When people think about stock market gurus, many names can come into minds. For sure, the greatest investor is still Warren Buffett who has managed to keep his name in the Top 5 richest man on earth for so long that I can’t remember since when.
While Warren’s advice are sound and his techniques very profitable, they are limited. Warren focus on the ability for a business to continuously and with sustainability grow its income and earnings. And it’s no secret that most of Warren’s investments are made in very predictable businesses with strong brand names.
That said, if you strictly invest in dividend growth stocks and very predictable businesses, you might miss great capital gain opportunities. While increasing earnings and dividends will generally eventually traduce in an increase of market share price, you might see that your capital gains are increasing very slowly.
With these techniques, forget about growth stocks of nice tech companies. Forget investing in mostly cyclical businesses. Forget about profiting from uncorrelated markets…
Warren Buffett was not focusing on capital gains. He was focusing on earnings. Capital gains were a direct consequence of earning growth.
It is here that Stan Weinstein can enter the field to give you other advice which I think are sound too!
Stan Weinstein is a technical analyst. His methods have been published during the ’80s and the same book is still selling today. When asked why he didn’t write other books, it seems than Stan replied that he had said everything there was to know!
Let’s look at how to profit from growth and cyclical stocks to give our portfolio a boost!
While I’m mainly focused on dividend growth investing, I won’t say no to a great opportunity!
I do not plan on affecting more than 5-10% of my capital to such opportunities but I don’t want to miss them if I can.
Stan Weinstein advice #1 Invest with the trend!
Like a herd of birds, market is trendy! If you don’t believe it, go to finance.yahoo.com, open the stock chart for any index (S&P500, Dow Jones etc…) and see by yourself.
We have bull markets and bear markets. The most important thing to do when you buy a stock, is to make sure you buy with the trend, not against it!
Why? Because that’s hell of a force! Imagine if you had to swim for an hour against the ocean wave. Wouldn’t you find it better to surf the wave?
That’s exactly the same thing here. When most investors think the market will go down, eventually it will. And the opposite is true.
While this sounds like an evidence, most new investors have a tendency to invest a the top of a market or against it. And then they lose their money and tell everyone that the market is too risky.
Stan Weinstein has identified 4 phases in the market as you can see below.
Why do people invest at the end of phase 2 or in phase 3? Simply because that’s when the so-called gurus in the newspapers start talking about the incredible gains you can make in the market or investing in whatever stock that has gained more than a 100% of value already.
Unfortunately for you, if you buy there, it’s too late! All the profits were already made. The only thing that could happen to you, and it will if the price is overvalued based on the true fundamentals of the underlying business, is that your going to lose your money in phase 4, while the intelligent investor will have sold you his shares to secure his profit!
And why do newspapers are talking about it then? Because their business is based on eyes-catching news. And by definition, a news talks about something that happened in the pass… And that you missed! Newspapers are not oracles! You are reading newspaper to know what had happened not what will happen!
So, remember, before buying any stocks, look at the chart to see the trend! Even when buying a dividend stock, looking at the trend can help you see if you should wait a little more to buy more shares with the same capital!
Stan Weinstein’s advice #2 From the forest to the tree!
A stock is only a piece of a larger industry. And an industry, is a piece of market sectors. When putting it all together, you have to market in a whole.
The worst thing to do when you select a stock is to start you analysis from a single stock to the market, or even only analyse a single stock on its own. You have to see the global trend first! That’s a major mistake many so-called technical analysts are doing. They check the trend on the single stock and take a decision. While they might have identified the right trend on the stock, if they don’t look at the market in a whole, they could easily be cut with their pants off!
To select a good candidate, one must first look at the global market trend. Take a look at the S&P500 chart, the Nasdaq chart, the Dow Jones chart. Are they all going in the same direction? At what phase are they?
You think they are at the beginning of a phase 2? All right! That’s the perfect time to start investing!
Now, identify which sector or industries performs best in relation to the index.
Done? Now, take the industry that performs best compared to the index and find leaders that keep bringing the index higher. Not all stocks will move at the same pace. Find the best candidates!
Remember when you were at school. We all had gym classes and then team had to be made. Some people were chosen first and other’s last. Why? Because they were best performers.
It’s the same thing here. You cannot pick a stock on its own because someone told you it was the best stock. You have to compare it to its pals and get the big picture.
You’d like to do that? www.finviz.com can help you! The screener will help you identify interesting stocks and the group tab will help you identify best performing sectors and industries.
Stan Weinstein’s advice #3 Invest on the breakout!
While the stock price will be in phase 1, it’s going to form what we call a trading range. The price will go up or down between set boundaries. The more these limits will have been tested, the more the breakout will be significant! An investor shouldn’t buy a stock in a trading range. It’s lost time. The investor should focus on investing on significant breakouts.
These boundaries are called resistances.
For these breakout to be significant, they must follow these rules. First, the breakout must be of importance. You’ll have to decide what are your rules. Some will wait until the price close 3% over the resistance other will accept 2% or will wait for a pullback to the resistance price. Second rule, the price must also break over the 200 day moving average and the average line must head in the direction of the trend. Third, and it may be the most important thing to remember, the breakout must be accompanied by a significant pike in volume! Some will want to see at least the double of the normal volume.
If all of these ingredients are gathered, then chances are you have a winner!
Stan Weinstein’s advice #4 – Not all winners are winners!
Ok, you found a great potential explosive title to invest in! You are all excited because you know that these techniques are powerful.
Well, you know what? As with any potential good players, the potential might stay as potential and never realize.
What should you do then? It’s simple! Don’t put all your eggs in the same basket! But, don’t over diversify neither. Split your money equally on 5 to 10 stocks. That way, you will protect yourself from false alerts, and false alerts there will be!
Stan Weinstein’s advice #5 – Invest with a protection net!
When investing or doing almost anything in life, there’s always a simple rule to follow. Most of us are following it without even realizing it.
It is called the cost/benefits rule!
Let’s take an example. Let’s say there is a nice jar of cookies place on a shelf over the stove. The stove has recently been used by your mother and you know that you could burn yourself to death if you step on it. Since the risk is high, an even though you like cookies, the benefit of eating a cookie is not that great in the end, you might decide to wait a little until the stove cools down. Then, the risk will be low and the reward interesting… unless you mother surprise you while you’re trying to steal cookies!
The same applies to stocks. They can go up or down. You might be right on the overall tendency of the stock for the future, but wrong in the timing. Or, you might even be wrong on the future direction of the price. After all, you are not an oracle and technical analysis is based on statistics. Unfortunately statistics are guidelines, but sometimes, past is not going to repeat exactly the same way in the future.
That is why they have invented stop orders. And Stan recommends that you should always have a stop limit order on the market in case you were wrong on the trend. It will cut your losses.
The base of Stan’s techniques is to invest with the trend, surf the wave to the peak but, if the promised wave doesn’t show up, you must have an escape plan.
You’ll have to decide what is the best risk reward ratio for you. For example, a risk reward ratio of 1 would mean that you are okay with risking a 5% lost to make a 5% gain. For sure, that wouldn’t be very intelligent. A risk reward ratio of 3-5 would be more interesting. But, the greater the ratio, the better.
In conclusion, Stan’s technique is sound. But you can only use it at beginning and ends of a stock market cycle. If you time it right and place a trailing stop order, your investments, when done, will be on auto-pilot. It is not a short-term investing technique. It’s a technique designed to start investing when the wave lifts and surf on it until it dies.
Bull markets last for years. We might currently be on the tip of the wave, at the beginning of a new bear market. No one knows. But here I have talked to you about techniques to be used in a bull market. Fortunately, Stan applies the same techniques to invest in a bear market too!
Pretending that one would be able to perfectly explain all of Stan’s technique in a single post would be pretentious. That’s why I suggest you simply buy Stan’s book and learn with the master. It’s going to be one of the best ±15$ investment in you education!
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