1. WE FIND COMPANIES THAT ARE GROWING… IN REVENUES AND EARNINGS.
This is simple. Stocks go up because demand exceeds supply. If you have more buying than selling in any particular stock, it generally rises. If there is more selling than buying, it goes generally goes down.
Mutual funds, hedge funds and pension plans account for 75% of the daily activity in the stock market; they are the ones moving the market, not you and I. They invest in companies that grow...without exception. Our method isn't rocket science, but it works pick after pick. Mutual funds spend weeks and sometimes months researching a company before they allocate their money into that idea. They invest in companies that have the potential to grow and the only way a company grows is by increasing their revenues and earnings. So it is that simple.
When we find a company that is growing in annual revenues by at least 25% and see quarterly earnings growing at 25% or more, we know this is a stock that the institutions could support. We know when the institutions are establishing a position because we see a steady increase in the stock’s volume.
For instance, if a stock trades on average 100,000 shares a day over the last 50 days… and suddenly it is trading 300,000 or 400,000 shares a day for the next 7, we know that a large institution is establishing a position, not the individual investor. So we invest and will hold that stock until it hits a level that we feel we should sell it at. There are many different things we look for to determine when to sell a stock, but we'll save that for learning within The Stock Playbook.
We find our stocks only by looking at charts and reading financial statements. Investing based on tips or rumors is a waste of time and money, as is buying a stock because it was featured in a monthly periodical or on some Top Ten Stocks list.
2. WE FIND STOCKS WITH MORE BUYING THAN SELLING
The only thing that makes a stock go higher is more buying than selling, period. This seems so elementary, but it is the cornerstone to everything that we do.
We look for stocks that are being accumulated or bought by the institutions. Why is this important? Because it takes these institutions, weeks and sometimes months to establish a meaningful position in a stock that they like, and we can take advantage of the gain the institutions cause as they establish the position.
3. WE LOOK FOR STOCKS TRADING ON ABOVE AVERAGE VOLUME, NOT NECESSARILY HEAVY VOLUME.
Most newspapers financial sections list the most actively traded stocks each day and the list rarely changes. You’ll see Lucent, Apple, IBM, Citigroup and the like. These are not under accumulation.
Accumulation is when you see a stock that averages 100,000 shares a day suddenly trade 300,000 shares over a couple of days. These are the tracks that we are looking for when we are searching for stocks to invest in.
4. WE REALIZE WE WILL BE WRONG, AND OFTEN.
The most successful investors all have one thing in common. They realize they will be wrong and when they are, they cut their losses short and move on.
They don’t make excuses and continue holding the losing stock, or worse, buy more. This is also known as cost averaging down. They cut the line and move on. We like to limit our downside to no more than 10% depending on the details of each investment.