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Monday, June 21, 2004
Good evening friends,
Market Recap
The market traded flat for most of the day and then took a big dive in the last hour of trading. The Dow is down -45 points while the NASDAQ lost -12 points. Futures were up again this morning before the bell, but as usual, it gave a false indication as to what the markets will do by the end of the trading day.
This continues to be a trader's market, and if you hold any stocks over night, you risk being whipsawed. Sometimes you can get lucky when holding overnight as we saw tonight with PLMO and TBUS, both of which are up big in after hours trading after news releases. Tight stops in this market can save you, but they can also cost you in a few cases. Today we were stopped out of TBUS for a 2% loss and that ended up costing us 25% (based on the current after hours quote). Unfortunately, we cannot have both our stocks and our stops at the same time; it is one or the other.
Positive Comments on Pre-Alerts
We have received many positive comments on the pre-Alerts I have been sending before I make the trade. The pre-Alerts do two things: 1) they let you know ahead of time what I am planning so that you can position yourself ahead of our trade and 2) they take away the concern that our Alert has an effect on the price of the stock. As I have said many times before, we cannot affect stock price at all and these pre-Alerts should calm those who think we can.
I do not want to flood everyone with huge amounts of Alerts because many members do not follow the market during the day. However, I think the Alerts are important on some stocks that do not have specific buy points. The Alerts also allows me to bring to your attention any stock I find during the day that are not on the Bulletin. Keep in mind that these pre-Alerts may not always be sent. For example, a stock may be about to move or may already be moving too fast to issue a pre-Alert. In these cases a pre-alert will not be possible.
Buy and Hold vs. the Trader
There has been some discussion about the buy and hold style of investing lately, and I want to chime in and give my opinion on this subject. You might think that I am against this type of investing but that is not the case. As you know, it is not my favorite way to invest but it does have its advantages (although very few in my opinion). I will give two examples below, after reading them you will see that the success of the buy and hold investment style is really determined by when you happen to get in the market. Take the following two extreme examples into consideration before you decide to buy and hold.
Example 1
For anyone who was lucky enough to get in the stock market back in October of 2002 when the NASDAQ hit bottom around 1150, they have done very well. They are up over 80% provided they still hold and they were able to buy at the exact bottom. 80% in less than two years is a fantastic return for buying and holding. The advantages here are that you do not pay taxes on your unrealized gains and you pay far less in commissions than traders do.
However, looking at the chart of the NASDAQ now (from the left), it is very easy to see that 1150 was the bottom. But back in 2002, how many of us knew that 1150 would be the bottom when we looked at the chart from the right, not knowing what would happen the next day or weeks to follow?
Nobody knew at the time that was going to be the bottom so anyone who got in at that time would have had to have a little luck on their side. Chances are most people got in above the bottom because it is very hard to catch the exact bottom of any market or individual stock. This 80% is about the very best that any buy and hold investor could have achieved assuming they were lucky enough to catch the bottom. In a lot less time, a trader using our conservative money management trading system could have made 4 times as much following our trades, even if they did not play every stock we played and assuming they paid a little more then we did by the time they got the Alert. Even under optimal conditions as I have described above, a good trader can always out perform the buy and hold investor.
Example 2
Now let's look at another example of how buy and hold can hurt somebody who is not informed on market cycles. Let's say someone got into the market for the first time when the NASDAQ hit 5000 in March of 2000. (This is an extreme example but the previous example was also extreme. Somewhere between these two figures would be where many new people have put their money in the market.) Let's say this person was unlucky enough to put all their money in the market in March of 2000 at the NASDAQ's high of 5000. If they bought and held all the way down to NASDAQ 1150 then they lost almost 80% of their money. That is very painful to sit and watch.
It has been over four years since they lost that money and they are still 3000 points from breaking even at 5000 points. In fact, if you lose 80% it takes a 400% gain to just get your money back. Folks, it has been four years since the NASDAQ topped out, and it will take at least 5 to 10 years to get back to 5000 in my opinion. If it does take ten years to get back to 5000 then that would be 14 years for this poor soul who came in the market back in 2000 to just get even.
We may not see NASDAQ 5000 again in our lifetime and if we do, how do we know that will not be a double top and start to go down again from there? This means this person who bought in the market at the top in 2000 finally got there money back 14 years later and may still have to wait to make money because this double top could start the next bear market and the cycle could start all over again.
I for one believe if the NASDAQ ever gets back to 5000 it will certainly turn and reverse back down. It will not break through that resistance the first time. This is an extreme example but believe me, there are some unfortunate people in that category, and they have been washed out of the market by the buy and hold mentality on investing.
Over time buy and hold does work but it is only for people who have enough money to put their money away for 20 or 30 years and forget about it. Warren Buffet does this; the man never sells any stock. But then again, does he really need to sell? If you are like Warren Buffet and do not need to sell stocks to live, then you can buy and hold forever. If you need your money to buy the things you want in life, then you have to sell stock sometime. The question is, do you want to sell at 7% average annualized gain after 30 years of holding your stock when you are too old to do anything with the money? Or do you want to sell every day, week, month, or even hour when you have a profit so you can go out and enjoy your life and provide for your family?
Stock trading is a business and you need to pay yourself sometime. While most investors are putting money into the market, I am taking money out of the market almost every day. I guess I just have a little different perspective about trading/investing than buy and hold investors. This does not mean they are wrong. Everyone has their own way of investing. I have done both, and I have always had better result trading than I have when I bought and held.
It is my opinion that if you are good enough at trading, you can out perform the buy and hold investor hands down. To compare the two, it is like the Super Bowl champions playing the local high school football team. The professional trader vs. the buy and hold investor. Over time, whose gains would you rather have?
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
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