Two great posts to IG in the last few days have me back to make a counter-post to their great arguments. Call me the devil of IG if you want, but that’s my job, right?
I don’t think you should sell off everything. I believe that a large correction is coming sooner than later (and is necessary) but I still wouldn’t sell off everything. Here’s a refresher of my strategy and why I am not dumping things wholesale, and then what I’m doing.
My strategy is simple. Limit the stocks I watch to 50. Those 50 stocks are name monopoly companies. In other words, companies that you think of when you think of a specific sector. Walmart, Apple, Microsoft, Ebay, Harley Davidson, Target, McDonalds, etc.
Then, I only buy these stocks when they are below their 50 AND 200 day moving averages. It’s that simple.
Once I have a stock, I let the runners run, selling off only enough shares to secure some of my profit, which is what I’m starting to do now. Are you up $1000 on a stock? Sell off $1000 worth. You’ll have your profit and a very, very tiny capital gains tax since it’s based on the growth of the shares you sold, not the dollar amount you cashed out. (So if you sold 10 shares at $100 for $1000 cash and you had purchased those shares at $9, you’d pay taxes on the $1 gain per share, or taxes on $10 rather than $1000.) Protect your profits! That’s not to say sell everything everytime you’re up $1000 either, watch the stock. I’ve let Apple run from $65 where I bought my first bunch of shares to the $138 or so it is now, only taking small amounts of profit out and using those profits to buy more shares on dips. I didn’t even sell after the $8 drop, I actually bought more shares!
Here’s the deal, if you felt Apple was a good buy at $130 and it drops to $120, why would you sell? Unless some really bad long term news came out, this is a buy trigger to me. Not only does it lower the cost basis of your original purchase, but it increases your holdings at a price better than you thought was good before. WWE is a good example for me. I bought in at $12.50, it dropped to $10 and I doubled my investment in it and it popped up into the $16 range. This took a couple years, but huge gain for me. I did the same with Tim Hortons International. Bought at $32 at the IPO, it dropped to $22 and I bought more there, more at $24 and more at $27 and now it’s back to $32. My original investment I’m even on and I’m way up on my subsequent purchases.
If you’re buying stocks when they are low originally, drops shouldn’t affect you much. Especially if you’re pulling out profits when your stocks are rising. You should try to remain around 20% cash to buy on the drops. Apple was a good opportunity when it dropped $8 on AT&T’s earnings report. There was no reason for Apple to drop $8. If you had bought it, you would have been up $2-3 a share in a day or two depending on when you got in.
The best companies won’t drop as far as the others either. ETF’s and Index funds will drop some, sure, but if you have cashed out some of your profit from the big gains you should be able to pick up more shares at a premium price, which is a good thing.
Bottom line is, if you don’t need the money right now or in the next couple of years, there’s no need to panic when a pull back is coming because it’s really irrelevant in the big picture. The goal, at least in my opinion, is to amass shares of great companies and you need the market to drop to do that. Does Buffett dump Coke when it has a bad quarter? No, he doubles down. He knows he’s picked a great company and it will come back and when it does he’ll have a lot more shares that he bought with profits he got during the up period. That’s the key to me.
Invest in peace…