Everything I Buy Drops $5 the Day After I Buy It
$5 is only $5. It can add up to thousands of dollars when you own hundreds of shares. I think the keys to surviving $5 drops in the stock every time you place a trade comes down to three things. First, understand your time horizon for both your trade and the time it will take to get to your investment goals. Both long term and short term goals help to understand how to reach your “needs” on a realistic time horizon. Second, understand the investment or trade inside and out. Write down the exit strategy including when to get out, the risk in the trade, the loss you can take before you feel the need to adjust or change your positions in the trade. Third, be willing to place protection as you grow your portfolio. You will not be right 100% of the time so give yourself a way to lessen the loss. Let me go over some thoughts on the process of portfolio growth in today’s “new normal” stock market. I also want to spend a little time going over the issue of placing a trade and then having it go against you right from the start.
I had a conversation with an individual about the stock market today. He is someone I admire as a father, respect as a man, and have grown to love his family. Obviously, he is a friend of mine and the question came out: “Everything I Buy drops $5 the day after I buy it”? Whether it was a question or a statement, I know it was said in exasperation. I almost laughed because I really know that feeling! Welcome to herd mentality when trading in the stock market. It seems like we are always doing the wrong thing. In fact, the market has a term called dumb money. Dumb money is considered the retail investor (Yes, it is a rude term to use). Smart money is considered “professional” money managers (Yes, sometimes they are as dumb as it gets). In real life the term just denotes a losing trade. It is interchangeable with a loss, retail investor, a mistake made in trading, or even just said in frustration. I think it allows us to learn humility when things don’t go as we had planned. It also can mean the difference between basic trading rules, techniques or mistakes that the retail investor seems to do over and over again that professional money seems to avoid.
When buying a stock, you have a one in three chance of having the stock gain value. Stocks move up, down and sideways. Only one out of three chances to make money and you lose money in the other two. The odds or probability are 33% chance to make money and a 67% chance to lose money. Your trade is nothing more than your best educated guess. The information to make the decision is usually based on past performance on a stock, index or event. We use programs sometimes to do the work for us. We look at advisory programs thinking the person has some secret to always be right in the stock market. Just to let you in on a little secret, there is NO secret. It is just a lot of hard work and a methodology that changes the odds in your favor to consistently make money in the stock market.
There is a big difference between “smart” money and “dumb” money. The best advice I give anyone I talk to is understand time horizon. Professional stock market advisors have an infinite time horizon in their expertise, recommendations and historical data. They are always right because they can wait forever for their best educated guess to be right. The algorithms used in a program have over a hundred years of data and of course the system worked sometime within the history of the stock market. It ticks me off to see the claims used in infinite time horizon because it isn’t real. Averages are used to represent portfolio gains even though they mislead the client. Historical performance is expected to matter even though the new normal, the stock market fundamentals from 2008 to the present, has very little relevance to the historical data. Don’t forget you can’t get mad at them because you are supposed to be trading with money you can afford to lose. It is a rigged game for the professional to win with little to no accountability in my opinion.
Everyday people have bills to pay, money to make, significant others to be held accountable to, and death to shorten our time horizon. When I talk to individuals, I always try to help them define the time horizon they need to make money in the stock market. Hopefully it is 5, 10 or 20 years that they need to make a certain sum of money in the stock market. Why? That allows a short term loss. A $5 drop in the stock you bought yesterday does not matter as much in the big picture. Nobody likes to lose money but remember nobody is right 100% of the time either. Understanding the time horizon gives you a different perspective to the short term losses that may occur. I’m not a fan of day trading, swing trading or the riskier commodities, forex or single option trades. Too much risk for the everyday person. When you lose you are booking a loss with no way to regain the loss without starting over. The most important thing to understand is that you need a larger percentage gain to make up for a loss.
I recently was asked about Disney (DIS) and why I purchased more shares at $115 a share. Well, it was $8 cheaper than the yearly high at almost $123. They have Star Wars coming out and my metrics say it will significantly add to their earnings. They have pricing power and continue to raise prices for their theme parks. ESPN has lost viewers but still has a huge following that watch the program faithfully. Cruise ships are making money, toy sales are great and the movie division is knocking it out of the park. Based on past history and with the future lineup of movies, I feel they have a reason to move higher. Now, I do know past history never guarantees future results. I also know that some say the stock is fairly priced but I see room to run based on my fundamental research. It is my best educated guess and I’m going to stick to it. Why? My time horizon is to see it run over the next 6 months. In the next six months I would expect DIS to be higher due to the profits from Star Wars and Christmas shopping. Of course I am wrong today but tomorrow I could be right again. I didn’t spend every penny I had on DIS. I have other positions in the portfolio and I also have other cash on hand. I can buy more shares and dollar cost average. I have a time horizon that extends into the first half of next year.
“But Kevin the Fed FOMC meeting is next week and the stock has now fallen $7.50 from where you bought it at. Why not buy it after the meeting”? Well, DIS has a past history of bucking the market trend and moving bullish in times of uncertainty. More importantly, I always insure my stock positions as I first enter the position with the long put. I buy the right to sell a stock at a certain price for a certain period of time. When I bought the new shares at $115 I also bought the right to sell the shares for around $4 a share. Why? Well when I buy share of stock every penny invested is at risk. I feel more comfortable when I have 96% or more of my total invested capital protected. DIS has an x-date where stock ownership on the 10th of December allows you a dividend payment of $0.71 on January 11, 2016. My protection allows me to be wrong and not take a huge hit in my portfolio. Anything I can make on the way down is a profit as the stock comes back up in price. When I can’t afford the insurance I use a little trick to pay for the insurance to get me through the earnings event. I honestly have to admit to myself I can’t predict the tops and bottoms of the waves of price movement.
In placing a trade or investing in a stock we always need an exit strategy. In all honesty the exit strategy defines the trade. Some look at probabilities which is another way to state herd mentality on when to get out of positions. The whole Fibonacci, Elliot Wave Theory and technical analysis are all based on the herd mentality way of thinking. I believe an exit plan has to be decided, written down and pre-planned before the trade is even placed. When I first started I wrote down every position I was going to get into. I would write out by hand my dollar figure and profit percentage I would make in the trade. I had certain pricing points that would trigger an exit or an adjustment to the trade. Spread trading is a great way to create wealth. Eventually you care more about protecting what you’ve earned instead of just making more money and your style of trading changes.