23-02-56

This whole stock market investing really tests your patience and your greed tolerance.  Take for example in this case study where the stock broke in mid 2016 after a long sideways grind between 2015 and 2016.  Right off the bat, the stock zipped from 56 to about 63 within a few days.  But then … get’s stuck in another sideways grind between August and November.  Followed by another crazy burst all the way to 75.  That’s a major move!

Now if you’re like me and you do this on the side, you may only have time to watch a handful of positions – getting out of a position to find another place to park the money may be difficult.  So maybe instead of taking profits, you may be willing to stick in this trade to see how far this stock could go. Because at the end of the day you’re not doing all of this just to make a couple hundred bucks. You’re doing this with the idea that you’re making some sizeable side income.

But how would you know to stay in a trade, or exit?  If you did your homework right and you know how to maintain a portfolio, then you can afford to take certain risks.  Say for example, if you can move your stop above the price you bought the stock, then essentially this position becomes a riskless position.  So you can take the chance of sticking in this move, because all your risking is the profits.

Because what’s worse than losing your profits is also losing some of your initial capital and if you don’t have any risk on this trade then why not, just see how it goes. The worse that can happen is that you can lose some of your profits.

Blurred Lines and Why Support and Resistance is open to Interpretation

Once in a while it would be nice to get a textbook-like entry or exit, where we can easily and clearly identify support and resistant levels. However, I seem to find the ones that are complicated … you know the ones where we have to look at the chart in a different angle.  Kind of like looking at art, you have to take on a certain interpretation.  Take for example here, this is one which shows a support level, but you need to have a little bit of a creative interpretation.  Support levels may be a little bit blurred because price may not actually bounce off it, but rather, may just fluctuate around the zone. But that doesn’t mean you always have to cut these types of stocks from your watch list. In fact, in most cases, nothing comes so cleanly, and you have to weight the pieces all together and see if it’s worthwhile taking the risk.

In this chart, you can see an awesome-looking move as the price went from 2003 all the way to 2005, 2006, almost clearly going up and up and up. But then it started to stall in early 2006, and you can see a support level around 27, 27.5 point. However, what was going on in June and July of 2006 is that price hit the support level, went sideways for a while and then bounced up.

Now, this isn’t exactly the most textbook type of support because you can see how price fell below the level then hovered around, digested, and then bounced up.  Many people would have cut this chart, but other people may actually take this as a good, solid support level.  If you have many choices in your watchlist, it may be worthwhile to cut it all together because this is a little more advanced of a setup. 

The Art of Setting Stops

One personal touch with investing that varies between investor to investor is how fast they want to move up stops.  Let’s say if you can’t be in front of a computer all day, then you may want to tell your brokerage to automatically close a trade if a stock price falls below a certain level.  This “certain level” is what you set within your brokerage account.  Let’s say if you’re out grabbing a coffee and the price of one of your stocks continues to fall, you want to be automatically kicked out of the position, and that’s what a stop does.

How people move up stops is a very personal type of thing. Some people like to see some type of indication that a bottom has been made. Say for example in August 2004, where you can see a rounded bottom developing.  Some people would just move up the stop to the 12.5 level, right when they see the bottoming level form.  Others may wait to see a little bit more confirmation, because even if there is a rounding bottom, a stock can (and this has happened to me) fluctuate and fall below this bottom, and then start going up.  So if you move up the stop too quickly you will automatically get kicked out of the trade, even though it was just because the stock just wanted to find a better base, before going up. It’s like finding your footing if you’re wall climbing. Sometimes you may slip, but then eventually you find your footing and you continue going up.

Other people will take a more conservative approach and wait for a break out of the high which happened in March or April of 2004. So that’s another approach. But the risk you run here is that price may never hit this level, and could fall, even below the bottom and just keep dropping – and you’d be kicking yourself that you should have exited earlier.  Sot that’s the art behind moving up stops.  Too aggressive, and you can get kicked out quick.  But too conservative, and you may leave yourself open to major pain.

A good compromise is: why not wait for the stock to hit halfway between the range.  That way you can see if the stability is made, and the price confirms itself and continues going up.  The way to determine what works for you is to access your risk tolerance and then adjust to your style of investing. 

$100 in 9 Days

 

Welcome to another edition of 100 Dollar Club – the purpose of these case studies is to review the fruits of hard labour – and the best fruit is that initial taste of a winning trade, which I like to call, “$100 Dollar Club”, when you make your first $100 dollars.

 

This trade took 9 days to make it’s first $100 profit … not bad! But to be honest, this was a tricky setup.  Firstly, I love the narrow band; you can see how the price touched the top and bottom of the channel.  Also, the trend going into this band was textbook – each of the lows touching the trendline.

 

But what’s so tricky then?  The trickiness comes in the whipsaws within the channel.  You can se the fake breakout at (1) in early 2018.  Which many would have taken as a solid entry trigger – broke out of the resistance level and maintained some days before retracing back into the channel.  And should you have taken this breakout signal, you also would have been shaken out of this trade because shortly after the fake breakout, the stock fell through the mid point, and then broke support.  For many of us who use automatic stops, failure of the support would have triggered execution of the trade!

 

The only reason I didn’t enter the stock in beginning of 2018 was probably because I didn’t find this chart setup till March or April.

 

My entry was nearer to the end of May.  And being a little more conservative, I chose to wait for the price to breakout above the high of the January fakeout.

 

But always remember, making $100 bucks is good, but always keep in mind the 3-step system:

  • Pick a great company
  • Wait for a setup and breakout
  • Exit when the trend is broken

Perfect setup, still fails – Part 2

The first sign that got me a little nervous was how the price fizzled and pretty much retraced the entire breakout candle.  But then, there seemed to be some signs of life since price rebounded, only to fade again.

 

I’m not sure what the learning lesson here is, or if there is one here at all.  But the take away I took was that sometimes you can do all the homework and find ta text book setup – and it can still completely fail.

 

You just never know.

 

Plan your risks accordingly.

Perfect setup, still fails

Sometimes, the charts don’t always work out in your favor.  This was a setup that should have been a lay up of a gem.  I love the trendline, it’s very clean, the lows were never tested.  So, when I see the setup in 2015-2016, I start to get excited.  It’s super clean – it hits the tops and bottoms of the channel just clearly – I mean there were a couple instances when it looked like it was going to breakout but didn’t.  Finally, the moment I was waiting for – a strong breakout.  I can’t remember the catalyst, news of some sort, but strong bullish candle – and immediately things start going sideways.

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The Reward of Being First to the Party

Just like any business, the payday comes when selling an asset for higher than what was paid. All our day to day efforts to increase marketing, to reduce housekeeping costs, staging to attract more potential tenants … are just efforts to make margin as wide as possible. At the end of the day, we want the maximum sale price.

One part of the equation is buying the house at a low price. There are a variety of ways to drive down price, but let’s look at three common ways: if the seller needs to sell, if the overall market has been beaten down (like in the real estate collapse in 2007-2008), or if you happen to buy somewhere before it becomes a popular tourist destination.

One of our firm’s first clients loved taking his family on cruise ship vacations. One particular trip, about 20 years ago, the vacation was to hop from one Hawaiian island to the next. Unfortunately, the whole family falls seasick, but luckily the ship happened to be docking the next day on Maui. The family decides to end their cruise adventure and stay on solid Maui ground for the rest of the time.

Maui, 20 years ago, was nothing like what you see now. You could actually get a spot on Kaanapali Beach to tan! These days, that beach is so popular that even if you are from a small town in Finland, you’ll still manage to run into 3 of your neighbors while you walk between the golf course to the nearest Starbucks.

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Kaanapali Beach now… can’t even walk

The family falls in love with the Maui, and the dad buys a property – not for investment purposes, but rather, to lay the foundation for their annual trip to the then-quiet island of Maui.

Today, that same property has appreciated 168%.

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This is literally the view from their vacation home overlooking the beach.

And the rental income is roughly 17.4% net income return to original asset cost… per year. And it’s completely turnkey – there is a very capable management company, the reservation rate is very high, and the expenses are running very lean. There are ways for him to increase the net, however, for his current lifestyle; he is perfectly content with doing absolutely nothing except for cashing in the cheque every month.

This is a wonderful story of being first to the party. However, the takeaway is not about buying properties in undervalued markets – because there is certainly risk that comes with this (see “The Risk of Being First to the Party”).

And yes, to this day, the family (with some additional family members) still goes to Maui on their annual trip.

When to Sacrifice Net Income for Peace of Mind

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