A couple of questions were posted on VFC's Stock House and I'll give VFC's take:
Both Questions were from Barkley. I deleted the post and his email due to the fact that there are spamming rif-raf that browse the blogs. If he still wants his email out there he'll let me know and I'll post it.
Question: I recently have taken a hit due to the bad news about INSMED. I never cashed in on the gains leading up to the bad news so it hurt extra bad. I realized how inexperienced I am and how much I actually don't know. You seem to have a plethora of knowledge and I have a lot of questions. Not about which stock to pick but about strategy. An example would be at what percentage of growth should you take your gains to minimize your losses?
VFC's Take: In my opinion, you want to be playing on house money with your stocks; meaning you've pulled enough profits after a run to cover the cost of your initial investment. This way, if your stock goes to zero you break even on the investment.
That being said, breaking even is never the goal of investing, it's about realizing profits. In order to keep yourself honest, before you invest in a stock you need to have an entry and an exit strategy.
The entry strategy entails deciding what price you are willing to pay for a stock. Coming up with an entry strategy for a speculative stock is a lot different than buying into an established company. For instance, you know what you're getting with Microsoft (MSFT) and your main strategy is to just average down. For speculative stocks, you'll need to come up with your own plan on how much you are willing to pay for the stock. This will be based on where you think the stock will be trading in the future, which will be based on your DD. I'll get to DD later. Once you have established what you want your buy price to be, start buying. Stagger your buy orders so that you can average down if the stock drops in price after you start buying.
Keep in mind when buying, if your stock starts to shoot up and you don't have all the shares that you want- don't chase the stock. Let what you have ride and see where the stock settles after profit takers and day/swing/momentum traders leave the stock. Chasing the stock will force you to buy higher than you want and more often than not the stock will drop below your 'chase' price. It's better to make gains with the shares that you have bought for your entry price than it is to try and get in on a spike, only to watch your new shares decline in value after the price settles. That could negate the gains of your original investment that you worked so diligently to make sure you stuck to your plan. Trust me, VFC is speaking from experience on this one.
The exit strategy is the opposite of the entry - obviously. This is where you decide when, and for what price, you will sell your stock.
After you've done some DD, decide whether your stock is a short, mid or long term investment. Since it's YOUR investment, you decide what you consider to be short, mid or long term. For my own guidance, I consider short term to be 0-6 months, mid term to be 6 months to 2 years and long term is anything more than 2 years.
Your decision to call your stock a short, mid or long term investment is based on when you think you'll get the expected returns from that stock. For biotechs, it's usually based on the results of clinical trials or FDA approvals, or both (if you also stagger your sell orders).
For instance, if you have 5000 shares of a stock that is trading for five cents and you think that in a year from now it will trade for $1.00 or higher, then lay out a plan for yourself of for what price you want to sell the stock. In VFC's opinion, you should not have 100% of your purchased shares when/if the stock hits your price target because that means you did not take any profits along the way.
Example: you are averaged into stock XYZ for five cents and you have 5000 shares of the stock. A year from now you think XYZ will be $1.50. You decide that your exit strategy has you selling 500 shares at $.25 (five times your money), then a thousand at $.50 and you say you'll hold the rest until over a buck. Those are significant gains that you made, and even though the stock still went up you protected yourself from not having realized any gains if the stock dropped. The good thing about selling some profits is that if the stock drops back down, then you can buy back in cheaper and pocket the difference. VFC likes to call this 'free money.' Of course nothing is free and these days the government wants more and more of your hard earned money. I say "hard earned" because DD takes time. My point: Stick to your plan- which is to realize profits, but also to make sure you at least break even.
For instance, take CSUH. I decided long ago that anything under ten cents would be my buy price and I decided that I would take some profits at twenty five cents. Some would say that I looked silly selling at twenty five cents after the stock again doubled a week later, but I don't regret the sell because I only sold SOME shares and I was still making money on the shares that I did not sell.
Again, stick to your plan and sell on the way up because, as in the case of INSM that you described- it's worse to watch a stock rise and then drop and wish you would have sold something than it is to sell into a spike and bank some profits. By selling some shares you are ensuring that you get some reward for your DD, whether the stock goes up or down.
Here's another factor- your tolerance for risk. Some investors can sit on a 1000% gain without selling because they are a) pretty sure it will go up even more, but even more significantly, b)have so much a tolerance for risk that they could watch it drop again and not loose much sleep over it. The "b" type are the ones that either have a lot of money anyway or were used to watching their money disappear into the willing hands of European bar owners for ten years.
ALWAYS REMEMBER THIS: A profit is better than a loss. Once you're stock enters your sell zone, make sure you realize some profits.
Another note to consider: If you're in a speculative, low priced stock, a five cent gain can be huge. In the sub-one cent stocks a .002 gain could be huge. It's up to you to decide what is a good price for you to sell. I've sold stocks this year for a 3500% gain and some I was satisfied with a 20% gain. And don't forget, not every stock you pick will be a winner- sometimes you'll have to sell for a loss, but if you're able to buy on dips and sell a little bit into spikes, you can eliminate some of your risk exposure and end up trading on house money- that way you haven't lost anything in the investment.
Hope that answers the "when do I sell" question.
Next Question: I try to do my own due diligence however I am often lost on where to look. I am young (27) and looking to start chipping away at my future student loans or gaining enough money to put down a mortgage for a house when I get out of school. Thanks for your time and any help you can offer will be a great benefit. I would be willing to pay.
VFC's Take: First of all, anyone emailing me or sending me comments, don't offer to pay. That's not what VFC is here for. I had no guidance when I started investing and I'm merely offering my experiences, insights and lessons-learned with those looking to do for themselves what others, like Bernie Madoff, would be more than willing to do for you- for a big price. Investing has become a hobby for me and investing only gets better with the sharing of ideas. My payday comes when I find a good stock and that's how it should be.
Where to start with Due Diligence- in my opinion, it depends on the stock.
Established companies are pretty standard; you have historical growth, projected growth, guidance, revenue and everything pretty much laid out for you there. Plus you can use analyst reports, but be somewhat wary of those. From my experience, analysts often go positive on a stock AFTER it has already had a big run and they don't say sell until it has already dropped. That's not always the case, but I've seen it too much to become a believer. In fact, my biggest mistake when I first started investing was buying and selling when the analysts said to. I lost a lot of money doing that, that's when I decided that I needed to start finding stocks BEFORE the analysts went positive on that. That takes time, researh and a lot of speculation.
I deal a lot in speculative stocks, but my strategies for DD are universal.
First, I see if the stock passes VFC's 'smell' test; or maybe a better way of putting it is the 'common sense' test.
Simply put- does the company have something that people will want?
For instance, I have a speculative investment with Capstone Turbine (CPST). When I saw the tide switching to 'green' technology, I found CPST because the company makes energy efficient microturbines. Another one, Celsius Holdings (CSUH) makes the first 'calorie burning' beverage. I usally stay away from food and beverage stocks, but Celsius actually burned calories. Common sense told me that this thing could take off because many Americans jump at the chance to do something productive while putting out minimal effort. Additionally, the country is gearing away from sugary engergy drinks and moving towards healthier beverages.
Both of those companies passed VFC's 'smell' test.
For biotechs and small pharma, it'll be FDA approvals and clinical trial results that dictate your DD profile. That's pretty cut and dry.
However, it's important to also look to see how company management is spending money. Few speculative companies actually make money, but to get a feel for how dedicated management is to looking out for the investors you've got to look at the terms of financing deals, how the company spends the money they raise and whether the paper results match up to the words of the CEO in the conference calls.
Bad management could be reason enough to not invest in a company, but that depends on your opinion when you've done your DD. I believe that, in the end, unless a company is blatently pissing away money and opportunity, a good product will eventually overcome bad management.
Other DD notes:
- Always listen to conference calls, even if it's after the fact. This is where you can get a feel for confidence level of the speakers and you can match hype with reality.
- Email IR with any questions that you have. A good company will generally respond to you.
- Keep up with consumer trends and geo-political situations. If your company makes a product that depends heavily on sales in Iran and that country is on the brink of civil war, then that is going to effect the bottom line.
- Read the reports and SEC filings! Read every quarterly report and every SEC filing. Even with speculative stocks. See where money is being spent. Is management using the money to grow their reputations at the strip club or are they using it to grow the company? That stuff is important.
- Don't be afraid to speculate. That's what you do with speculative stocks- you speculate. If a stock becomes overvalued, do you think that the company's current growth rate will allow it to catch up to the stock price?
There's so much more that could go into DD, but essentially it's up to you to decide what is most important for you when investing.
I like to find speculative stocks before anyone else does and here are a few more things that VFC looks for:
- low volume trading voluem for the stock. Examples- TTNP earlier this year and MSBT right now. If you find a stock with potential that no one else has found yet, then you can buy it and simply wait for others to see the potential- it will rise on speculative buying and you can sell some of your position to cover your costs and hold the rest for the long term.
- low interest. i.e., no one is talking about it on the message boards. same benefits as above.
- a bad event caused the stock to drop and investors ran scared. that's when the small investor can accumulate heavily and wait for a recovery. examples: the entire market in March of this year, SIRI earlier this year.
Remember, it's your investment. Don't rely on someone else to make up your opinion for you. If the risk of an investment makes you lose sleep at night, move onto something safer.
That's enough of that for today. This is all just VFC's Take, I hope someone found something valuable in all of this.
Also, I have lost faith in Jim Cramer as a proponent for the small investor, but I highly recommend his book Real Money to those that are either just figuring it all out or are still looking to get in.
A couple of questions were posted on VFC's Stock House and I'll give VFC's take: