With the market's
to an end, I wanted to review a few ways you can go about
handling your stocks ... especially your winners.
Any growth-stock investor worth his salt cuts all his losses
short. Whether it's at 5% or 15%, at some point, any good
investor who's going to have success over many years will cut
losses. Also, any investor who's going to make good money
in the market takes good-sized positions. Thus, for
purposes of this discussion, I'll assume all losses are cut
short, and that position sizes are big enough to matter (each
position in the range 7% to 15% of your total portfolio).
So then the question becomes ... how do you handle your winning
stocks? I've been thinking a lot about this subject in
recent days and weeks, and I've concluded it comes down to a
battle between drawdowns and profit potential. Let me
explain.??On one hand, drawdowns (i.e., selling a certain percent
off a stock's peak) can really work against you. If you buy
a stock and it rises 25%, but then it falls 15% off its top and
you sell it, your total profit is just 6%. If you don't
sell it until it's down 20%, your profit has been erased; you're
back to breakeven. And that doesn't take into account that,
by the time a stock has dropped 20% from its high, it's often
wiped out a couple months' worth of gains.
On the flip side, however, is profit potential. If you take
the above paragraph to heart, you'll sell everything as soon as
you have any profit at all. But if you do that, you'll
never develop a large winner ... and large winners are where most
of an investor's gains come from over the long run.
Thus, there's a natural "tension" between booking profits and
letting them run. So if you want to make big money, you'll
need to choose a strategy that can maximize gains while
That leads me to several general strategies you can use to manage
your winners. This won't be as much about specific selling
rules as it will be about guidelines for your average winning
stock. (I'm happy to write about some technical indicators that
can help you sell stocks better in future Advisories.) So here is
a range of possibilities to consider.
Sell every winner when it rises a certain percent (10% or 15%)
from your buy price.
Drawdowns minimized, so portfolio results will be smoother. You
will be buying and selling relatively quickly so you can focus on
the best set-ups and opportunities and you won't get attached to
No chance of landing a big gain. Profits in portfolio are
totally dependent on "win percentage"-i.e., if half your stocks
are losers, which isn't uncommon, you won't make much
money. Very hard to have a truly great year.
What kind of investor it's best for (with a cheesy baseball
analogy thrown in):
The disciplined stock picker who abhors drawdowns and wants to
make relatively consistent profits (though not great profits)
over time. A singles hitter.
Unless you're a nimble short-term trader with great discipline,
it's going to be tough to make money if you're cutting every
Sell winners using trailing stops (15% to 20% off a stock's
recent peak), or when it falls through support, such as the
50-day moving average.
Opportunity to land big gains. Usually allows you to ride a
winner for as long as the stock wants to run.
Drawdowns will be horrible. When one stock begins to pull
back, chances are your other holdings will do the same.
Thus, a solid portfolio gain (say you're up 20% for the year) can
disappear in a hurry since all sell stops will be so far below
the stocks' highs.
What kind of investor it's best for (with another cheesy
The investor who's aiming for longer-term returns and doesn't
mind seeing 5% or 10% of his portfolio go by the wayside during
sharp market corrections. A power hitter looking for
doubles, but who also strikes out a bunch.
In the very long run, this method will produce large gains ...
but also choppy gains. It might not produce any profits for
a couple of years, but it can dazzle when it latches onto a few
After buying a stock, average up in price the first couple of
times it rises 5% or 10% above your last buy (if you bought at
50, you might buy some more at 55 and then again at 60). To
sell, you use a trailing stop or the 50-day moving average.??
Any single big winner (100% increase or more) could drive your
portfolio's results for the whole year. Your biggest position
sizes will naturally be in the best performers because of
The vast majority of your stocks will either be losers or
breakeven trades. Only the rare 50% to 100%-plus winner
will push your portfolio higher. Because it could take a
year or more to find that winner, your portfolio's returns could
be sour for long stretches before striking gold.
What kind of investor it's best for (with yet another
The kind who is solely gunning for huge gains over time, and
doesn't care about near-term performance. Also the kind who
recognizes that big winners take TIME to play out even if it's
been a year since finding one. The investor must have the
patience to ride through a few painful corrections. A
homerun-or-strikeout type of hitter.
This method probably produces the very best gains over
time. But the drawdowns and lack of consistent upside mean
you need to truly love finding and riding the major winners, and
have great confidence in yourself. It's very tough to pull
Sell a portion of your winner (one-quarter to one-half) when it's
up a reasonable amount (10% to 15%), then ride the rest of the
shares using a trailing stop.
Able to sock away a small amount of profit quickly, yet you can
still benefit from a big winner.
Your position sizes get reduced quickly, lessening the
impact of a big winner. And the profit taken by selling a
small portion of a small winner can be, well, small.
What kind of investor it's best for (with a final baseball
analogy thrown in):
One who can't stand the volatility of having big positions in a
few volatile growth stocks, yet still wants to hit a homerun
every now and then. The all-around hitter who sprays mostly
singles, a few doubles, and a homer every now and then.
This is my preferred method. My own, personal mindset makes
it difficult to constantly aim for big winners, especially when
that involves the inevitable 20% correction in leading stocks.
Of course, the above four methods are just the tip of the
iceberg-you can delve into a mixture of averaging up and selling
on the way up, you can vary position sizes, and so on. But
giving some thought to these portfolio management strategies
today will do just as much for you as finding the next hot stock.
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Wall Street's Next Big Shocker
With unemployment rising and real estate prices spiraling south,
it's clear the market's volatility is about to increase
exponentially-especially headed into the new year.
For these reasons, the next market move we see headed our way in
the next 30 days could be the biggest shocker of 2010. My free
report reveals what you must do now to protect yourself and
Get it today!
For tonight's stock idea, I'm going back to a liquid (i.e.,
well-traded) leader that I've written about in months past.
Many of these liquid leaders, especially those in the technology
arena-stocks like Priceline.com, Baidu, Apple, etc.-have been
lagging the market during the past couple of weeks. And,
frankly, many have been moving sideways for the past four to six
weeks, thanks to the recent market pullback that came prior to
this lagging period.
That action leads us to two possibilities. The first is
that these stocks are actually building multi-week tops, and with
market sentiment at nosebleed levels, are giving us early and
early indication of an upcoming correction. And you can bet
that if I see more than one or two of these leaders decisively
break below their 50-day moving averages on big volume, I'll be
peeling back exposure to the market in general.
But, with that said, I think it's too early to conclude these are
tops. They could just be building new launching pads for
another upmove! So, tonight, I wanted to bring up one of
these stocks, which good be at a solid buy points.
, formerly known as Network Appliance (
), and it's emerging as the King of Data Storage. Sure, EMC
and others are still big competitors, but there's plenty of room
for everyone. NetApp's products appear better suited for
the new cloud-computing reality, which has led to solid growth
during the past few quarters as big corporations have ramped up
their technology spending.
In the past four quarters, revenues have ramped higher by 36%,
33%, 36% and 33%, while earnings have gained 43%, 61%, 123% and
41% during the same time. In fairness, that growth is
supposed to slow in the quarters to come, but analysts have been
notoriously behind the curve with many names in this sector.
Chart-wise, NTAP's relative performance (
) line-which measures how the stock is performing relative to a
major index like the S&P 500 or Wilshire 5000-has been
basically flat since the last part of September, similar to many
leaders. The stock itself took a brief hit three weeks ago
when its earnings report (due after the closing bell) was somehow
leaked in the last hour of trade. But the stock rebounded
nicely after the conference call that night, continued to find
support in the days ahead, and has begun to crawl higher in
The upshot: After a quick shakeout, NTAP looks to be finding
support around its 50-day line for the first time since this
rally began on September 1. If you're game, I think you
could buy, say, half of what you normal buy here, with a stop
around 50-52. Then you could fill out your position if you
see NTAP sport a good gain on above-average volume, which would
tell you that institutional investors are building
positions. If the market remains buoyant, liquid names like
NTAP could have another leg up.
All the best,
For Cabot Wealth Advisory
P.S. Don't forget to reserve your copy of
Cabot's 10 Favorite Low-Priced Stocks for 2011
by December 12, 2010, to get a 15% discount! There's only a few
days left, so don't delay.