Singles Win Games in Baseball and Stocks
Sticking with the baseball theme, this article is going to look at the fascination with people wanting to find that ‘home run’ stock. It’s stupid. Quit doing it. It’s unnecessary and a really bad strategy.
I don’t know how many times I’ve tried to explain to people that getting rich isn’t a strike of lightning or a quick grab, it’s a slow and steady process. The tortoise always beats the hare and it’s the same with the stock market. Sure, it’s cool to say that you caught that lightning in a bottle and doubled or tripled up on one stock, but if a stock is going up that much, it’s pretty volatile and you’re probably putting yourself at extra risk.
The key to succeeding in the market is to go for singles. Singles win baseball games, not home runs. Sure, the home runs get you on Sports Center and all those other TV shows, but it’s not a good strategy at all and it puts all of your eggs in one basket.
The way I look at a stock is, if I can get a 2-3% return in a month I’m golden. That’s all I want, 2 to 3%. So, on a $20 stock I’m looking to get to $20.40 or $20.60 a share. This is easy to accomplish and if you can’t find stocks that go up 40 freakin’ cents, you shouldn’t be trading stocks, stick to index funds and ETFs.
Think about it, while the majority of people are shooting for the big bucks, I’m taking 2-3% a share, over and over, all year long. If I get just 2% a month, that’s 24% a year, totally killing the stock markets average return of 11%. (It’s actually more than 24% a year because with each sale I have more money to buy more shares the next time, so I’m compounding as well, but we’ll keep the math easy for those of you that can’t grasp this concept.)
Quit thinking you need to get 11% out of one stock a year. That’s a $2.20 gain for a $20 stock. That’s pretty difficult to pick on a consistent basis, instead, shoot for a lot of small gains throughout the year.
Even after taxes, if you made 24% gains and paid 30% in taxes (which you don’t), you’d make $3.36 cents on every share of a $20 stock. At your buy and hope 11% stock market average on the same stock you’d only make $2.20 BEFORE taxes and be 100% at risk the entire time.
That’s the other thing about TRADING stocks vs HOLDING stocks, every time I take my profit and get out, I’ve cut my risk to zero, zip, zilch, nothing.
(A little advanced lesson here for those of you who ‘get it’) Now, this isn’t to say that as soon as a stock hits 2% you automatically sell it, no no no. When a stock hits my 2 or 3% target, I put a stop loss on it for the amount I paid for it, locking in my original investment. Now, I’m only risking my gain, not my principle (not entirely, but pretty close). When the stock continues to go up, just move your stop loss with it. If it goes up to 4% gain, move your stop loss to protect your 2% gain. Keep chasing the gains and locking in the profit.
This is how you get rich in the stock market. This is how you win the game. You grab small gains, ‘singles’, over and over and then get out of risk.
- Invest in peace….
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You can’t get rich on 2%. Besides using your own theory I could make a killing using penny stocks. You can get the magical 11% easy enough because if I buy a stock for like $1.50 to make the mythical 11% all I need is for it to go up .16. Penny Stocks RULE !!!
I disagree. You can easily get rich on 2% if you make 2% a month, or a week. I only have to make 5 trades to hit your 11% mark, but I can do it with little to no risk. Sure, you can make 11% on a penny stock quickly, however, your risk is through the roof on penny stocks. You need to strike a balance between risk and reward.
Suffice it to say, with my 2-3% strategy, I’ve easily averaged a 20%+ gain in the market 5 years in a row.
2-3% per month seems doable and adds up to a very respectable return for the year.
I would stress that it is important to let your winners run. Your trailing stop loss method would do that. We need those big 25, 50, 100% winners to make up for the small (and sometimes big) losses we’ll take along the way.
It comes down to a matter of style, but you can still make money even if your “batting average” is less than .500, as long as you make more when you hit (win) than you lose when you strike out (lose).
Absolutely, let your runners run, but don’t be looking for a huge gain, enjoy them when you get them. Set a small gain goal to start.
As for losses, I don’t have losses. I’ve had 6 losing stocks in 5 years and 2 of those were my fault for not setting my stop loss. There’s a key to choosing stocks and when to buy them, but that’s a lesson still to come some day when I talk all about my entire year with no losses that caused my accountant to shake his head in disbelief.
I love the baseball analogy, so I will also use it in my rebuttal. Why would you as the general manager of the ball club, want to keep trading players who are “hitting singles” for other players who are “hitting singles”. This indicates to me that there wasn’t any confidence in these “players” anymore than a hope or prayer or speculation.
I have to echo the sentiments of let your winners run. One, you are incurring costs, two, you are not allowing yourself to enjoy capital gains taxation but trading frequently.
How do I let winners run? I don’t subscribe to “buy and hold”, nor do I subscribe the “always check my stop loss” philosophy. I subscribe to the “buy when it’s right, sell when it’s right”.
1. Buy stocks that have a buffer, when the positivies far outweight the negatives, when its trading at a discount to its intrinsic value.
2. Buy stocks that pay dividends. Stocks that don’t are merely baseball cards! I’m paid to be patient, I’m paid to be a shareholder rather than to speculate in the stock.
3. Buy companies that are earning, that have positivie cash flow and know how to keep the cash flowing. Speculating on unproven technology stocks is no more than a crap shoot. You might hit it big, or you might hit the tanks. Companies that keep cash-flowing are exactly the single hitters that you are looking for.
4. Sell when when the company is overvalued. You gotta see the forest from the trees. Holding onto winners can carry so far. Pull the trigger when its right, not when you’re fearful to lose out on 1, 2%
5. Don’t chase high dividend yields. What’s more important is a healthy payout percentage. Does this company have the ability to increase its dividend in the future or has it done so consistently or is it paying out more than 100% of its earnings, meaning its borrowing to pay you. These dishonest practices will haunt you in the future.
6. If you can’t hold onto winners that have given just more than 2, 3%. It’s pretty much the same mentality as if you’re chasing a homerun hitter.. How easy do you think it is to be right 12 times during the year, versus targetting focusing and being right 2, 3 times a year? The law of averages will render this strategy a mediocre return along with costs eating into the profit.
Sigh.. I should have added more baseball anlogies…
3. “You might it big, or you might hit the ”
4. Sell when the company is overvalued. You gotta be able to see when your star pitcher is running tired
5. Chasing high dividend yields is like when your’re at bat and you’re swinging for “obvious pitches” but get thrown out by the knuckle ball. What’s more important than the yield is a healthy payout….
Finally, I don’t think dynasty teams like the New York Yankees change their entire roster from year to year. They selectively add new players to complement the existing team. Don’t be in such a hurry to let go of your players.
BTW, I don’t think its wrong to look for a ten-bagger. It’s all about the scouting. Is your scouting report, so so are you going to find the next Derek Jeter. How much focus could you put into your scouting report if you’re tempted by every next 2, 3% guy that comes along? Discipline is key!
While I again appreciate your comments, I also disagree with most of them.
1) Buy stocks that have a buffer. – Yes, of course, however, that buffer you see is based on past performance, not future. The current stock price is based on future expectations. So, while it may appear there is a buffer, it’s an imagined buffer. I’ll get into how to buy stocks in a later article to show how to lower risk, but you’ll choke on your hot dog when you see the indicator I’ve used for 5 years with a 90+% success rate.
2) Buying stocks that pay dividends is an ok idea, however you’re limiting yourself to which stocks you can buy and dividend paying stocks aren’t very volitaile. This is a good idea if you intend to hold, however any dividend that is under 4% is a LOSS of money due to inflation. If I wanted a 4% return I’d buy a CD with 0% risk vs a stock with 100% risk.
3) Buy companies that are earning – Well, yes, however this doesn’t always translate into stock appreciation like you think it would and conversely, stocks that are losing money hand over fist appreciate a lot of times as well. The stock market isn’t based on fundamentals, it’s based on opinion and emotion, so you can’t take the math and make your decisions on that all of the time. If you could, everyone would be rich.
4) Sell when the company is overvalued – When is this? Is Apple Overvalued? Could be. We don’t know. What are they currently making? We don’t know. When’s their next product release? We don’t know. How long will the price stagnate at one point like Walmart/Microsoft have? My the stock price stagnating we’re missing out on opportunities, which means we’re losing money even though the stock is flat. Until hindsight teaches us, we don’t know where the stock price should or could be. Even if you do the math, a stock price is rarely at the valuation of a company. If it was, the prive would remain the same between reporting periods, (like it did before the Internet and other news items started causing the prices to jump like crazy all year long to invoke more profits for Wall Street.) Protecting gains and not losing money is the key to becoming rich.
5) Don’t even pay attention to dividends when choosing stocks. That shouldn’t be what makes you buy a stock at all. It’s a nice bonus, but if you’re looking for dividends, buy CDs at 0% risk.
6) How easy do I think it is to be right 12 times a year? I think it’s very easy actually. At least to ensure I gain at least 2% per stock. It’s been incredibly easy. To gain 11% per stock, not as easy. I’ve had some stocks double, some triple, sure, but my goal wasn’t to buy Deckers (DECK) at $22 because it was heading to $47. I had no way of knowing that, but I DID know Deckers would at least get to $23 and I’d m ake a profit and when it got to $23 I locked in my initial investment, ensuring I wouldn’t losing money.
4b) Star pitcher getting tired – A nice analogy, but I disagree that companies are overvalued or not once you own them. Too expensive, sure, but you’re not looking to buy at this point and I never sell a stock outright, I always use a stop loss, so it doesn’t matter if a stock is overvalued to me, not to mention, lets say I buy WWE at $10 and it goes to $12 and I sell early, its still running, I just buy it again. Now, people will say, “Oh, but the fees!” It’s $28! If $28 in fees is killing your profit, you aren’t trading enough shares.
The Yankees don’t change their team every year because their stocks are on a constant rise. No stock is a constant rise, not even the best companies like Coke and Walmart and Microsoft and McDonalds. This isn’t a mountain, it’s a rolling hill. Get on at the bottom, get your money and get off, wait til it goes down and repeat.
Just for example, lets take Sirius. Say you bought it at $3.00 or whatever when Howard Stern made his announcement. 25,000 shares. So, you are in it for $75,000. It went up to $7.00, but your stop loss caught at $6.00 so now you cashed out $75.000 and you have $150,000. Mind you, this all happened in like 4 days. Sirius is now at $4.00. You could now buy 37,500 shares of the same stock. That is the key. While you could let your 100 shares of whatever run forever, you’ll always be making $100 every $1 your stock goes up. I prefer to continously increase my shares by trading so that when a stock goes up $1 I make $5000, or $10,000 and the only way to do that is to constantly return cash.
A key mistake people make is to think the goal is to have stock. That isn’t the goal. The goal is to make money. If you owned a store that sold anything, would you keep your entire inventory forever because someday it’ll be worth more? No. You sell it and take that money and buy better stuff and sell that and buy better stuff. That’s what stock trading is supposed to be. Bring a stock in, sell it, have more money, rinse and repeat. You can always buy the same stock you just sold.
So, in conclusion, I don’t care if people want to go search for those 3 baggers. Go for it! Your risk and your loss. However, if you aren’t getting rich from it. If you haven’t quit your job and are just trading stocks (or could) because you’re doing so well, if you’re encuring losses a lot, then you’re doing something wrong and should maybe open your eyes to new strategies.
– Invest in peace….
See I think Vince is wacko. Because you are open to , too much loss when your value stock gets injured and declares bankruptcy. Value stock is so popular once Warren Buffet said it but it is a myth like unicorn, toothfairy, paperless society, etc…
LOL… sorry, can’t help but laugh at tooth fairy. That’s exactly why value investing ain’t for the vast majority for investors out there! =)
If everybody became a value investor, there would be no more value investing. Please do not become a value investor J Dawg.
Cheers!
BTW, let’s not misunderstand bankruptcy. A company emerging from bankruptcy can certainly keep surviving. There are extreme cases where all existing shares are cancelled and the creditors are installed as the new shareholders. But as long as the company remains solvent after emerging bankruptcy and the creditors can be paid off (which USG could with its loads of cash), existing shareholders are safe!
USG remains more than solvent, and has refinanced by asking existing shareholders to reinject capital through warrants offering. Those proceeds have been used to satisfy creditors. They were able to satisfy creditors will all accumulated interest fulfilled as well! With Warren Buffett’s assistance, they have installed a win-win situation for all stakeholders.
Bankruptcy is an injunction against creditors to claim against a company’s assets while situation looks uncertain. Merck and Pfizer were candidates for this situation too! As with all cases, there are success and failures… American Airlines, Altria, USG are examples… but there have also been just as many failures.
Steve, your strategy requires constant monitoring, a luxury that most investors do not have… imagine a society where people can sit at the computers and daytrade for a day job. Everybody making 2% frequently, locking in. Ideal right? Who’s going to drive the companies and economy in that case?
You keep bringing up rollercoaster examples like SIRI that fits your thesis while not using any companies that fit my criteria for comparison, I can’t argue if you keep insisting on using SIRI, a stock I wouldn’t care to have in my watch list because investing is about making money but also being comfortable with one’s own risk tolerance. You might have balls of steel, but try telling an average InvestorGeek reader that?
I take exception when you use the words, go search for a 3 bagger, your risk, your loss.. .Why are you using negative words to put me down to boost you up? Why do you think searching for 3 baggers is risky? What do you know about my decision making process that makes it so risky? I don’t really feel like reading a column written by you if you keep this up. You’re right, you’re not here to make friends, but the way you’re approaching your rebuttals aren’t making me think either.
Then don’t read my column, I don’t care. I’m not writing a column for you, I’m writing for the public. You put down all of my opinions to start with and in almost 13 comments on my 2 articles.
As for me monitoring my stocks, I look at them once a week, only on Fridays after the market is closed, but you haven’t given me a chance to even get there. I spend maybe 5 minutes a week on the market.
As far as SIRI, I tripled up 25,000 shares in one day the day Howard Stern made his announcement, so even though SIRI might not be profitable, might not be a good company, it doesn’t matter if you jump in at the right time and anyone who didn’t see a jump coming when Stern made his announcement doesn’t know stocks.
Have an open mind, while you may feel that my strategy is dumb, takes too much time, doesn’t work, whatever, in 5 years I’ve gone from having a full time job to pretty much being retired and only working when I feel like it. It’s worked. For years it has worked. For years I have shocked my accountant, friends and family. I do think holding stocks is a risk. I do think holding stocks leaves a lot of cash on the table and that’s what my articles will continue to show if you give me a chance to get more than two posted.
Peacemaker here. Continue in peace.
Steve, I agree with your use of stop losses, they are great tools for investors. I would like to see in future articles your methodology and research strategies for finding the stocks that will generate the 2% monthly gains. If it is an easy as you make it sound we would all be filthy rich.
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