule, your results may not even be close. Ready? The important rule is this:
THE STOCK THAT YOU BUY LOW MUST BE FROM A LARGE, WELL KNOWN COMPANY THAT HAS BEEN AROUND FOR DECADES!
You see, I am not talking about buying the stock of some two year old company that has just developed a method to turn cow patties into biofuel, has 20 employees, and whose stock has dropped from $15 to $2. I am talking about major U.S. companies, the kind you will find on the DOW or S&P 500, the kind your mom and dad owned and maybe even your grandpa. And I am suggesting that in particular, you buy these stocks when they are unloved, unwanted, unheralded, uninspiring, and most importantly, you are very, very, UNSURE if they will ever recover.
BECAUSE THEY ALMOST ALWAYS DO!
Now please, don't write in to remind me about Enron, WorldCom, or some crummy airline that bit the dust and never came back. For every Enron, there are 50 more instances where the large company "ugly duckling" came back to life as a beautiful swan. DOW stocks such as Caterpillar (CAT), Exxon Mobil (XOM), and McDonald's (MCD) were all ugly ducklings at one time in the last decade, and then rebounded to become swans.
Here are four more examples of well known stocks that defied the critics, coming back from the dead to make large profits for those investors with the courage and tenacity to commit to a medium to long term position. These returns do not even include the dividends:
1) Altria (formerly Philip Morris, symbol MO):
In early 2000, nobody loved the big bad cigarette maker. Tobacco Law suits abounded and Dot.com tech stocks were the only place to be. On 3/10/2000, MO would finally bottom, closing at 10.49. But that was the beginning of the Nasdaq crash, and after that money began to pour into defensive stocks such as food and tobacco. By 5/18/01, MO was at 31.27. That's a triple in 14 months. Not too shoddy. But those who bought near the lows and held MO until the beginning of 2008, saw the price of their stock go as high as 81.38.
HOW DOES A 675% RETURN OVER 8 YEARS SOUND TO YOU?
Yes, I know, you wouldn't have caught the absolute bottom to buy it, nor the absolute top to sell. I get that. So maybe your return would have been only 500%?!
2) Walt Disney Co. (DIS):
After the market melt down from 2000-2002, Disney shares were at 13.77 on 8/13/02. We had just been through 9-11 and nobody wanted to fly anywhere. This especially hurt the entertainment stocks like Disney. In fact, hundreds of stocks were at their lows at that time, and most seemed like screaming buys because they were so cheap. But many of them never recovered, simply because they were not true quality, they were simply victims of the market collapse. The trick was to buy the tried and true companies, such as Disney, that had been temporarily beaten down. By 2/12/04, Disney was back to 28.00, a gain of 103% in 18 months! Hold the stock until May of 2007, and the return becomes 165%!
3) Ford (F):
I wanted to include Ford because this stock is so trashed right now. As I write this, the stock has just dropped below five bucks a share. You have to go back to 1991 to find this stock as low as it is today. People talk about Ford and GM like nobody will ever buy a car again. The fact is that sooner or later all these rattletraps wear out and people have to buy another one. Remember the Ford Pinto? The Chevy Vega? If you don't, consider yourself lucky. Today's cars may be better made, but people can only put off buying a new car for so long. Eventually the auto sales will rebound. Let's set the time machine for the last day of 1991. The economy stinks and Ford is at 4.68. Buy it then, throw it in the sock drawer, and hold it until 6/30/92, when it closes at 8.76. Now you have an 87% profit in six months. Nice! But hold Ford until 6/2/98, when it closes at $32.49, and you have a seven year profit of nearly 600%!
Even nicer!
4) Citigroup (C):
Ugh! Everybody hates this one. A couple of Tycoon writers were absolutely blasted by the readers a few months ago for recommending this one at higher levels than where it is now. But I want to share a little history with you. On 4/11/97, Citi closed at 13.29. Anyone who recommended the stock near that price, or especially above that price, probably got blasted as well. Most people would not touch the stock at that time. Well, fast forward the time machine to 6/5/98, and Citi closes the day at 26.12. Almost a double in 14 months! Now hold the stock until 9/1/00 when Citi closed at 53.59. That's a 300% gain in 3 1/2 years! So ease up on the fellas here, ok? History is definitely on their side, and as George Santayana said, "Those who do not learn from history are doomed to repeat it."
Ironically, as I'm writing this piece, I get a message from my friend, Tim, who works for one of the largest Brokerage Houses on Wall Street, a company listed on the S&P 500. His company stock has recently been trashed, and he tells me that it's now hitting new long term lows. I can sense his panic, and when people who don't ordinarily talk about a stock's negative performance begin to do so, that's often a contrarian signal to me that at least a short term bottom may be close. I commiserate with him, and after pulling up the chart, I point out that between May and October, 2001, his stock was cut in half from $70.00 to $35.00. But those who bought shares at $35 rode the stock back up to $60 by early 2004, and to $95 by 2007. I tell him to buy some more, and keep buying it even if it goes lower than current levels. Eventually he will be rewarded.
Ok, you say, but how do we know when it's the exact bottom?
The answer is, we don't! Oh sure, we can use the Bullish Percent Index and various technical indicators such as MACD and RSI to help us get into a stock, sector, or market near the bottom. But only a very lucky soul can pick the exact bottom. That should never be our objective.
My point is that you don't have to pick the exact bottom to still make a ton of money. If I buy Ford at $5.50 and it drops to $4.68 before it rebounds and rises to $32, who cares? I will admit that the toughest part for many investors is sticking with a declining stock before it goes back up. Sheepishly, Average Joe tells himself that the dentist was right, and what is worse, begins to doubt his own judgment. With his confidence low, he sells the stock, then feels absolutely horrible when the stock climbs higher again. No wonder he either decides to pull out of the stock market completely, or he panics by buying stocks that have already run up like parabolic spikes. At least the dentist no longer laughs at his picks, but Joe's return over the next year or two is probably flat to negative.
So declare your independence from the market returns of the Average Joe!
If you stick with the type of companies I have detailed, and buy them for the medium to long term when they are trashed and unloved, you will make some very large profits over the years. Here is a quick three step process for you:
1) Type "List of DOW stocks" into your browser, and pull up any site with a current list of the DOW 30.
2) Go to Yahoo or Big Charts and pull up long term charts ( 5 year or maximum) for several DOW stocks.
3) Look to see where long term support for each stock has been. In other words, what was the lowest price for that stock each time it bottomed and moved higher?
Step three will give you an idea of the approximate level where the stock may bottom again. If the stock is near that price, don't try to pick the absolute bottom for your entry position. The stock may very well be reaching levels where your risk of loss is diminished, and the potential for upside is the greatest. If you are really nervous, split your buy order in half. Enter one buy order at market price and the other at a limit price 4-5% below the market order.
If you don't like buying DOW stocks, you can use the same method with any of the larger, well established S&P 500 stocks that meet the rule criteria that I discussed previously. If you like this method, but want to hedge your bet a little bit, you can always buy an S&P index fund or one of the market index ETF's instead of buying individual stocks. Just bear in mind that your return will probably not be as great with an index fund or ETF. During the eight year period of time that MO was gaining 675%, the DOW itself only gained about 50%.
Unless you are very lucky, you may not see a profit the first week or even the first month, but give it a couple of years and you will be way ahead of the game. You see, history does tend to repeat itself in the stock market. If someone on CNBC says "this time it's different", alarm bells should go off in your head. It's never different! Frothy bubble stocks always sell off and beaten down great companies almost always come back.
Oh, and by the way, maybe it's not such a good idea to talk stocks with your dentist, especially during those times like now when the market is declining, and you find yourself in somewhat of a vulnerable position....!
Finding a great stock is like pulling teeth sometimes...
Have a very happy 4th Of July! See you next week!
 Ethan Roberts Contributing Editor The Tycoon Report |
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